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Ec355, lecture 5 actually 4'5: Poverty and Social Policy Lecturer: David Reinstein

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Title: Ec355, lecture 5 actually 4'5: Poverty and Social Policy Lecturer: David Reinstein


1
Ec355, lecture 5 (actually 4.5) Poverty and
Social Policy Lecturer David Reinstein
2
This week
  • Poverty and Social Policy
  • Defining and measuring poverty
  • Poverty in the UK (and other wealthy countries)
  • Social Policy
  • Policies to combat poverty (in general)
  • The UK welfare system
  • Global Poverty (Besley and Burgess paper)
  • Measurement, patterns, trends
  • The role of policy
  • Cleaning up
  • Term paper
  • Exercises
  • Pizza tax additional intuition
  • Discussion
  • Student evaluation of teaching
  • Reading CM chapter 15 (skim 15.4 and 15.5),
    17.1-17.2, skim 17.3, read 17.5. Besley and
    Burgess (2003)

3
Defining poverty
  • When needs exceed resources
  • Needs for survival? For optimal health?
  • Attainment of minimum capabilities (health,
    transportation, social acceptance, education)
  • Needs for full participation in society?
  • Should our measure depend on individual choices?
  • A relative measure?
  • Economics some minimum level of utility?
  • Again, the relevant measure depends on its
    intended use! The question which measure is
    better cannot be answered in a vaccum.
  • discuss

4
Poverty lines
  • A poverty line identifies a level of income
    considered to be necessary to prevent poverty.
  • Difficulty Different costs, requirements under
    different conditions and societies, public
    services matter.
  • The poverty line may have to be adjusted for
    local purchasing power and background amenities.

5
Absolute poverty line
  • Rowntree (1901) The level of income necessary
    for the bare necessities of life.
  • measures poverty in terms of lack of command
    over basic consumption items that are essential
    for maintaining physical efficiency now called
    the cost of basic needs (CBN) method of setting
    poverty lines (Ravallion and Bidani 1994). The
    poverty line is the sum of food and nonfood costs
    in a basic consumption basket. (Kakwani, 2003)

6
determined by physical needs
7
Relative poverty
  • Level of income that enables participation in
    society.
  • A subjective measure. Townsends index gained
    influence in the 1980s. Criticised for being
    based on individual choices.

8
  • 2008 A single person in Britain needs to earn at
    least 13,400 a year before tax for a minimum
    standard of living, the Joseph Rowntree
    Foundation says. (see singleadult_minimum.pdf
    for more details (on CMR))

Note that a commonly used measure of poverty is
having income less than half of the national
average (i.e., below about 12,000/year per
capita in the UK). Compare Global poverty line
defined given as roughly 1.25 per day (about 6,
300 per year). The second tier benchmark of
about twice this (derived from the average of
national poverty lines in lower middle income
countries) covers a third to half of the world.
9
Outcome measures of poverty
  • Sen (1983) poverty is an absolute notion in the
    space of capabilities but very often it will take
    a relative form in the space of commodities or
    characteristics
  • For richer communities, however, the
    nutritional and other physical requirements
    were typically already met, and the needs of
    communal participation would have a much higher
    demand in the space of commodities
  • Possible critique Couldnt the person in the
    richer community join a poorer one instead?
  • (Townsend Even the core capabilities are
    relative to a particular society)

10
Measuring poverty as P(y,p) Sens (1976) Axioms
  • Focus changing the income of someone above the
    poverty line should not effect P
  • Monotonicity axiom P should rise (other things
    held equal) if the income of a poor household
    falls (some element of vector y declines).
  • Weak transfer axiom A transfer of income from a
    poor household to a poorer household should
    decrease P (and vice/versa).
  • Anonymity/symmetry labeling doesnt matter
  • ?what about the number or ratio in poverty?

11
Measures
  • Poverty headcount ratio fraction of population
    below poverty threshold. Fails monotonicity and
    weak transfer axioms.
  • Hq/n
  • Poverty gap (average) distance below the
    poverty line for those in poverty. Fails weak
    transfer axiom.

12
Sens index (1976)
  • Where q is the number in poverty, n the total
    population, G is the Gini coefficient among the
    poor, z is the poverty line, yi is (poor person)
    is income, hence gi her income gap, and I the
    average income gap (S(z) is the set of poor
    people).
  • Sens P satisfies the previous axioms plus some
    more that Sen thought important.
  • As Sen shows, this measure in effect, weights
    income gaps by rank in some interpersonal welfare
    ordering. Note if the poor are all equally poor
    (G1) then only the income gap HI matters.
  • (I see no clear connection between this index and
    capabilities.)

