Poverty & Income

1. Poverty & Income

2. Definition of Poverty The definition of poverty used by the United States federal government is based on a set of money income thresholds that vary with family size & composition. The poverty threshold for a family of 4 with 2 children in 2004 was $19,157 . A four-person family with cash income below its threshold would be classified as poor. The United States poverty rate in 2004 was 12.7%.

3. Poverty varies with race & Hispanic ethnicity.

4. Poverty varies with educational level.

5. Poverty varies with family type.

6. Poverty varies with gender. • In 2001, 12.9% of the female population & 10.4% of the male population lived below the poverty level.

7. Poverty varies with age combined with gender.

8. “Feminization & Juvenilization of Poverty: Trends, Relative Risks, Causes, & Consequences,” by Suzanne M. Bianchi • In absolute terms, women are at greater risk of poverty than men, & mother-child families have much higher poverty levels than two-parent families. The ratio of women’s poverty rates to men’s poverty rates has fluctuated over the past several decades.

9. Specific age brackets. • The ratio of women’s to men’s poverty rate has increased for those under 25 & over 65. • However, among those in the prime working ages, the ratio of women’s to men’s poverty rates has declined.

10. Mother-Child Families • In the 1960s & 1970s, a woman’s most common path to single parenting was to marry, have children within the marriage, experience marital disruption, & then raise the children on her own. • In the 1980s & 1990s, it became increasingly common (especially among blacks) for an unmarried woman to have a child & raise the child on her own. • Between 1983 and 1992, the proportion of female family householders who had never married and who had children increased from 4% to 31%.

11. Never-married mothers are younger, less educated, & less likely to be employed than divorced mothers. • The median income of children with a never-married mother is only about one half that of children with a divorced mother. • About half of divorced mothers with children under age 21 report receiving some child support from the nonresident father. The percentage is only 17% for never-married mothers.

12. Public Assistance for Children • Since 1970, there has been an increase in the percentage of children receiving public assistance, and an increase in children’s reliance on public assistance rather than parental earnings, but public assistance for child poverty stagnated during the 1980s. • Studies indicate that the United States is much less generous in its public support of children than other European countries.

13. Benefits for the Elderly vs. Benefits for Children • The elderly have been covered under programs such as Social Security & Medicare, whose benefits are indexed to the Consumer Price Index (CPI), so they keep up with inflation. • Children, on the other hand, have been covered by programs such as TANF (Temporary Assistance to Needy Families), Medicaid, & Food Stamps, which are not indexed to the CPI. Consequently, the value of these benefits has declined in real terms.

14. Effects of Poverty on Children • Poor children are • 1.7 times more likely to have low birth weights; • 3.5 times more likely to have dangerously high blood-lead levels; • twice as likely to have short-stay hospital periods during the preceding year; and • 10 times as likely to have experienced food insufficiency at least once in the past year.

15. Poor children live in less safe neighborhoods & attend lower-quality schools. • Mortality rates in infancy & childhood are much higher among the poor.

16. Children from low socioeconomic status families have IQ test scores that are 10-15 points lower than children from families with higher socioeconomic status. • Health conditions, such as low birth weight, lead absorption, anemia, & ear infections, may account for 2 of these points. • Less stimulating home environments (fewer toys & materials to foster child development) may account for another 7 points. • Poverty increases parental stress which may reduce the effectiveness of resources.

17. Although poverty rates have increased & remained high for children, children’s access to better quality housing, medical care, & other amenities such as air conditioners & telephones has improved.

18. Factors affecting Trends in Poverty among Women & Children • the increase in women’s employment & earnings in the 1980s & 1990s; • the decline in manufacturing employment & “family wage” jobs that negatively affected less-educated workers, but probably had a greater impact on men than women in the 1980s; • the increase in non-marriage and resulting shift in single-parent families from those with a divorced parent, usually a mother, to those with a never-married mother in the 1980s;

19. the interaction between trends in men’s earnings & the movement away from marriage among the poor, & the resulting negative effect on private transfers of fathers’ income to children, even as child support enforcement improved in the 1980s & 1990s; and • the divergent trends in the effectiveness of public transfers in alleviating poverty among children & the elderly.

20. “Female Headship and the Economic Status of Young Men in the United States, 1977-2001” by Christopher Brown & Randall KesselringJournal of Economic Issues, Vol. 37, pp. 343-351.

