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Chapter 12 Poverty and Welfare Two ways to measure poverty: –Absolute terms: in poverty if income  threshold –Relative terms: in poverty if income is.

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Presentation on theme: "Chapter 12 Poverty and Welfare Two ways to measure poverty: –Absolute terms: in poverty if income  threshold –Relative terms: in poverty if income is."— Presentation transcript:

1 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).

2 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 2001. –Single mom with two kids: in poverty if family Y  $14,269. –Note: Year-round full-time at minimum wage = $10,300.

3 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.

4 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 2001. –Poverty rate will likely grow as economy on edge of second recession.

5 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%.

6 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)

7 More on Poverty Poverty rates by education for persons in LF 27 weeks + 1998: –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.

8 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.

9 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.

10 PRWORA Personal Responsibility and Work Reconciliation Act (PRWORA) of 1996. –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.

11 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.

12 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.

13 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.

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