ECO OF POVERTY AND WELFARE PROGRAMS
ECO OF POVERTY AND WELFARE PROGRAMS ECO 450G
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Date Created: 10/23/15
ECO 4506 Notes Fall 2006 Semester University of Kentucky Professor Aaron Yelowitz Chapter 3 Counting the Poor I Poverty Drawing a Line II The Official Poverty Line Ill Poverty Thresholds IV The Number of Poor People V Measurement Problems VI Characteristics of the Poor I Poverty Drawing a Line The distribution of income looks like a disfigured bell as in Figure 31 Who is poor One approach uses an absolute standard of deprivation the other a relative standard 0 Absolute approach Some bundle of goods and services that is regarded as essential to the physical wellbeing of a family unit Could be for example minimum caloric intake for survival and shelter World Bank defines poor as 1day income Industrialized nations have a different concept of minimum needs which is a problem with the absolute definition This approach incorporates subjective views about what is minimally necessary for survival Absolute necessities should change very little over time yet Figure 32 shows that American s expectations of what it means to Just get by Live in Reasonable Comfort and To Fulfill all of your dreams has changed according to Schiller Discussion questions Are the dollar amounts adjusted for inflation How was the survey conducted 99 by phone and does that lead to bias Are the results statistically signi cantly different from one year to the next Example Barebones budgets See httpwwwepinetorgissueguidespovertypovertyissueguidepdf Economic Policy Institute argues that poverty thresholds are much lower than what it actually takes to support a family and then use this as motivation for living wage ordinances For example after account for housing food childcare transportation health care other necessities and subtracting off taxes and ignoring transfers the bare bones budget for a single parent family with two kids was 34822 in Baltimore in 1999 Discussion question Does barebones equate to absolute deprivation 0 Relative approach States that a person is poor when his or her income is significantly less than the average income of the population Some approaches use lower quintile decile etc In these cases the poverty rate wouldn t change unless there was perfect equality This approach says nothing about the quality oflife at the bottom of the income distribution Fuchs Point Those with incomes less than half the national median are poon Poverty can fall over time but definition is ad hoc 0 May want to consider other factors like age family structure amp number of children II The Official Poverty Line The official poverty line in the US uses the absolute approach to define poverty Thus the government must try to identify the minimum amount of money required to sustain a family 0 In 2001 poverty line was 18000 for family of 4 0 In 1998 it was 16600 Minimum Needs To establish an absolute poverty line we require some notion of what bundle of goods and services is minimally adequate Such a bundle will include food clothing shelter fuel and perhaps other goods In principle we could generate such a list of minimum subsistence based on components like minimum caloric intake etc Converting These Needs Into Monetary Measures Once we arrived at some agreement on the subsistence levels for essential items one could try to convert those subsistence levels into money income By doing so we allow for some disagreement in what the actual subsistence levels are individuals could choose differing amounts of the subsistence goods Note that although the income flowis the single best indicator of purchasing power other indicators like access to credit asset levels and inkind assistance are not accounted for by a poverty line that is reflected in annual income III Poverty Thresholds The CEA Line The first officially sanctioned poverty line was establed by the Council of Economic Advisers CEA in 1963 at 3000 per year per family The established this line by observing that a minimally adequate diet for a family of four would cost about 1000 per year and that consumer studies indicated that lowincome families spent approximately twothirds of their income on nonfood items Thus the CEA scaled up the 1000 of minimum food expenditure per year to 3000 of minimum total expenditure By their estimates 334 million people lived in poverty in 1963 The CEA measure did not account for family size obviously it is somewhat more expensive to meet minimum needs with larger families and somewhat less expensive with smaller families Thus the CEA measure underestimated the number of large families in poverty and overestimated the number of small families in poverty The SSA Index The Social Security Administration SSA revised this measure in a number of important ways these are largely incorporated in the current poverty measure Family size The poverty line was adjusted for family size but this was not as simple division and multiplication They assumed families enjoy some economies of scale for example rent and heat typically do not decline by half for a family of two Thus SSA computed equivalency