Urban Poverty Issues and Antipoverty programs

1
Urban Poverty Issues and Antipoverty programs

• Prof. David E. Clark
• Weeks 11-12

2
Why Study Poverty in Urban Economics?

• Spatial concentration
• Urban vs. Rural
• Central city vs. suburban
• The correct policy recommendation depends on a
  correct analysis of the problem.

3
Defining Poverty

• One Definition
• An individual is poor if he/she has little money
  income.
• Problems with definition
• This is an absolute measure vs. a relative one
• Considers only money income, but not assets
• Doesnt consider investments in human capital
• More ideal definition
• 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.

4
Defining Poverty - Government

• 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.
• A survey done in 1950s established that a
  nutritious meal costs approximately 1/3rd of
  annual budget of poor.
• Thus, define nutritious diet and multiply by
  three to get the poverty line.

5
Defining Poverty - Government

• If your income falls below some threshold, you
  are in poverty.
• Most frequently cited is the line for a family of
  4 persons.
• There are actually 48 poverty thresholds.
• Look at Census web site
• http//www.census.gov/hhes/poverty/threshld.html

6
Components of income

• Excluded
• In-kind transfers (e.g., housing and food
  subsidies).
• Net worth
• Taxes and other payments.
• Permanent income.
• Does not adjust for under-reporting of income,
  believed to be high in the poor.
• No regional variation in prices.

• Included - cash income
• Earnings from WS
• Social Security, SSI, public assistance.
• Dividends, interest on savings and investments
  rental income, estates, trusts, royalties.
• Unempl. comp, workers comp., vet. benefits.
• pensions, annuities, alimony, child support,
  periodic income

7
Inflationary Indexing

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

8
Who are the poor and where do they live?
9
Magnitude of Poverty in the U.S.

• Year poor Percent of total
• 1929 60 mil. approx. 50
• 1959 39.5 mil. 22.4
• 1969 24.1 mil. 12.1
• 1979 25.3 mil. 11.6
• 1989 31.5 mil. 12.8
• 2001 32.9 mil. 11.7

10
Influence of Definition

• Census has been experimenting with alternative
  measures of poverty.
• Look at web site
• http//www.census.gov/hhes/poverty/poverty01/rdta
  ble6.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.

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Profile of Poor Table 14.3

• Who are they?
• Minority concentration.
• Female headed households
• Heavy burden on children
• Uneducated (below HS degree).
• Where are they located?
• Metro vs. rural
• Central cities vs. suburbs

12
Look at Underlying Causes of Poverty

• Causality necessary to identify appropriate
  public policy to mitigate problem.

13
Macro and regional economic stagnation

• Evidence suggests that urban unemployment is
  heavily influenced by economic growth.
• Recessions are increasingly regional in nature.
• Minorities suffer most during slow growth
  periods?
• Earnings disparity between blacks and whites
  increases.
• Expansionary macro policy can be used.
• Imprecise policy tool.
• Potential tradeoff with inflation.

14
Labor Market Discrimination against Central City
Minorities

• Earnings functions nearly always identify racial
  differences in earnings.
• Minorities earn less even after controlling for
  education and experience.
• Growth of earnings lower for minorities as well.

• Earnings

White
Minority
Age
15
Discrimination Costly (assuming equal
productivity)

• White Labor Market

• Minority Labor Market

S
W
W
S
WW
WM
D
D
L
L
LW
LM
16
Potential explanations

• Is all else equal?
• Measuring educational quality
• Measuring effort
• Statistical discrimination
• Race or ethnicity is used as a signal.
• Signal may be efficient.
• Use of approach is clearly inequitable.

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Demographic Explanations

• Female headed households are more likely to be
  living in poverty.
• Reasons
• Most are single-parent households so full-time
  work frequently not possible.
• Female wages lower than male wages
• Only about 1/3 of single mothers receive child
  support.
• What has been happening to this over time?
• Very strong growth

18
Spatial Mismatch between Jobs and Employment

• Poor are concentrated in cities.
• McKinney and Schnare (1989 Journal of Urban
  Economics) find that overall patterns of
  integregation have improved slightly over period
  1960-1980.
• Primarily due to mobility of black households
  into higher income neighborhood strata where
  exposure to whites is greater.
• Within neighborhood income strata, no change.
• Jobs increasingly decentralizing.