21. As we have seen, poverty rates for female-headed households in the U.S. are consistently higher than poverty rates for other households. • Some people believe that encouraging these women to marry is the solution to this problem. • A question arises however: If marriage is a good route to better economic status, why do so many poor women remain single or become divorced? • The article by Brown & Kesselring explores that question.

22. B & K show that since 1977, there has been a drop in the “breadwinner ratio,” the number of males per 1,000 females (aged 22-34) that qualify as marriageable based on an income test.

23. Trends behind the drop in the breadwinner ratio • Falling average incomes for males aged 22-34. • Rising within-group earnings inequality for this population.

24. Both the mean and the median income of males aged 22-34 were substantially lower in 1992 than in 1977. Despite a long period of economic expansion after 1992, the mean & median remained lower in 2001 than in 1977.

25. Income inequality has risen among males aged 22-34 as well. (Higher values of the Gini coefficient & the Theil index indicate greater inequality.)

26. An important factor underlying the widening disparity of incomes among workers in the past 3 decades is “skill-based” technical change. • This change has contributed to an increase in earnings of college graduates relative to high school graduates.

27. Other factors influencing income inequality may include: • 1. Import penetration & relocation of production facilities abroad, • Political resistance to an increased minimum wage, • Seniority clauses in collective bargaining agreements, and • Lack of union building in the growing service sector.

28. We see that the “breadwinner ratios” have fallen. For example, for incomes over $20,000, the ratio for all races dropped from 677 in 1977 to 549 in 2001. The ratios are particular low for blacks. For blacks, the ratio dropped from 394 in 1977 to 356 in 2001.

29. Brown & Kesselring’s Conclusion • “Public policy that aims to increase the proportion of children living in traditional, two-parent households cannot be successful unless it addresses the economic opportunities (or lack thereof) available to young men. • The option to marry, if it exists at all, is most often a bad one [economically] for poor single mothers.”

30. 3 Goals of Welfare Programs 1.Alleviate poverty. • These goals are in conflict. • This conflict is sometimes referred to as the “iron triangle of welfare.” 3. Limit costs by keeping downnumber of recipients. 2. Provide incentives to work.

31. It is impossible to simultaneously have • 1. a low tax rate on additional earnings of welfare recipients to encourage work, • 2. a high welfare guarantee (maximum payment) to raise families out of poverty, and • 3. a low break-even level of income (maximum income level at which benefits are still available) in order to limit the number of eligible individuals and thus program costs.

32. Benefits Received = Guarantee - (tax rate) (earnings) Suppose the guarantee is 10,000 and the tax rate is 100% or 1.00. That means that for every dollar earned on a job, the welfare payment is reduced by a dollar. Break-even earnings can be found by solving for earnings when the benefit = 0. 0 = 10,000 - 1.00(earnings) So break-even earnings would be 10,000.

33. Example Consider 3 options, A, B, & C. Option Annual Welfare Welfare Tax Rate Break-even Guarantee (in percent) Earnings A $10,000 100 $10,000 B $10,000 50 $20,000 C $5,000 50 $10,000

34. Option Annual Welfare Welfare Tax Rate Break-even Guarantee (in percent) Earnings A $10,000 100 $10,000 B $10,000 50 $20,000 C $ 5,000 50 $10,000 The high tax rate in option A provides little incentive to work. In option B, the lower tax rate increases work incentives. With the same guarantee as in A, the earnings threshold for eligibility (break-even earnings) increases and so do costs. Option C has a low tax rate and therefore good work incentives, and the low guarantee keeps costs down, but the resulting reduction in the earnings threshold and in the number of eligible individuals implies that there will be many more families in poverty.

35. AFDC • Aid to Families with Dependent Children • the U.S. welfare system from 1935 to 1996. • provided eligible families with cash assistance. • recipients also frequently qualified for food stamps, Medicaid (government-provided health insurance), and housing subsidies. • represented about 1% of the federal budget.

36. AFDC Families • AFDC largely targeted single-parent families. • By the late 1980s, in nearly half of the states, some poor 2-parent families with an unemployed parent were eligible for AFDC under the Unemployed Parent Program. • In 1988, Congress extended the program to eligible 2-parent families in all states as part of the Family Support Act, in hopes that access to the program would reduce the incentive of families to break up in order to receive benefits. • Research has not found that this policy change encouraged individuals to get or stay married.

