The one main cause of rising child poverty in New Zealand since the 1980s
09 Dec 2014 Leave a comment
Poverty and Behavior: Bryan Caplan
09 Dec 2014 Leave a comment
in applied price theory, applied welfare economics, health economics, human capital, labour economics, labour supply, poverty and inequality, welfare reform Tags: causes of poverty, economics of personality, poverty and inequality
- alcoholism: Alcohol costs money, interferes with your ability to work, and leads to expensive reckless behavior.
- drug addiction: Like alcohol, but more expensive, and likely to eventually lead to legal troubles you’re too poor to buy your way out of.
- single parenthood: Raising a child takes a lot of effort and a lot of money. One poor person rarely has enough resources to comfortably provide this combination of effort and money.
- unprotected sex: Unprotected sex quickly leads to single parenthood. See above.
- dropping out of high school: High school drop-outs earn much lower wages than graduates. Kids from rich families may be able to afford this sacrifice, but kids from poor families can’t.
- being single: Getting married lets couples avoid a lot of wasteful duplication of household expenses. These savings may not mean much to the rich, but they make a huge difference for the poor.
- non-remunerative crime: Drunk driving and bar fights don’t pay. In fact, they have high expected medical and legal expenses. The rich might be able to afford these costs. The poor can’t.
Yet as Charles Murray keeps reminding us, all of the pathologies on my list are especially prevalent among the poor.
The shape of the welfare state in the USA
08 Dec 2014 Leave a comment
in fiscal policy, income redistribution, labour economics, labour supply, politics - USA, public economics, welfare reform Tags: effective marginal tax rates, Obama care, poverty traps, welfare reform
One in five Americans on Medicaid; this image does not include those on Medicare –those over 65 who get their healthcare paid by the government.
Is welfare dependence optimal for whom – part 3: abatement free income thresholds and labour supply
08 Dec 2014 Leave a comment
in labour economics, labour supply, occupational choice, welfare reform Tags: Labour leisure trade-off, welfare reform
Another welfare reform is a modest income threshold below which benefits are not abated. This is low for unemployment and sickness beneficiaries and higher for domestic purposes and invalid beneficiaries.
The idea behind abatement-free income thresholds is to not penalise part-time work among sole mothers and encourage the unemployed and sick to return to full-time work.
The Figure 1 shows that an increase in the benefit abatement threshold has similar ambiguous net labour supply effects to a lowering of welfare benefit abatement rates.
Figure 1: Impact of abatement thresholds on labour supply
- Arrow 1 in figure 1 shows that some who were not currently working will now find working part-time a more attractive option because of the introduction of a benefit abatement-free threshold. Their take-home pay is higher although they enjoy less leisure time.
- Arrow 2 in figure 1 shows that some part-time workers will reduce their working hours because working less and claiming the benefit clearly increases both their take-home pay and allow for more leisure time.
- Arrow 3 in figure 1 shows that workers who work a relative high number of hours per week for a relative low wage will reduce from full-time to part-time working hours because of a revised leisure-labour trade off now makes a somewhat lower take-home pay worthwhile because of increased leisure time.
- No welfare recipients leave the welfare system but some join it because of the introduction or increase in the abatement-free income threshold.
The net labour supply effects of a higher benefit abatement-free threshold are ambiguous because the reduced hours of those already in work offsets the labour force participation of those previously not in work.
Whether net labour supply increases or decreases depends on the relative numbers of individuals at different points on the budget constraint working full-time, not working and working part-time and on the magnitudes of their responses. Some will stay as they were either working full-time, not working or working part-time.
The objective of reducing welfare dependency by encouraging part-time work by those not working has important unintended adverse consequences for the labour supply and welfare dependency of those currently working part-time and full-time on low wages.
A common result of welfare reforms that increase abatement thresholds or reduce abatement rates is that no welfare recipients leave the welfare system but some join it. Welfare dependency is not reduced by financial incentives that increase the generosity and the availability of welfare benefits.
The labour supply effects of welfare reforms that increase benefit abatement thresholds or reduce benefit abatement rates are ambiguous because the reduced working hours of existing workers offsets the hours worked by those not employed prior to the reform. A further complexity is that encouraging part-time work channels beneficiaries into low paid jobs that offer little training and other human capital benefits.