scales the factor that translated a budget for a 4 person household into a budget for other household sizes SSA s poverty calculation for a family of four in 1963 was 3130 not much different from the CEA s poverty calculation Official Poverty Index The current poverty line is adjusted annually for inflation To see how inflation has varied over time you can view Table B60 of the Economic Report of the President available at httpwwwgpoaccessgoveoptables06html Between 1963 and 2001 prices had increased by about a factor of six and the poverty line for a family of four was 18104 The poverty line in the US as it currently stands does notimply an increased standard of living for the poor It only accounts for rising prices but inflation numbers are not adjusted for changes in quality which could be important for some goods In reality there has been real economic growth over time This means that even after adjusting for inflation the standard of living for most households in 2001 was better than the standard of living for similar households in 1963 The absolute poverty line which is indexed for inflation does not reflect a rising standard of living for the population as a whole Selected Poverty Thresholds in 2003 Family Size 1 9244 4 18504 8 31222 As can be seen from the above table taken from Table 34 of Schiller the poverty line is nonlinear Note that with the exception of Alaska and Hawaii the poverty line in the US is not adjusted for costofliving differences That is it is assumed that the same amount of money is needed to meet basic needs in different parts of the country Hard Choices The American public is occasionally asked What is the smallest amount of money a family of four needs to get along in this communityquot In 1996 the median answer was 30000 see Figure 32 Schiller therefore concludes that the public s view of minimum needs is well above official poverty thresholds and that most Americans do not believe that the official poverty standard is high enough It is not clear what to make of this survey evidence however In particular it is not clear what goods the survey respondent is envisioning when making this income calculation For example does the respondent view a television microwave oven or automobile as essential What does it mean to get alongquot Cultural Context In the US the poverty line is an official line that separates poor from nonpoor It does not necessarily indicate what is enough There is no official definition or line for the middle class or upper class The text points out that today s poverty thresholds allow for a lifestyle equal to the average American family in the 1950s World poverty unsurprisingly is much higherthan in the US IV The Number of Poor People As mentioned previously the Census Bureau uses the CPS to compute poverty statistics annually based on money income See httpwwwcensusgovhhespovertypovdefhtml for more details Trends in poverty taken from httpwwwcensusqovhhespovertvpovertv01pov01chtqif showthe number of peop1e and the percentage who hve m poverty over trme Ftyum 1 Number of Fun and Paveny Kale 1959 to 2001 32 5 NHHM n 7 nchm Thema r L r L L L L V M n the 1960s ncreased 1n the 1ate 1970s and has remawned 1n the 12715 range thereafter Even durmg the economrc expansron of the 1ast decade the poverty rate peaked at 1511n 1993 and roughed at11 31n 2000 How Four The poverty gapquot refers to how far be owthe of cm poverty mdex a famHy 1s A famHy n r ngnr p n r n u 1m on Mt ut n m n p p L Hbebw the povertyhne by aH poor peop1e In 2001 t was 92 bHMon or approx mate y 2800 per poor person V Measurement Problems h p 1 1h 1 1 mg wrth the nouon that the poverty Mne shou1d be an abso1ute measure meanmg that rt shou1d not marease wrth the rmprovrng standard of hvrng In addrtron the fracuon of the typrca1 budget that rs devoted to o expendrture has changed over trme Others Lt L 1 LLF mp elhw 1 heydwsagree r a but not assets such as ownmg a home There are at 1east ve drf cumes wrth the current poverty Mne lnkind income Many poor families receive income inkind meaning they receive goods or services directly from the government instead of cash These are clearly valuable For example poor households might receive food stamps Medicaid health insurance Medicare if they are elderly subsidized housing energy assistance and subsidized childcare Because they receive these goods inkind these households do not need to use their own cash to purchase them The official poverty count ignores inkind income Schiller s Table 35 shows that the poverty rate in 2001 would fall from 113 to 86 if inkind transfers and tax credits were included About 8 million people would be taken out of poverty Not only is the poverty level affected by inkind income but poverty trends as well In kind income particularly health insurance subsidies have grown tremendously over the past forty years In 2001 inkind income accounted for 75 of welfare benefits up from 55 in 1968 At the same time it is difficult to value many inkind transfers The value of health insurance for example depends on health status In general the value of inkind assistance depends on whether the transfer is marginal or