Poverty

1. Poverty O’S Chapter 14 (c) Allen C. Goodman, 2006

2. Is poverty urban? • In US we define a poor household as one whose total income is less than the amount required to satisfy “minimum needs.”

3. Poverty in the United States Source: http://www.census.gov/prod/2003pubs/p60-222.pdf

4. Poverty Population -- Location • Not exclusively urban • More in Central City than elsewhere

5. Poverty by Race

8. Reasons for Poverty • Unemployment -- Large proportion of poor households lack full-time workers. • Low wages -- If one is working at minimum wage, it doesn’t provide enough income to lift households out of poverty.

9. Poverty and Urban Areas • We are seeing that segregation occurs. With jobs moving into the suburbs, we may see a “spatial mismatch” between people and jobs. This is related to segregation. Why?  Long commutes which are costly and reduce net wage.  Long commutes which may lead to unemployment.  Poor information about potential jobs.

10. Why segregation? • Voluntary? • Evidence suggest most Blacks would prefer to live in integrated neighborhoods • Lower incomes • Some explanatory power. Some studies suggest that if Black incomes were higher there would be less segregation, although it would not be eliminated.

11. Why segregation? • Racial prejudice • Studies show that Whites prefer at least 80/20 • Blacks prefer 50/50. • Agent discrimination • Roychoudhury and Goodman found this to be the case with housing audit data for Detroit. Discuss. • Exclusionary zoning • Discriminates against Blacks.

12. Impacts of Segregation • Cutler and Glaeser find: • All else equal, young black adults are worse off in more segregated cities • Earn less income • Have lower HS graduation rates • Are more likely to become single mothers. Elas of outcome to 1% ↑ in segregation

13. Why? • Fewer role models? • Is it the case that the lack of contacts with positive role models  much worse outcomes. • Suggests for Detroit that if D = 60 rather than 80, this implies a -0.29 * (28.6%↓ in segregation) = 8.3% decrease in single motherhood. Do we believe this?

14. Back to spatial mismatch • Is it race or space? • Ellwood felt that spatial factors were overrated since Black youths didn’t work in their own neighborhoods anyway, so the location of jobs was relatively unimportant. • Ihlandfeldt found: • Inferior access to employment opportunities explains between 24 and 27% of gap between Black and White employment rates. • Spatial mismatch is more important in big metro areas.

15. Education and Poverty • How do firms hire workers. • They demand labor. They stop if MRP equals the wage rate. • Discuss Demand = MRPlabor wage rate L* Labor

16. Education and Poverty • More education -> greater MRP. • More likely to get hired at a higher wage. Demand = MRPlabor wage rate L* Labor

18. Earnings and Education

19. Race and Earnings • About 3/4 of gap between White and Black earnings can be explained by differences in: • education • age • skills • location. • Rest (12 – 25%) may be related to discrimination.

20. Discrimination • Prejudiced firm doesn’t like to hire Blacks. • Sees it as a lower MRP. • Pays more to White workers • Foregoes profit. Demand = MRPlabor Prejudiced Demand wage rate Foregone  L** L* Labor

21. Statistical Discrimination • Suppose that an employer has to choose between a White or a Black applicant. Wants to hire worker with higher VMP. • Believes that, on average, due to education and work experience, W is more productive than B. • “Better” choice is W, based on imperfect information. It is STILL discrimination.

22. Statistical Discrimination • Similar story has occurred w/ mortgage lending. • Belief that, on average, due to current and future wealth (which we can’t always see), W is a better risk than B. • “Better” choice is W, based on imperfect information. It is STILL discrimination.