Urban Poverty Issues and Antipoverty programs Prof David

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

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.

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.

Defining Poverty - Government n 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). Based on the expense associated with a nutritious meal. u A survey done in 1950’s established that a nutritious meal costs approximately 1/3 rd of annual budget of poor. u Thus, define nutritious diet and multiply by three to get the poverty line.

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 actually 48 poverty thresholds. u Look at Census web site u http: //www. census. gov/hhes/poverty/threshld. html

Components of income n Included - cash income n Excluded u Earnings from W&S u In-kind transfers (e. g. , u Social Security, SSI, housing and food subsidies). u Net worth u Taxes and other payments. u Permanent income. u Does not adjust for underreporting of income, believed to be high in the poor. u No regional variation in prices. 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

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

Who are the poor and where do they live?

Magnitude of Poverty in the U. S. n Year 1929 1959 1969 1979 1989 2001 #poor Percent of total 60 mil. approx. 50% 39. 5 mil. 22. 4% 24. 1 mil. 12. 1% 25. 3 mil. 11. 6% 31. 5 mil. 12. 8% 32. 9 mil. 11. 7%

Influence of Definition n n Census has been experimenting with alternative measures of poverty. Look at web site: u n http: //www. census. gov/hhes/poverty 01/r&dtable 6. html 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.

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

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

Macro and regional economic stagnation n Evidence suggests that urban unemployment is heavily influenced by economic growth. Recessions are increasingly regional in nature. 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.

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

Discrimination Costly (assuming equal productivity) n White Labor Market n S W Minority Labor Market W S WW WM D LW L D LM L

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.

Demographic Explanations n n Female headed households are more likely to be living in poverty. 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

Spatial Mismatch between Jobs and Employment n Poor are concentrated in cities. u Mc. Kinney and Schnare (1989 Journal of Urban Economics) find that overall patterns of integregation have improved slightly over period 1960 -1980. 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.

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.

Prejudice and Discrimination Prejudice is an attitude based on race; Discrimination is an action where people treated differently based on race. n Question: n 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.

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.

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.

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

Does spatial mismatch explain poverty? 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. n

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.

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.

Stimulating Local Job Growth n n Alternatively, local policy makers can stimulate local demand for labor. Bartik (1993) “Who Benefits from Local Job Growth: Migrants or the Original Residents” Regional Studies, 1993, Vol. 27(4), 297 -311. 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.

Hysteresis Effect 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. n u Acquired skills increase self-confidence and reputation from employers. u Local residents more employable in LR.

Training Programs n n This type of program is aimed at the supply side of the labor market. 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.

Ashenfelter (1978) Orley Ashenfelter wrote a paper which appeared in Review of Economics and Statistics, in 1978. n Examined workers completing governmentsponsored job training course in 1964. n Examined panel data to analyze the incomes earned through a 5 year post-training period. n

Findings Compared trainees with a control group n Findings: n 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.

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

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 supply side.

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.

Welfare loss from payments-inkind vs. payments-in-cash Food Direct income support parallel shifts the budget line F** F* U 1 O* O** U 2 Other Goods

Scenario #1: High food consumers Payment-in-kind shifts only a portion of budget line. Food No consequence for heavy food consumers F** F* U 1 O* O** U 2 Other Goods

Scenario 2: Low food consumers Food U 1 U 2 U 3 Preferred location F** F* O* O** Other Goods

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.

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.

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

Labor-Leisure Choice Income Slope of budget line=d. I/dleisure I 1 La 1 Leisure Labor

Impact of Welfare on Budget Constraint Income IBreakeven wage=0 Assumes 100% takeback rate IG=Income grant Leisure Labor

Equilibrium point Income Assumes 100% takeback rate IG=Income grant Leisure Labor

Are those who don’t work lazy?

Why not simply reduce takeback rate?

Breakeven point n n n n Define Ie=earned income t=takeback rate Grant is taxed at Ie*t Breakeven point is thus the point where Ie*t=IG. Solving for I gives: Ie=IG/t Thus, if t=1. 0 then breakeven I=IG If t=0. 5, then Ie=IG/0. 5=2*IG

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

Welfare reforms n Wisconsin was pioneer u e. g. , W 2, 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

Has welfare reform been successful? n Timing of reforms was fortunate u Lengthy expansion during 90’s u Welfare rolls fell substantially 52% decline (94 – 99) F Still concentrated in largest cities F 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. u Effect on incentives

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

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.

Policy Proposal: Ghetto Dispersal 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. n

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.

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

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