In summary, an increase in the benefit abatement-free income thresholds for welfare recipients has the following effects:
- not all welfare recipients will respond to a higher abatement-free income threshold by supplying more labour;
- those welfare recipients who do respond to a higher abatement-free income are better-off and supply more labour and take-home more pay;
- the increase in labour supply is in part-time work by beneficiaries earning income up to the higher abatement-free income threshold;
- No welfare recipient leaves the welfare system – those welfare recipients who respond to this welfare reform continue to collect their full welfare benefit and work a few more hours each week.
While reforming the welfare system is intended to change the labour market behaviour of welfare recipients, it also has unintended consequences on individuals who are not collecting welfare benefits.
An increase in the exemption level for earned income affects the labour market behaviour of someone who is not receiving welfare benefits has the following effects:
- prior to the increase in the abatement-free threshold, the individual is best off by working part-time or full-time and not collecting welfare or even being eligible to collect welfare benefits; and
- after an increase in the benefit abatement-free income threshold, a worker is better-off by supplying less labour and collecting a full welfare benefit, which raises their total income.
Permitting welfare recipients to keep larger amounts of income without losing any of their welfare benefits will attract more workers into the welfare system. Some workers will find that they are better-off by joining the welfare system and switch from full-time work to being a welfare recipient who works part-time (up to the new higher exemption level). The cost of the welfare programme increases, there are more welfare recipients, and no welfare recipient loses any benefits.
All welfare recipients who increase their labour supply up to the new higher exemption level (and lower abatement rates) and all workers who switch to the welfare system will be better-off.
The effect of the quantity of labour supplied is ambiguous: some old welfare recipients will increase their labour supply up to the new higher abatement-free threshold (probably by a relatively small amount) but new welfare recipients will decrease their labour supply (probably by a relatively large amount) as they move from full-time work to part-time work on welfare.
The overall effect of changes in benefit abatement regimes depends on the number of old and new welfare recipients and the size of the labour supply change for each.
- The quality of labour supplied will deteriorate as some full-time workers switch to welfare and work part-time; part-time workers generally have less attachment to the labour force and tend to invest less in human capital to up-grade their labour market skills.
- High-productivity workers are working fewer hours while lower-productivity workers work more hours.
If the objective is to reduce the number of people on welfare by moving some welfare recipients (those who are able to work) into work, increasing abatement free income thresholds or lowering abatement rates are not the solution. Both options increase the number of people on welfare.
A reduction in the amount of welfare benefits will reduce the number of people on welfare, reduce the cost of the welfare programme, increase the supply of labour, increase the number of full-time workers relative to part-time workers but make all current welfare recipients worse-off and risks providing inadequate income support to those who are unemployable.
The blogs so far
part-one-the-labour-leisure-trade-off-and-the-rewards-for-working
part-two-the-labour-supply-effects-of-welfare-benefit-abatement-rate-changes
part-3-abatement-free-income-thresholds-and-labour-supply
part-4-in-work-tax-credits-and-labour-supply
part-5-higher-abatement-rates-and-labour-supply
Is welfare dependence optimal for whom – part 2: the labour supply effects of welfare benefit abatement rate changes
06 Dec 2014 Leave a comment
in labour economics, labour supply, welfare reform Tags: benefit dependency, Labour leisure trade-off, welfare reform
Figure 1 shows that the introduction of a welfare benefit has both income and substitution effects. The welfare benefit abates at rate t so the take-home pay of workers is less than the full wage until the benefit cut out point shown by the arrow in Figure 1. After this cut-out point, no benefits are payable and the work receives a full wage of w times the hours worked.
Figure 1: the labour supply effects of the introduction of a welfare benefit
The income effect increases the consumption of all goods including leisure. The substitution effect increases the attractiveness of not-working relative to work because prior to the cut-out point, take-home pay is less.
· Some workers will choose to not work at all as indicated by arrow 1 in figure 1 because this makes them better off. They have more leisure time and more income.
· Other workers working at a relative low wage will work less hours than before as indicated by arrow 2 in Figure 1 because of the revised rewards of working. Working fewer hours for slightly less is a better labour-leisure trade-off for them. They earn less, but have more leisure time.
