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Urban Poverty Issues and Antipoverty programs Prof. David E. Clark Weeks #11-12.

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1 Urban Poverty Issues and Antipoverty programs Prof. David E. Clark Weeks #11-12

2 Why Study Poverty in Urban Economics? n Spatial concentration u Urban vs. Rural u Central city vs. suburban n The correct policy recommendation depends on a correct analysis of the problem.

3 Defining Poverty n One Definition u An individual is poor if he/she has little money income. n Problems with definition u This is an absolute measure vs. a relative one u Considers only money income, but not assets u Doesn’t consider investments in human capital n More ideal definition u An individual is poor if he/she has little money income, (relative to others in U.S.), few assets, and no prospect for substantially larger income.

4 Defining Poverty - Government n Poverty defined by the Social Security Administration, based on an absolute poverty line (there are 48 of these depending on family sizes and number of kids below 18). n Based on the expense associated with a nutritious meal. u A survey done in 1950’s established that a nutritious meal costs approximately 1/3rd of annual budget of poor. u Thus, define nutritious diet and multiply by three to get the poverty line.

5 Defining Poverty - Government n If your income falls below some threshold, you are in poverty. u Most frequently cited is the line for a family of 4 persons. n There are actually 48 poverty thresholds. u Look at Census web site u

6 Components of income n Included - cash income u Earnings from W&S u Social Security, SSI, public assistance. u Dividends, interest on savings and investments rental income, estates, trusts, royalties. u Unempl. comp, workers comp., vet. benefits. u pensions, annuities, alimony, child support, periodic income n Excluded u In-kind transfers (e.g., housing and food subsidies). u Net worth u Taxes and other payments. u Permanent income. u Does not adjust for under- reporting of income, believed to be high in the poor. u No regional variation in prices.

7 Inflationary Indexing Since 1969, the poverty line has been indexed by the CPI. CPI overstates inflation. Why? Implications for measurement of level of poverty?

8 Who are the poor and where do they live?

9 Magnitude of Poverty in the U.S. n Year#poorPercent of total mil. approx. 50% mil.22.4% mil.12.1% mil.11.6% mil.12.8% mil.11.7%

10 Influence of Definition n Census has been experimenting with alternative measures of poverty. n Look at web site: u n Using an alternative definition of income that added the value of means-tested noncash transfers (e.g. food stamps,housing subsidies, and medicaid) to post-tax cash income from the private and government sectors would result in 29.0 million people being poor, and a corresponding poverty rate of 10.3 percent in 2001.

11 Profile of Poor: Table 14.3 n Who are they? u Minority concentration. u Female headed households u Heavy burden on children u Uneducated (below HS degree). n Where are they located? u Metro vs. rural u Central cities vs. suburbs

12 Look at Underlying Causes of Poverty Causality necessary to identify appropriate public policy to mitigate problem.

13 Macro and regional economic stagnation n Evidence suggests that urban unemployment is heavily influenced by economic growth. n Recessions are increasingly regional in nature. n Minorities suffer most during slow growth periods? u Earnings disparity between blacks and whites increases. n Expansionary macro policy can be used. u Imprecise policy tool. u Potential tradeoff with inflation.

14 Labor Market Discrimination against Central City Minorities n Earnings functions nearly always identify racial differences in earnings. u Minorities earn less even after controlling for education and experience. u Growth of earnings lower for minorities as well. Earnings Earnings Age Minority White

15 Discrimination Costly (assuming equal productivity) n White Labor Market n Minority Labor Market S D W L W L S D W LWLW WMWM LMLM

16 Potential explanations n Is all else equal? u Measuring educational quality u Measuring effort n Statistical discrimination u Race or ethnicity is used as a signal. u Signal may be efficient. u Use of approach is clearly inequitable.

17 Demographic Explanations n Female headed households are more likely to be living in poverty. n Reasons: u Most are single-parent households so full-time work frequently not possible. u Female wages lower than male wages u Only about 1/3 of single mothers receive child support. n What has been happening to this over time? u Very strong growth

18 Spatial Mismatch between Jobs and Employment n Poor are concentrated in cities. u McKinney and Schnare (1989 Journal of Urban Economics) find that overall patterns of integregation have improved slightly over period F Primarily due to mobility of black households into higher income neighborhood strata where exposure to whites is greater. F Within neighborhood income strata, no change. n Jobs increasingly decentralizing.