19
Income constraints

• However, look at evidence from Margo article.
• Holding constant other factors, nonwhites more
  likely to live in central city.
• Study by Kain (1985) showed that if location
  choices were exclusively by nonracial factors, we
  would expect twice as many blacks living in
  suburbs.

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Prejudice and Discrimination

• Prejudice is an attitude based on race
  Discrimination is an action where people treated
  differently based on race.
• Question
• If blacks prefer to live near whites, even if
  whites dont prefer to live near blacks, why
  dont we observe leap-frogging behavior?
• Possibly tied to discrimination in housing
  markets.

21
Evidence on Housing Discrimination?

• Some evidence that white buyers, renters,
  borrowers have been treated differently
  historically than black counterparts, although
  improvements have been noted.
• Fair housing audits are used for real estate
  agents, landlords, lenders.
• Steering behavior by real estate agents may be
  based on using race as a proxy for preferences of
  individuals (i.e., statistical discrimination).
• Again, discrimination is costly to seller,
  landlord, lending institution.

22
Exclusionary Zoning

• Exclusionary zoning has also had an effect on
  residential land use.
• 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.
• Techniques
• Minimal square footage, minimum lot size, minimum
  frontage, etc. excludes low income from
  neighborhoods.

23
Regardless of cause, segregation exists.

• Look at the consequences!

24
Does spatial mismatch explain poverty?

• Evidence has been mixed.
• Some (e.g., Ellwood) point to racial factors as
  alternative factors.
• Others Ihlanfeldt, Sjoquist, Leonard suggest that
  it is an important influence.
• Next time, we look at Ihlanfeldt article.

25
Public Policy

• Since the Great Society, spending on anti-poverty
  policies has increased dramatically, and its
  level in 1987 was over 100 billion.
• There are many anti-poverty programs, and we
  cannot do justice to the literature in a short
  presentation.
• We examine just a few actual policies.
• Focus is on understanding broad economic issues.

26
Macroeconomic Policy

• Goal is stimulate the demand side of the local
  labor market
• Low income households (especially minorities)
  suffer relatively more during recessions.
• Macroeconomic expansionary policy is too broad a
  brush to apply to specific geographic regions.
• May conflict with other macroeconomic goals.
• General policy direction - avoid deep national
  recessions.

27
Stimulating Local Job Growth

• 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.
• Approximately 1/4 of new jobs from local growth
  increases the labor force participation rates of
  local residents.
• Minorities benefit most from growth.
• Higher wage industries provide greater employment
  benefits for local residents.

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Hysteresis Effect

• Bartik argues that job growth has LR effects on
  unemployment and participation rates due to
  hysteresis effects.
• SR job experience increases human capital for
  local residents.
• Acquired skills increase self-confidence and
  reputation from employers.
• Local residents more employable in LR.

29
Training Programs

• 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.
• Predominating notion during the 1960s.
• Strong growth in 1960s, moderate growth in
  1970s, decline during 1980s and 1990s.
• Some welfare reforms give limited training to
  current welfare recipients.

30
Ashenfelter (1978)

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

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Findings

• Compared trainees with a control group
• Findings
• Courses produced increase in the earnings of all
  trainee groups in period immediately following
  course completion.
• Increase for both white and black women was
  300-600 per year (in about 1970), and did not
  decrease in 5 years after training.
• Increase for men was similar, but fell by 50
  over the 5 year period.

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Other insights in literature

• Primary success is on programs which target
  youth.
• Some success in raising earnings for women.
• Less success with men.
• Earnings (wagehours) increased by increasing
  hours.

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Strengths and weaknesses

• Strengths
• Politically more attractive than others
• Have rebounded as a result of welfare reform.
• Some evidence of cost effectiveness
• Weaknesses
• More expensive than other policies
• If supply of skills increases and demand is low,
  may not be effective
• Requires coordination of demand and supply side.

