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Poverty and Welfare Programs

24 April, 2015 - 16:33

How effective have government programs been in alleviating poverty? Here, it is important to distinguish between the poverty rate and the degree of poverty. Cash programs might reduce the degree of poverty, but might not affect a family’s income enough to actually move that family above the poverty line. Thus, even though the gap between the family’s income and the poverty line is lessened, the family is still classified as poor and would thus still be included in the poverty-rate figures. The data in Figure 19.9 show that significant gains in work participation will be difficult to achieve.

Economist Rebecca M. Blank of the University of Michigan argued that empirical studies prior to federal welfare reform generally showed that welfare payments discouraged work effort, but the effect was fairly small. On the other hand, she also concluded that, following welfare reform, welfare caseloads fell more and labor force participation increased more than analysts had expected.[10] Evaluation of the effect of the federal welfare reform program on work participation, particularly over the long term, and on poverty continues.

KEY TAKEAWAYS

  1. Poverty may be defined according to a relative or an absolute definition.
  2. Official estimates of the number of people who are “poor” are typically based on an absolute definition of overty, one that makes very little economic sense.
  3. Several demographic factors appear to be associated with poverty. Families headed by single women are three times as likely to be poor as are other families. Poverty is also associated with low levels of education and with minority status. There is a wide range of welfare programs; the majority of welfare spending is for noncash assistance.
  4. Those receiving this aid do not have it counted as income in the official calculations of poverty.
  5. Welfare reform has focused on requiring recipients to enter the labor force. Many poor people, however, are not candidates for the labor force.

TRY IT !

The Smiths, a family of four, have an income of $20,500 in 2006. Using the absolute income test approach and the data given in the chapter, determine if this family is poor. Use the relative income test to determine if this family is poor.

Case in Point: Welfare Reform in Britain and in the United States

The governments of the United States and of Great Britain have taken sharply different courses in their welfare effort efforts. In the United States, the primary reform effort was undertaken in 1996, with the declaration to liminate welfare as an entitlement and the beginning of programs that required recipients to enter the labor force within two years. President Clinton promised to “end welfare as we know it.”

In Britain, the government of Tony Blair took a radically different approach. Prime Minister Blair promised to “make welfare popular again.” His government undertook to establish what he called a “third way” to welfare reform, one that emphasized returning recipients to the workforce but that also sought explicitly to end child poverty.

The British program required recipients to get counseling aimed at encouraging them to return to the labor force. It did not, however, require that they obtain jobs. It also included a program of “making work pay,” the primary feature of which was the creation of a National Minimum Wage, one that was set higher than the minimum wage in the United States. In the United States, the minimum wage equaled 34% of median private sector wages in 2002; the British minimum wage was set at 45% of the median private sector wage in 2002.

The British program, which was called the New Deal, featured tax benefits for poor families with children, whether they worked or not. It also included a Sure Start program of child care for poor people with children under three years old. In short, the Blair program was a more extensive social welfare program than the 1996 act in the United States.

The table below compares results of the two programs in terms of their impact on child poverty, using an “absolute” poverty line and also using a relative poverty line.

Child Poverty Rates, Pre- and Post- Reform

United Kingdom

Absolute (percent)

Relative (percent)

1997-1998

24

25

2002-2003

12

-21

Change

-12

-4

United States Absolute (percent) Relative (percent)

1992

19

38

2001

13

35

Change

-6

-3

Child Poverty Rates in Single-Mother Families, Pre- and Post-Reform

United Kingdom

Absolute (percent)

Relative (percent)

1997-1998

40

41

2002-2003

15

33

Change

-25

-8

United States Absolute (percent) Relative (percent)

1992

44

67

2001

28

59

Change

-16

-8

 


The relative measure of child poverty is the method of measuring poverty adopted by the European Union. It raws the poverty line at 60% of median income. The poverty line is thus a moving target against which it is more difficult to make progress.

Hills and Waldfogel compared the British results to those in the United States in terms of the relative impact on welfare caseloads, employment of women having families, and reduction in child poverty. They note that reduction in welfare caseloads was much greater in the United States, with caseloads falling from 5.5 million to 2.3 million. In Britain, the reduction in caseloads was much smaller. In terms of impact on employment among women, the United States again experienced a much more significant increase. In terms of reduction of child poverty, however, the British approach clearly achieved a greater reduction. The British approach also increased incomes of families in the bottom 10% of the income distribution (i.e., the bottom decile) by more than that achieved in the United States. In Britain, incomes of families in the bottom decile rose 22%, and for families with children they rose 24%. In the United States, those in the bottom decile had more modest gains.

Would the United States ever adopt a New Deal program such as the Blair program in Great Britain?

That, according to Hills and Waldfogel, would require a change in attitudes in the United States that they regard as unlikely.

Source: John Hills and Jane Waldfogel, “A ‘Third Way’ in Welfare Reform? Evidence from the United Kingdom,” Journal of Policy Analysis and Management, 23(4) (2004): 765–88.

ANSWER TO TRY IT! PROBLEM

According to the absolute income test, the Smiths are poor because their income of $20,500 falls below the 2006 poverty threshold of $20,614. According to the relative income test, they are not poor because their $20,500 income is above the upper limit of the lowest quintile, $20,035.