19 Income constraints n However, look at evidence from Margo article. u Holding constant other factors, nonwhites more likely to live in central city. n Study by Kain (1985) showed that if location choices were exclusively by nonracial factors, we would expect twice as many blacks living in suburbs.

20 Prejudice and Discrimination n Prejudice is an attitude based on race; Discrimination is an action where people treated differently based on race. n Question: u If blacks prefer to live near whites, even if whites don’t prefer to live near blacks, why don’t we observe leap-frogging behavior? u Possibly tied to discrimination in housing markets.

21 Evidence on Housing Discrimination? n Some evidence that white buyers, renters, borrowers have been treated differently historically than black counterparts, although improvements have been noted. u Fair housing audits are used for real estate agents, landlords, lenders. u Steering behavior by real estate agents may be based on using race as a proxy for preferences of individuals (i.e., statistical discrimination). n Again, discrimination is costly to seller, landlord, lending institution.

22 Exclusionary Zoning n Exclusionary zoning has also had an effect on residential land use. u Although it has been argued that this is used to protect home owners from incompatible land uses and fiscal free-riding, it keeps minorities out. n Techniques: u Minimal square footage, minimum lot size, minimum frontage, etc. excludes low income from neighborhoods.

23 Regardless of cause, segregation exists. Look at the consequences!

24 Does spatial mismatch explain poverty? n Evidence has been mixed. n Some (e.g., Ellwood) point to racial factors as alternative factors. n Others Ihlanfeldt, Sjoquist, Leonard suggest that it is an important influence. n Next time, we look at Ihlanfeldt article.

25 Public Policy n Since the Great Society, spending on anti- poverty policies has increased dramatically, and its level in 1987 was over $100 billion. u There are many anti-poverty programs, and we cannot do justice to the literature in a short presentation. u We examine just a few actual policies. n Focus is on understanding broad economic issues.

26 Macroeconomic Policy n Goal is stimulate the demand side of the local labor market u Low income households (especially minorities) suffer relatively more during recessions. n Macroeconomic expansionary policy is too broad a brush to apply to specific geographic regions. u May conflict with other macroeconomic goals. n General policy direction - avoid deep national recessions.

27 Stimulating Local Job Growth n Alternatively, local policy makers can stimulate local demand for labor. n Bartik (1993) “Who Benefits from Local Job Growth: Migrants or the Original Residents” Regional Studies, 1993, Vol. 27(4), u Approximately 1/4 of new jobs from local growth increases the labor force participation rates of local residents. u Minorities benefit most from growth. u Higher wage industries provide greater employment benefits for local residents.

28 Hysteresis Effect n Bartik argues that job growth has LR effects on unemployment and participation rates due to hysteresis effects. n SR job experience increases human capital for local residents. u Acquired skills increase self-confidence and reputation from employers. u Local residents more employable in LR.

29 Training Programs n This type of program is aimed at the supply side of the labor market. n Goal is to develop skills that increase earning capacity of the poor. u Predominating notion during the 1960’s. u Strong growth in 1960’s, moderate growth in 1970’s, decline during 1980’s and 1990’s. n Some welfare reforms give limited training to current welfare recipients.

30 Ashenfelter (1978) n Orley Ashenfelter wrote a paper which appeared in Review of Economics and Statistics, in n Examined workers completing government- sponsored job training course in n Examined panel data to analyze the incomes earned through a 5 year post-training period.

31 Findings n Compared trainees with a control group n Findings: u Courses produced increase in the earnings of all trainee groups in period immediately following course completion. u Increase for both white and black women was $300-$600 per year (in about 1970), and did not decrease in 5 years after training. u Increase for men was similar, but fell by 50% over the 5 year period.

32 Other insights in literature n Primary success is on programs which target youth. n Some success in raising earnings for women. u Less success with men. n Earnings (wage*hours) increased by increasing hours.

33 Strengths and weaknesses n Strengths u Politically more attractive than others F Have rebounded as a result of welfare reform. u Some evidence of cost effectiveness n Weaknesses u More expensive than other policies u If supply of skills increases and demand is low, may not be effective u Requires coordination of demand and supply side.

34 Income Support Programs n Examples of direct income transfers u Public assistance includes AFDC, SSI for aged and blind, Veterans Pensions, General assistance. u Social insurance includes Social Security, unemployment insurance, workers compensation, veterans compensation n Rationale: u The person him/herself is the best judge as to how to increase utility.