Figure 1 illustrates several of the ambiguities of welfare reform. A welfare benefit induces some workers to work fewer hours and others to stop working altogether. In addition, the abatement rate of less than 100 per cent increases the region in which workers working full-time or semi-full-time might find working less hours attractive. Some workers move from full-time work to part-time work on lower income but with more leisure time.
If the benefit abatement rate was 100 per cent, there is a larger gap between working full-time and not working at all. This large take-home pay gap makes jumps from not working to full-time work much more rewarding.
Several jurisdictions increased benefit abatement rates to 100 per cent to make full-time work more rewarding and part-time work less rewarding. Higher benefit abatement rates on earned income of welfare beneficiaries may actually increase net labour supply because fewer workers enter the benefit, more leave for full-time jobs, but fewer work part-time.
These intended and unintended consequences of welfare reform for abatement rate reforms are illustrated further in Figure 2.
Figure 2: Benefit abatement rate reductions and labour supply
Benefit abatement rates are reduced in Figure 2, which increases the cut-out point at which workers cease to be eligible for any welfare benefits.
· Arrow 1 shows the decision of those currently not working to start working part-time, which is a common motive for and the desired outcome behind reduced benefit abatement rates. These beneficiaries are working but are taking-home a higher income. Their labour leisure trade-off now favours more work and less leisure.
· Arrow 2 shows those currently working part-time reducing their hours because this clearly increases both their take-home pay and their leisure time.
· Arrow 3 shows the full-time workers working at a relative low wage have an incentive to reduce to part-time because this is a better labour-leisure trade-off for them. Their take-home pay is less, but they enjoy more leisure time.
The net labour supply effects of lower abatement rates are ambiguous because the reduced hours of those who are already in work offsets the labour force participation of those previously not working.
A key point to remember from this reduction in welfare abatement rates is no welfare recipients leaves the welfare system but some join the welfare rolls because of the reduction in the benefit abatement rate.
Whether labour supply on net actually increases or decreases depends on the relative numbers of individuals at different points on the budget constraint working full-time, not working and working part-time and on the magnitudes of their responses.
Some will stay as they are working full-time, not working and working part-time. Others will reduce their hours of work. The dictates of team production and co-ordinated working times may prevent this happening immediately. At the next job changes, those currently working full and part-time can take full advantage of lower benefits abatement rates as shown in Figure 2.
The objective of reducing welfare dependency and poverty by encouraging part-time work with lower benefit abatement rates has unintended consequences.
People focus on those who start working part-time as a conduit to eventual full-time work and self-sufficiency if welfare abatement rates are lowered to make part-time work more attractive.
What is forgotten is those who are currently working full-time, or part-time, who because of the increase in income from part-time work plus continued for partial benefit receipt find that part-time welfare dependency is optimal for them. They drop out of full-time work.
An additional reason for this entry of new people onto the welfare rolls is that welfare benefits come with a range of second tier benefits. In addition to housing supplements to pay the rent, there are special grants that can be applied for to pay for unexpected expenses such as medical and dental work or damaged around the house.
As alluded to previously, one of the welfare reforms introduced in the United States in the early 1980s was to increase the welfare abatement rate on earned income to 100% from 67% which it applied since the 1960s. This increase in welfare benefit abatement rates to 100% on earned income increased the gap between welfare dependency and working full time. The idea was to make full-time work a more attractive option relative to welfare benefit receipt.
The blogs so far
part-one-the-labour-leisure-trade-off-and-the-rewards-for-working
part-two-the-labour-supply-effects-of-welfare-benefit-abatement-rate-changes
part-3-abatement-free-income-thresholds-and-labour-supply
part-4-in-work-tax-credits-and-labour-supply
part-5-higher-abatement-rates-and-labour-supply
Is welfare dependence optimal for whom – part 1? The labour-leisure trade-off and the rewards for working
04 Dec 2014 2 Comments
in applied welfare economics, labour economics, labour supply, politics - New Zealand, welfare reform Tags: Labour leisure trade-off, welfare reform
The higher is the welfare benefit, the greater the probability that an individual will choose to go on welfare rather than work. Welfare dependency is the most rewarding leisure-labour trade-off for them.
The higher the wage on offer to a given worker in the labour market, the greater is the probability that they will choose to work rather than go on welfare. Working is the most rewarding leisure-labour trade-off for them.