13
Poverty in the UK (and other wealthy countries)
14
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15
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17
Social Policy
  • Policies to combat poverty (in general)
  • Public goods and services with progressive
    taxation pro-poor
  • Regulation and mandates (e.g., minimum wage
    legislation, affirmative action
    anti-discrimination programmes)
  • Benefits (and income redistribution) ...
  • Other
  • Encouraging charitable giving and volunteering
    (tax benefits)
  • Government employment, Birth control policies
    (controversial), (Developing countries)
    provision of micro credit, improved property
    rights.
  • direct and indirect

18
Benefit issues
  • Cash payments versus targeting neccesities (food
    stamps, council housing) and merit goods
    (education, medicines). Class discussion of pros
    and cons
  • Argument for cash 1. With rational actors who
    also are acting in their (own and childrens)
    best interest a lump-sum transfer is optimal (see
    2nd welfare theorem). 2. government provision of
    goods or directed benefits are vulnerable to
    other inefficiencies, distortions, and fraud.
  • Argument for other 1. Lump-sum transfers are
    infeasible perhaps in-kind transfers have less
    distortionary effect then (e.g., a means-tested
    benefit). 2. Poor people may need to be guided to
    merit goods perhaps they are more vulnerable
    to the pathologies discussed in behavioral
    economics and psychology such as myopic
    preferences. 3. Benefits are given to parents
    they may not act in their childrens best
    interests. 4. Externalities.

19
  • Contingent benefits target an identifiable group
    (e.g., the retired, single mothers, or low-caste
    Indians) more likely to experience poverty versus
    income-related (means-tested) benefits.
  • Argument for former Less tied to behaviour, so
    less distortion of the labour supply decision.
    May be cheaper to administer.
  • Argument for latter With a positive mcpf
    (remember that?) the less spent the better.
    Means-testing can better target those in real
    poverty.

20
Digression to labour market (ch 13)
  • Labour-leisure tradeoff (depict indifference
    curves)
  • Budget constraint (leisure versus consumption)
    determined by wage rate (net of taxes) slope in
    hours worked (depict)
  • Impact of proportional income tax A decrease in
    the (net) wage rate will lead to an decrease in
    the labour supply only if the substitution effect
    dominates the income effect.

21
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22
(Dis)incentives Poverty and unemployment traps
  • (refer to fig. 13.4 and box 13.4)
  • Unemployment benefits (and wealth and informal
    means) lead to a minimum level of income (or
    consumption) even with no hours worked. This
    point of discontinuity means some will choose not
    to work. Depict adjusted budget constraint.
  • The rate of benefit withdrawal can mean that
    purchasing power declines as hours worked
    increases over some range here no one would
    want to work (a number of hours in this range).
    This is a poverty trap.
  • An unemployment trap is where this occurs for the
    first hour worked.
  • Depict both

23
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24
The negative income tax (will fix)
  • Designed to give more incentive to work, remove
    poverty traps (counter benefit withdrawal)
  • CM depicts a simple lump-sum benefit with
    subsequent proportional taxation this is
    essentially an administrative change only a
    real negative income tax is different. (I just
    realised this, will give a corrected picture for
    next week)
  • Subtle problem to have progressive taxation, at
    some point rate must increase, and negative
    income tax can make this jump more abrupt.
  • (details) and graphs here
  • Ynet Yt-t(Yi-YA)

25
Minimum wage legislation
  • The standard argument is that it under perfect
    competition it creates unemployment and
    inefficiency, merely shutting the low-skilled out
    of the market.
  • But with monopsony power (e.g., a single employer
    and many independent workers) a price floor can
    improve efficiency. depict on board At a
    higher wage more people are willing to work. And
    even if employment is unchanged this should lead
    to lower inequality.

26
(monopsony power)
  • MRP is the Marginal Revenue Product.
  • S is the elastic supply of labour.
  • MFC is marginal factor cost this includes both
    the wage paid and the increment to previous wages
    needed to hire another unit of labour.
  • Without a minimum wage the monopsony firm sets
    MFCMRP at level Lm yielding wage 4 (on the
    supply curve.
  • With the minimum wage the monopsony firm sets
    MRPminimum wage 5 and hires L2 in labour.
    The deadweight loss of monopsony is also reduced.

27
  • Empirical results are mixed. Discuss Card, etc.
  • Fuchs et al. (1998) polled labor economists at
    the top 40 research universities in the United
    States on a variety of questions in the summer of
    1996. Their 65 respondents split exactly 50-50
    when asked if the minimum wage should be
    increased.
  • Minimum wage is a blunt tool may help in some
    sectors, hurt in others, especially those that
    can switch to cheaper labour markets.

28
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29
Minimum wage introduced in UK in 1999
  • Currently 5.73/ hour (compares, e.g., to 4.31
    in USA)
  • The Low Pay Commission found that, rather than
    make employees redundant, employers have reduced
    their rate of hiring, reduced staff hours,
    increased prices, and have found ways to cause
    current workers to be more productive (especially
    service companies).