35 Welfare loss from payments-in- kind vs. payments-in-cash Food Other Goods F*F* O*O* Direct income support parallel shifts the budget line F ** O ** U1U1 U2U2

36 Scenario #1: High food consumers Food Other Goods F*F* O*O* Payment-in-kind shifts only a portion of budget line. F ** O ** U1U1 U2U2 No consequence for heavy food consumers

37 Scenario 2: Low food consumers Food Other Goods F*F* O*O* F ** O ** U1U1 U2U2 U3U3 Preferred location

38 There is some empirical support for Scenario #2 Smeeding (1982) found each dollar of foodstamps was worth $0.97 to recipients. Blanchard et. al. (1982) found replacement of food stamps with cash transfers did not effect food consumption.

39 Public Welfare n AFDC is probably the most publicly visible income support program. u Means tested u Payment made by federal government. u Can be augmented by state government F Average payments vary substantially between states. e.g., in a year when Calif. average payments were $553/month, Alabama awarded $114/month.

40 Consequences n Purported welfare migration between states n Destabilizes families u Benefits are removed when earnings reach a particular level. n Disincentive to work

41 Labor-Leisure Choice Income Income Leisure Labor I1I1 La 1 Slope of budget line=dI/dleisure

42 Impact of Welfare on Budget Constraint Income Income Leisure Labor I G =Income grant Assumes 100% takeback rate I Breakeven wage=0

43 Equilibrium point Income Income Leisure Labor I G =Income grant Assumes 100% takeback rate

44 Are those who don’t work lazy?

45 Why not simply reduce takeback rate?

46 Breakeven point n Define I e =earned income n t=takeback rate n Grant is taxed at I e *t n Breakeven point is thus the point where I e *t=I G. n Solving for I gives: I e =I G /t n Thus, if t=1.0 then breakeven I=I G n If t=0.5, then I e =I G /0.5=2*I G

47 Evidence on Welfare Impacts n There is a substantial literature here and we simply provide overview here. u Work disincentives fairly well established. u Strong evidence of destabilization of families. u Mixed evidence on welfare migration

48 Welfare reforms n Wisconsin was pioneer u e.g., W2, Edfair n Current reforms u Phase out for income guarantee. F Required work participation after 24 months of assistance F Assistance eliminated after 60 months u Period of training and child-care assistance

49 Has welfare reform been successful? n Timing of reforms was fortunate u Lengthy expansion during 90’s u Welfare rolls fell substantially F 52% decline (94 –99) F Still concentrated in largest cities u Market effects F Will lower the market wage for low-skilled Bartik (1998) estimates up to 8% drop in earnings for low-skilled women.Bartik (1998) estimates up to 8% drop in earnings for low-skilled women. u Effect on incentives

50 Problem of Urban Ghettos n Two policies have been suggested u Dispersal u Development

51 Dispersal arguments n Ghetto is a place that is fundamentally ugly, and it fosters activities that are considered “unacceptable” in nonghetto areas. u Ghetto represents a negative externality for the MSA. u Ghetto aggravates and accentuates urban problems. n Problems of the Ghetto: u Spatial Mismatch, and Blight-flight process only makes the situation worse. u Low educational quality in city schools.

52 Policy Proposal: Ghetto Dispersal n Improve efficiency of labor market (informational systems for suburban jobs). n Create suburban housing glut for low income. n Suburbanize even if its at the expense of integration. n Subsidize suburban schools to take ghetto residents.

53 Counter-arguments n Dispersal is not feasible. u Disruptive to integration goals. u Creating mini-ghettos will only create new pockets of poverty in the suburbs. n Development of ghetto is preferable.

54 Case for Development: Economic n Multiplier effects. n External agglomeration economies u One success lowers costs to others in region. n Demonstration effects n Leadership effects u Keep your most talented and ambitions in the community.

55 Political Case for Development n Source of leadership for political struggles. n Foster interaction between races. u Less likely to have backlash. n Politically more feasible. u Viewed as self-help.

56 Development Techniques n Greenhouse industries n Pool resources in CDC’s. n Enterprise Zones

57 Cutler and Glaeser Article “Are Ghetto’s good or Bad?” Quarterly Journal of Economics, 1997, p


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