Both the income and substitution effects of welfare benefits provide a disincentive to work. Higher income levels from generous welfare benefits induce higher consumption of all normal goods, including leisure. Income taxes and a high benefit abatement rate provides little incentive to work (the substitution effect) for lower paid workers and some second earners.
When confronted with the choice of a low-paying job and a generous welfare benefit, some will choose welfare over work. These workers are responding rationally to the (dis)incentives embedded in the labour market and welfare system. For them, welfare dependency is optimal.
This is particularly true for single parents with low labour market skills. One or more children may generate more net income (from increased welfare benefits) than working in the labour market and paying child care. If there is no expiry date for these welfare benefits, some individuals who go on welfare will stay on welfare for a long period of time.
Of course, the economics of crime comes up. A condition of receipt of welfare benefits in just about every welfare state is healthy adults must make themselves available for work and actively look for work.
Most of the essentials of the impact of welfare reform on labour-leisure trade-offs are captured, and most policy dilemmas are clearly defined within the framework in Figure 1. Figure 1 illustrates the position of two workers regarding whether to work (the participation decision) and how many hours to work.
Figure 1: The basic leisure-labour trade-off
The hourly wage rate represented by the symbol W in Figure 1 is traded-off against working fewer or no hours. This additional of leisure time includes: pure leisure; household production such as child care, cooking and cleaning; education and other human capital investments; and personal time such as self-care and sleep.
- Worker 1 in Figure 1 works 40 hours while worker 2 with different circumstances works part-time in Figure 1.
- Worker 1 could be a male with no dependents so not working full-time has a relatively high opportunity cost even if low paid.
- Women who higher qualifications are also more likely to be persistent workers alternating between full-time career and part-time work when there are child care responsibilities.
- Worker 2 in Figure 1 could be a sole parent or a second earner in a married couple with young children. For these workers, working can have a high opportunity cost because of the cost of child care, especially if the sole parent or second earner is low paid.
- For workers with a high opportunity cost of work and low wages from working, for them, welfare dependents can be quite optimal.
- Not so for society because the welfare benefits conditional on people making themselves available for work and taking steps to find it and stay in work.
The next few blogs will explain how various welfare reforms change the labour leisure trade-off for welfare recipients. There are three main parameters in any welfare system:
- the amount of the welfare benefit,
- the threshold for the benefit abatement on earned income, and
- the benefit reduction rate for income exceeding the abetement-free threshold.
This is not to ignore work testing and work requirements, these complications are postponed to later blogs. All of these parameters and the implications of changing them on labour supply will be discussed in future blogs.
The blogs so far
is-welfare-dependency-optimal-for-whom-part-3-abatement-free-income-thresholds-and-labour-supply
is-welfare-dependents-optimal-for-the-whom-part-4-in-work-tax-credits-and-labour-supply
is-welfare-dependence-optimal-for-whom-part-5-higher-abatement-rates-and-labour-supply
is-welfare-dependence-optimal-for-whom-part-6-mandatory-work-requirements-and-labour-supply
is-welfare-dependence-optimal-for-whom-part-7-the-role-of-tagging-in-welfare-benefits-system
Adjusting for transfers and taxes reduces income inequality between highest and lowest quintiles by 50% » AEI
02 Dec 2014 Leave a comment
in applied welfare economics, labour economics, poverty and inequality, welfare reform Tags: poverty and inequlaity
Lindsay Mitchell – Labour’s Carmel Sepuloni: be careful what you ask for
01 Dec 2014 Leave a comment
in applied welfare economics, labour economics, labour supply, minimum wage, politics - New Zealand, poverty and inequality, welfare reform Tags: Carmel Sepuloni, inequality and poverty, James Heckman, James Julius Wilson, labour economics, Roland Fryer, welfare reform
Lindsay Mitchell has a nice blog today on the views of the new Labour Party spokesman on social development – the New Zealand ministerial portfolio covering social security and social welfare
Carmen Sepuloni disagrees with National Party’s policy of requiring solo mothers to look for work. She believed there should be support for sole parents to return to work, but not a strict compulsion:
It is a case by case basis. I don’t think it should be so stringent because it’s not necessarily to the benefit of their children.