34
Income Support Programs

• Examples of direct income transfers
• Public assistance includes AFDC, SSI for aged and
  blind, Veterans Pensions, General assistance.
• Social insurance includes Social Security,
  unemployment insurance, workers compensation,
  veterans compensation
• Rationale
• The person him/herself is the best judge as to
  how to increase utility.

35
Welfare loss from payments-in-kind vs.
payments-in-cash

Food
Direct income support parallel shifts the budget
line
F
F
U2
U1
Other Goods
O
O
36
Scenario 1 High food consumers
Payment-in-kind shifts only a portion of
budget line.

Food
No consequence for heavy food consumers
F
F
U2
U1
Other Goods
O
O
37
Scenario 2 Low food consumers

U1
U2
Food
U3
Preferred location
F
F
O
Other Goods
O
38
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.

39
Public Welfare

• AFDC is probably the most publicly visible income
  support program.
• Means tested
• Payment made by federal government.
• Can be augmented by state government
• Average payments vary substantially between
  states. e.g., in a year when Calif. average
  payments were 553/month, Alabama awarded
  114/month.

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Consequences

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

41
Labor-Leisure Choice

• Income

Slope of budget linedI/dleisure
I1
Leisure
La1
Labor
42
Impact of Welfare on Budget Constraint

• Income

wage0
Assumes 100 takeback rate
IBreakeven
IGIncome grant
Leisure
Labor
43
Equilibrium point

• Income

Assumes 100 takeback rate
IGIncome grant
Leisure
Labor
44
Are those who dont work lazy?
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Why not simply reduce takeback rate?
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Breakeven point

• Define Ieearned income
• ttakeback rate
• Grant is taxed at Iet
• Breakeven point is thus the point where IetIG.
• Solving for I gives IeIG/t
• Thus, if t1.0 then breakeven IIG
• If t0.5, then IeIG/0.52IG

47
Evidence on Welfare Impacts

• There is a substantial literature here and we
  simply provide overview here.
• Work disincentives fairly well established.
• Strong evidence of destabilization of families.
• Mixed evidence on welfare migration

48
Welfare reforms

• Wisconsin was pioneer
• e.g., W2, Edfair
• Current reforms
• Phase out for income guarantee.
• Required work participation after 24 months of
  assistance
• Assistance eliminated after 60 months
• Period of training and child-care assistance

49
Has welfare reform been successful?

• Timing of reforms was fortunate
• Lengthy expansion during 90s
• Welfare rolls fell substantially
• 52 decline (94 99)
• Still concentrated in largest cities
• Market effects
• Will lower the market wage for low-skilled
• Bartik (1998) estimates up to 8 drop in earnings
  for low-skilled women.
• Effect on incentives

50
Problem of Urban Ghettos

• Two policies have been suggested
• Dispersal
• Development

51
Dispersal arguments

• Ghetto is a place that is fundamentally ugly, and
  it fosters activities that are considered
  unacceptable in nonghetto areas.
• Ghetto represents a negative externality for the
  MSA.
• Ghetto aggravates and accentuates urban problems.
• Problems of the Ghetto
• Spatial Mismatch, and Blight-flight process only
  makes the situation worse.
• Low educational quality in city schools.

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Policy Proposal Ghetto Dispersal

• Improve efficiency of labor market (informational
  systems for suburban jobs).
• Create suburban housing glut for low income.
• Suburbanize even if its at the expense of
  integration.
• Subsidize suburban schools to take ghetto
  residents.

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Counter-arguments

• Dispersal is not feasible.
• Disruptive to integration goals.
• Creating mini-ghettos will only create new
  pockets of poverty in the suburbs.
• Development of ghetto is preferable.

54
Case for Development Economic

• Multiplier effects.
• External agglomeration economies
• One success lowers costs to others in region.
• Demonstration effects
• Leadership effects
• Keep your most talented and ambitions in the
  community.

55
Political Case for Development

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

56
Development Techniques

• Greenhouse industries
• Pool resources in CDCs.
• Enterprise Zones

57
Cutler and Glaeser Article

• Are Ghettos good or Bad?
• Quarterly Journal of Economics, 1997, p. 827 -872