30
The UK welfare system
  • Major expansion of the welfare state in the
    1940s, some scaling back in the 1980s.
  • Job seekers allowance contribution based and
    income-based (basic rate) (see JobCentre for some
    details note terminology has changed since CM)
    . Must show you are actively seeking work.
  • Income support (alternate) means-tested for
    groups not required to seek work (pensioners,
    single parents, disabled)
  • Retirement pension
  • Housing and council tax benefit, social fund
  • Child benefit
  • Working tax credit
  • Incapacity and disability benefit
  • Welfare to work (education and training scheme
    direct government provision/subsidy)

31
Government (welfare) spending
32
UK benefit rates
  • See http//www.jobcentreplus.gov.uk/JCP/stellent/g
    roups/jcp/documents/websitecontent/dev_015666.pdf)
  • For single person over age 25
  • JSA max 64.50
  • Income support same

33
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34
Replacement rates (updated to 2003, OECD)
35
Global Poverty (Besley and Burgess paper)
  • Although the fraction in poverty is falling, the
    absolute numvers have shown limited change
  • Millenium Summit (2000) ambitious set of goals,
    including reducing the proportion of people
    living on 1 a day from 30 to 15 of the worlds
    population by 2015.
  • Our agenda for reducing poverty needs to be
    built on firm theoretical foundations why?
  • How to achieve this?

36
Poverty line
  • Chen and Ravillion (2001) use price and
    consumption basket data fom the 1993
    International Comparison Project to come up with
    the 1.08/day figure Also reflects domestic
    poverty lines.
  • A conservative measure for middle income
    developing countries.

37
Description Who the poor are and how they live
  • Great heterogeneity by region, country, and
    within countries.
  • The Chinese Miracle and the African Tragedy
    (next slide)
  • Cross-country analysis. Difficulties in
    comparability. Signpost for future work/
    combining macro and micro findings.

38
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40
Variations in inequality
  • Changes in income/capita do not seem correlated
    to changes in inequality (at least in this
    context) stability within countries over time.
  • Regression relation to poverty differences

41
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42
Role of policy
  • Previous Washington consensus sound fiscal and
    monetary policy, privatization, property rights,
    free trade.
  • Change in economic thinking/focus
  • Institutional and political context crucial
    consider elite and political capture
  • Need for pro-poor policy, particularly in
    credit and property rights
  • Land reform (tricky)
  • Need to focus on distributional impact of growth
  • Redistribution though taxes is difficult
  • Social infrastructure important

43
Credit
  • Pro-poor expanded credit aggregate credit
    expansion not enough.
  • Argument depends on particular asymmetric
    information/moral hazard story.
  • Microcredit peer selection and monitoring,
    typically operated by NGOs. Why do they have
    such high repayment rates.

44
Property rights (and land reform)
  • Equity and efficiency?
  • Means to access credit
  • Alleviating moral hazard
  • But unintended consequences
  • Reputation and networks as substitutes for formal
    enforcement
  • Duflo The poor are not given capital optimally
    because they cannot make binding comittments

45
Last weeks questions
  • CM chapter 14 (Q 2 3)
  • Q. 2 What advantages/disadvantages does the Gini
    coefficient have over other measures of equality?
  • Advantages A single number (unlike Lorenz
    curves), widely used, interpretable graphically
    (via Lorenz curves). Satisfies the anonymity and
    relativity axioms.
  • Disadvantages Hard to interpret as a welfare
    measure the weights placed on each individual
    are fairly arbitrary. May underemphasize the
    income distribution at the bottom end, which is
    more relevant to extreme poverty. Is not as
    elegantly decomposable into within-group and
    between group inequality (as in Theils entropy
    index).

46
  • Q 3 An index of inequality is constructed based
    on unequivalised individual incomes at a
    particular moment. Would the index be higher or
    lower if (a) lifetime income was used (b) if
    equivalised income was employed and (c) if
    household income was used instead?
  • a. Lower, as income fluctuates throughout the
    life cycle, adding variance to the measure.
  • b. So, the texts discussion of equivalence
    scales is confusing. In the literature not
    using equivalence scales means assuming that
    everyone in a large household (with total income
    Y) gets the same income as a singleton with the
    same income Y. So it is as if everyone in the
    household had income Y. This means basically
    assuming that all goods in the household are
    non-rival (like heat). Using equivalised income
    means adjusting the incomes downward for people
    in larger households. As larger households tend
    to be wealthier, adjusting these incomes
    downwards (relative to smaller households) will
    lead to a lower measure of inequality, at least
    at first. But if we keep adjusting it downwards
    (towards the extreme in which each individual in
    a household effectively gets only a 1/N share of
    the income) the equivalized income of the
    (individuals in the) larger households eventually
    goes below that for lower households, and our
    measure of inequality increases again. This
    argument depends on per-capita income (the 1/N
    measure) being lower in larger households.
  • c. This question is hard to interpret, sorry.

47
New homework
  • CM exercises 15.2, 15.4 (based on recent recent
    statistics), 17.1 (explain in context of poverty
    trap), 17.3 (give arguments in both directions.
    Also 13.5.
  • Read CM ch 4-5, also (added) 13.1-13.2 (ignore
    Slutsky, ignore reservation wage, dont worry
    about real income versus money-income effect.
    Know the graphical analysis), 13.4 benefit traps.
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