The American sociologist James Julius Wilson in The Truly Disadvantaged (1987) and When Work Disappears (1996) wrote about how more children are growing-up without a working father living in the home and thereby gleaning the awareness that work is a central expectation of adult life:
. . . where jobs are scarce, where people rarely, if ever, have the opportunity to help their friends and neighbors find jobs. . . many people eventually lose their feeling of connectedness to work in the formal economy; they no longer expect work to be a regular, and regulating, force in their lives.
In the case of young people, they may grow up in an environment that lacks the idea of work as a central experience of adult life — they have little or no labor force attachment.
Carmel Sepuloni appears to believe that work is not a central expectation of adult life. Hard work used to be a core value of the Labour Party.
The toughest week of door knocking for the Labour Party in the 2011 general elections was after the Party promised that the in-work family tax credit should also be paid to welfare beneficiaries.
Voters in strong Labour Party areas were repulsed by the idea. These working-class Labour voters thought that the in-work family tax credit was for those that worked because they had earnt it through working on a regular basis. The party vote of the Labour Party in the 2011 New Zealand general election fell to its lowest level since its foundation in 1919 which was the year where it first contested an election.
When Sepuloni was on the Backbenchers TV show prior to the recent NZ general election, she was asked by the host whether she would support a $40 per hour minimum wage if that would mean equality. She did not hesitate to say yes.
Sepuloni does not seem to have noticed that wages must have something to do with the value of what you produce and the ability of your employer to sell it at a price that covers costs.
The economic literatures (Heckman 2011; Fryer 201o) and sociological literatures (Wilson 1978, 1987, 2009, 2011), particularly in the U.S. is suggesting that skill disparities resulting from a lower quality education and less access to good parenting, peer and neighbourhood environments produce most of the income gaps of racial and ethnic minorities rather than factors such as labour market discrimination.
Grounds for optimism about the effectiveness of welfare reform in overcoming barriers to employment lie in the success of the 1996 federal welfare reforms in the USA.
The subsequent declines in welfare participation rates and gains in employment were largest among the single mothers previously thought to be most disadvantaged: young (ages 18-29), mothers with children aged under seven, high school drop-outs, and black and Hispanic mothers. These low-skilled single mothers who were thought to face the greatest barriers to employment. Blank (2002) found that:
At the same time as major changes in program structure occurred during the 1990s, there were also stunning changes in behavior. Strong adjectives are appropriate to describe these behavioral changes.
Nobody of any political persuasion-predicted or would have believed possible the magnitude
of change that occurred in the behavior of low-income single-parent families over this decade.
People have repeatedly shown great ability to adapt and find jobs when the rewards of working increase and eligibility for welfare benefits tighten.
via Lindsay Mitchell: Carmel Sepuloni: be careful what you ask for.
Milton Friedman on Welfare
30 Nov 2014 Leave a comment
in Milton Friedman, welfare reform Tags: Milton Friedman, welfare reform
Have @NZGreens accidentally published a chart showing substantial and pretty continuous real wages growth in recent decades?
12 Nov 2014 Leave a comment
in labour economics, politics - New Zealand, poverty and inequality, welfare reform Tags: poverty and inequality, The Great Enrichment
The UK’s welfare benefits cap of £26,000 per year – the income of the average working family
09 Nov 2014 Leave a comment
in welfare reform Tags: benefit caps, UK politics, welfare reform
Since the cap was introduced a year ago, more than 38,600 households have had the amount they are paid in benefits limited to £26,000 a year – the income of the average working family.
Despite predictions by critics that the new rule would cause misery, the poll – conducted by Ipsos Mori – found that 45 per cent of those affected say they have been spurred to return to work.
Benefits for couples and lone parents have been capped at £500 per week, or £350 for a single. childless person.
The £26,000-a-year cap is equivalent to an income of £34,000 before tax, which is similar to the salaries of many nurses and teachers.
Cheryl Prudham, her husband Robert and their nine children are going on a trip to Menorca, just weeks after the mum said she should be given a bigger house at the expense of the taxpayer.
HT: Daily Mail – their photos above are a little bit too focused on ethnic minorities. The Daily Mail’s audience is the working class Tory and the lower middle class.
Utopia, you are standing in it! 
Recent Comments