Chapter 12 Poverty and Welfare Two ways to measure poverty: –Absolute terms: in poverty if income  threshold –Relative terms: in poverty if income is  population average U.S.: absolute poverty measurement: – Developed  40 years ago by Molly Orshansky –Steps: 1) calculate $ to buy nutritionally adequate diet for a year 2) multiply above by 3 (assumes food is 1/3 of budget).

Absolute Poverty Threshold Varies by family size/type. Does not vary geographically or city versus rural area. Yes adjusted annually for inflation using CPI. Based on pre-tax income and does not include any noncash benefits like Medicaid or EITC. Examples: –Traditional family of four: in poverty if family Y  $17,690 in year –Single mom with two kids: in poverty if family Y  $14,269. –Note: Year-round full-time at minimum wage = $10,300.

Criticisms of Absolute Poverty Threshold Too high: –Ignores Medicaid, EITC Too low: –Food spending really ¼ not 1/3 of family budget and if so, should multiply food expenditure estimate by 4 not 3. Based on food budget associated with minimal quality diet.

Who is in Poverty? See Table 2: –Poverty by race and family structure. See Table 3: –Poverty rate by type of family head. Summary: high poverty rates can be traced to families headed by women and particularly by minority women. Further details: –Extreme poverty: 15% of AA kids live with family Y  ½ threshold –Poverty rate is cyclical: peaks right after recession. –Rate fell throughout most of 1990s but rising since –Poverty rate will likely grow as economy on edge of second recession.

International Comparison Report by UNICEF in 2000: –US poverty rate at 22.4%; –US rate is highest rate of most industrialized nations. Compare: –Sweden:  3% –France:  8% –Germany: just  10%.

Determinants of Poverty Female HH heads have always been poor but now more of them. –Why?  divorce rates;  out of wedlock births. Why low income? –Most single heads are women who have lower income than men. –Low earnings due to: Low individual market productivity: Poor education; Limited L mkt opportunities (not enough low-skilled jobs; discrimination); Culture of poverty? (controversial)

More on Poverty Poverty rates by education for persons in LF 27 weeks : –Less than HS degree: 14.5% –HS degree 6.6%. –Some college; 4.5% –College graduate: 1.4%. Other causes: random bad luck (costly medical situation; job loss; divorce). –One estimate: among white female- headed HH, 72% were not poor prior to divorce. –Majority of women receive no alimony; much non-payment of child support but this is getting better. –Poverty is temporary condition for most.

No-Fault Divorce Laws and the Divorce Rate Since 1960s and 1970s: –Divorce rates doubled. –Laws have made divorces easier. Did  laws cause  divorce rates? –Cannot conclude without data. –Most studies find no empirical relationship between the two. –How test? Examine difference in laws/divorce rates across states (like a natural experiment). One explanation for rising divorce other than laws: –Social attitudes were changing along with growing female financial independence; so laws changed to catch up.

Welfare in US Social Security Act of 1935 created AFDC. –Means-tested program (eligibility based on income and assets). –Why created? Most single mothers were widows; much sympathy. –Laws changed many times over years. Why reform welfare? Three conflicting goals: –1) raise living standards; –2) maintain work incentives; –3) control program costs. Recent changes to require moms to work reflects broader trend of  maternal employment.

PRWORA Personal Responsibility and Work Reconciliation Act (PRWORA) of –Created TANF: Temporary Assistance to Needy Families. –Biggest feature of this reform: now welfare $$ is in block-grants to state so no longer a federal entitlement. –States have much more control. –5 year maximum limit on receipt of welfare. See Table 3: –Change in real value of cash welfare benefit.

Behavioral Effects of Welfare Extensive literature. –Welfare and work: consensus that welfare reduces work effort. –Welfare and marriage: evidence on this not clear. (one problem: much of welfare caseload in groups with inadequate “pool” of marriageable men). –Welfare and child outcomes: how does welfare reform affect children? Young kids; older kids. –Welfare and Work Attitudes: One effect is passing on idea to kids that everybody works. –Welfare and fertility: Evidence weak that welfare  single moms.

Extra Notes: Effects on Kids Effect on older kids: –Study in 2002: teenagers had lower test scores and higher drop out rates (likely due to reduced supervision). Effect on younger children: –Good of improves standard of living or care children receive. –Bad of childcare quality is poor.

Welfare reform and welfare caseloads: –Common knowledge: huge  caseloads in 1990s. –Empirical evidence: about 1/3 to ½ of this reduction due to welfare reform; much due to growing economy. Earned Income Tax Credit: –EITC started in 1975; expanded much in 1990s. –Helps in goal of “making work pay.” –Opposite of welfare:  benefit as  work; up to a max. –Is refundable: so even if owe no taxes, get the credit. Other policy suggestions: –improve compatibility of work and family. –  childcare funding and quality.