inframarginal To illustrate consider how inkind assistance affects the budget constraint of a household compared to an equivalent amount of cash Budget Constraint With Food Stamps Versus Income In the first budget constraint the individual s decision is unaffected by the cash versus inkind transfer thus he values the inkind transfer at it s cash equivalent In the second budget constraint the decision is affected and the inkind transfer forces the person to overconsumequot food thus in utility terms the inkind transfer is not as valuable as the cash equivalent Underreporting People may lie to survey takers about their income especially if they believe that their welfare benefits or taxes might be affected or if their incomes come from illegal sources Some estimates suggest that poor families spend twice as much income as they report receiving and the gap between spending and reported income as widened over time Of course access to credit or changing wealth could explain this too This could help reconcile consumption patterns with income patterns Income mobility Many spells of poverty are fairly short There is no obvious reason why income over the course of one year is the appropriate measure Why not one month Or five years Three out of five families that are in poverty in one year are out of poverty the next year Only one in ten families stays in poverty for five years or more Uncounted poor The CPS survey does not interview the homeless those who are institutions and prisoners Schiller argues that some families include unwanted aged relatives who may not share equally in a family s resources and therefore should be counted as poor Schiller calls this disguised povertyquot It is not clear however why this distinction could not also be made other household structures there are marriages that certainly stay together out of economic necessity for example where one spouse or the other does not enjoy equal access to the resources By the same token there may be households that are poor but receiving inkind resources from relatives like babysitting meals transportation gifts etc which would tend to overstate the number of poor Latent poverty The poverty measure takes into account cash income from all sources which includes not only earnings interest income dividends etc but also cash transfers such as welfare and social insurance programs like Social Security Obviously many individuals who are collecting Social Security are elderly and have few other sources of income Nearly 40 of all pretransfer poor are kept out of poverty solely because of government checks By pretransfer we mean counting income sources such as earnings pensions etc but not counting government payments By far the largest part of this reduction in the official poorquot is because of Social Security payments Of 269 million who are kept out of the official poverty rolls by government transfers about twothirds receive Social Security Of course people pay into Social Security during their working lives If we are to exclude Social Security benefits one should presumably consider what would have happened to those Social Security contributions during the working life Presumably at least some of those contributions would have been invested in the absence of Social Security This means that private income sources like pension income and dividends would have been higher too VI Characteristics of the Poor Age and Family Status Poverty rates vary tremendously by race AfricanAmericans and Hispanics have poverty rates around 22 whites have rates around 8 Female headed households have very high poverty rates around 35 The elderly tend to have lower poverty rates than the national average due in large part to the generosity of Social Security Geography The Northeast and Midwest regions tend to have lower poverty rates than the national average the South and West have higher poverty rates Interestingly despite the discussion of the South in the text the poverty rate in 1998 was actually higher in the West In 2001 the poverty rate was slightly higher in the South than the West Of course these estimates do not account for costofliving differences presumably this would overstate poverty in the South because costofliving tends to be lower Historically if you go to httpwwwcensusqovhhespovertvhistpovhstpov9html you will see that the South has had the highest poverty rate but the South made relative economic progress in the 1990s Labor Force Status The definition of in the labor forcequot is a person who is either employed or actively seeking employment as well as those who are temporarily not working because of illness bad weather vacation or a labormanagement dispute Out of the labor forcequot is everyone else and includes those who are keeping house attending school unable to work because of age or disability or not actively seeking employment Table 39 shows the unsurprising result that for families with children which implies that the head is almost certainly nonelderly virtually all nonpoor families had a working member while a much smaller fraction of poor families had a working member
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