37. AFDC - Work Disincentives • AFDC provided the maximum payment (AFDC guarantee) for recipients who did not work. • If a recipient entered the labor force, the AFDC payment was reduced by a dollar for each dollar earned on the job. • Thus, recipients faced a 100% tax rate on their earnings, a considerable disincentive to work. • Research indicates that AFDC reduced labor supply, but the effects found were fairly small.

38. AFDC - Medicaid Problems • By keeping their working hours low, recipients could retain access to Medicaid, which would be lost once they were no longer receiving AFDC. • In 1988, the Family Support Act required states to provide temporary Medicaid benefits for at least 12 months to individuals who left AFDC for employment. • Shortly after that, Congress expanded Medicaid to cover all children in poor families regardless of AFDC eligibility. • The latter reform has been found to have the desired effect of encouraging more people to work.

39. Most recipients used AFDC for transitory assistance (two years or less). • Some recipients did rely on it for long periods of time.

40. AFDC - Poverty • AFDC and other transfer programs had only modest success in alleviating poverty, because the amount of money available grew increasingly inadequate. • Between 1970 and 1993, the AFDC guarantee fell by 45%, in inflation-adjusted terms. • Combined with food stamps, in 1993, a family of three received only 2/3 the amount needed to reach the poverty threshold. • Stagnating real wages for less educated individuals compounded the difficulty of raising low-income households out of poverty.

41. Employment & Poverty • Employment is often insufficient to lift families out of poverty. • A job needs to pay enough to live on, and cover work-related expenses including child care, transportation, and any additional needed clothing. • Many jobs, particularly low-paying and part-time jobs do not provide needed health insurance.

42. Assisting people to find jobs is relatively inexpensive. However, it may be insufficient to help people escape poverty. • Welfare recipients usually have little education and few job skills. The poor need education and skills that raise their earnings. • These investments involve considerable short run costs, compared to simply maintaining welfare payments, and it takes a while for the investment to pay off.

43. Government Training Programs • MDTA (Manpower Development & Training Act) of 1962 helped people prepare for better jobs. • CETA (Comprehensive Employment & Training Act) of 1973 replaced MDTA and gave a greater role in decision-making and program implementation to local governments. • JPTA (Job Training Partnership Act) of 1982 placed greater reliance on the private sector. • WIA (Workforce Investment Act) of 1998 replaced JTPA and provided funds for job training and job support services at the local level.

44. The previously mentioned Family Support Act of 1988 included the JOBS (Job Opportunities and Basic Skills) Program. • This program required recipients (except those with an infant or disability) to engage in activities such as job search, training, and education. • The Act also provided for child care and transitional Medicaid benefits. • Research shows that welfare-to-work programs generally increased earnings, but frequently not enough to lift individuals out of poverty.

45. Recent Focus • The federal government has recently shifted its strategy for improving the self-sufficiency of welfare recipients away from job training and education and toward more immediate employment.

46. The success of this approach depends in part on a sustained healthy economy that creates sufficient jobs for lower-skilled workers. • In addition, without modification, this strategy may be insufficient not only for those who lack qualifications, but also for those who face employment barriers such as discrimination and physical or mental health problems. • Furthermore, those who find employment are likely not to have adequate earnings to escape poverty. So complementary income-raising policies, such as the Earned Income Tax Credit, are important.

47. TANF • Temporary Assistance to Needy Families • Current welfare program which replaced AFDC in 1996

48. Some of the ways in which TANF altered welfare • Welfare became a program of grants administered by states, with states having much more discretion in setting eligibility and program rules. • It required that 25% of the adult welfare population be employed by 1997, and 50% be employed by 2002 . • It mandated a 5-year cumulative time limit on receiving federally funded welfare, with exceptions possible for 20% of families. • It restricted eligibility for teens to those staying in school and living with their parents. • It stepped up enforcement of child support by non-custodial parents (usually fathers).

49. Another important change in the welfare system is that there is no longer a federal guarantee of assistance. • States provide benefits to needy families only if they are willing and able to do so.

50. In 1998, 3.2% of the U.S. population received welfare benefits, compared to 5.5% in 1993. • This change is due to 3 major factors: • 1. changes in the welfare system, • 2. expansion of the Earned Income Tax Credit, & • 3. the U.S. economic expansion of the 1990s.