Poverty alleviation and tax policy

This paper examines public good provision and tax policy—optimal non-linear income taxation and linear commodity taxation—when the government departs from purely welfarist objective function and seeks to minimise poverty. This assumption reflects much policy discussion and may help understand some divergences of practical tax policy from lessons in optimal tax analysis. In contrast to Atkinson and Stiglitz (J. Public Econom. 6 (1976) 55), it may be optimal to use differentiated commodity tax rates, including the taxation of savings, even if preferences are separable in goods and leisure. The optimal effective marginal tax rate at the bottom of the distribution may be negative, suggesting that wage subsidy schemes can be optimal. Finally, optimal provision of a public good is analysed under poverty minimisation.     

A SYNTHESIS OF POVERTY LINE DEFINITIONS*

A fundamental point of discussion in poverty research is whether poverty is an absolute or a relative concept. If poverty is seen to be a situation of absolute deprivation, a poverty line will usually be defined to be independent of the general style of living in society. If poverty is considered to be a situation of relative deprivation, a poverty line will be defined in relation to the general style of living in society. The choice for one of these two approaches has important consequences for social policy, as absolute poverty may be reduced by economic growth, while relative poverty will only decrease when income inequality decreases. This paper suggests a poverty line definition that is not a priori meant to be either absolute or relative, but depends on the perception of poverty in society. If the poverty line is higher in countries with higher median income (as an indicator of “general style of living”) the poverty line is said to be relative; if the poverty line does not vary with median income, it is said to be absolute. The poverty line definition suggested appears to be a generalization of almost all well-known poverty line definitions. Poverty lines thus defined are estimated for eight European countries on the basis of a 1979 survey. The resulting lines appear to have an elasticity with respect to median income of 0.51, and hence can be said to be halfway on the scale between absolute and relative.     

ECONOMIC MODELLING OF SUICIDE UNDER INCOME UNCERTAINTY: FOR BETTER UNDERSTANDING OF MIDDLE‐AGED SUICIDE*

This paper formalises an individual's decision about suicide within a framework of lifetime utility maximisation models. This is in line with the literature on economic modelling of suicide. The novelty of the paper is to take into account income uncertainty. Income uncertainty reduces a risk‐averse individual's expected utility, making them more likely to commit suicide. On the other hand, income uncertainty creates a value to postponing suicide even when their income gets sufficiently low. This is because income uncertainty means that if things go well, they will get higher income in the future. Thus, income uncertainty has two opposite effects on suicidal behaviour. The main objective of this paper is to construct an economic model of suicide for investigating net impacts of income uncertainty on suicidal behaviour. For this purpose, it is assumed that the wage evolves according to a stochastic process. Then, the threshold wage, below which an individual commits suicide, is derived as a function of the parameters of the stochastic process assumed for the wage evolution. Impacts of changes in these parameters on the threshold wage are calculated. With the result, the paper shows how income uncertainty affects suicidal behaviour.     

The Redistributive Effects of a Minimum Wage Increase in New Zealand: A Microsimulation Analysis

This paper examines the potential effects on inequality and poverty of a minimum wage increase, based on a microsimulation model that captures the details of household composition and the income tax and welfare benefit system and allows for labour supply responses. Results suggest that, largely due to the composition of household incomes, a policy of increasing the minimum wage has a relatively small effect on the inequality of income per adult equivalent person, and a money metric utility measure, using several inequality indices. Hence, the minimum wage policy does not appear to be particularly well targeted, largely due to many low wage earners being secondary earners in higher income households, while many low income households have no wage earners at all. These results are reinforced when allowing for wage spillovers further up the wage distribution. Nevertheless, a minimum wage increase can have a more substantial effect on some poverty measures for sole parents in employment.     

Housing as a wage and luxury good: absolute poverty and the distribution of income in supply-side economics

A fundamental tenet of supply-side economics is the ‘trickle-down’ effect, according to which a redistribution of income shares to those with higher incomes is supposed to result in sufficient income growth to make everyone better off. Apart from the inherent improbability of such an outcome, it is possible to argue that such a redistribution causes scarce resources to be transferred to luxury goods production, reducing the supply of the wage goods commodities in whose production those resources are used. The reduced availability of such commodities can give rise to an increase in absolute poverty (defined as the inability to afford basic necessities). This increase in absolute poverty forms a ‘threshold’ which must be more than balanced by an increase in real income due to the supply-side acceleration of economic growth before the ‘trickle-down’ effect may be said to have been realized. Some evidence from the UK is provided, together with a note on how this poverty mechanism affects the calculation of the retail Prices index.     

Wage subsidies, work incentives, and the reform of the Austrian welfare system

We analyze the employment and income effects of a needs-based minimum benefit system (“Bedarfsorientierte Mindestsicherung”) which has recently been introduced in Austria. The aim of this reform was to reduce poverty as well as to increase work incentives for recipients of social assistance. On the basis of a behavioral microsimulation model we show that this new system slightly increases employment but reduces incomes for the poorest households remaining unemployed. As an alternative, we analyze a budgetary neutral reform proposal which reduces financial incentives for marginal employment and provides a wage subsidy rewarding working longer hours. This alternative reform would yield larger positive employment effects, but more households would suffer from income losses. Overall, income inequality and poverty are affected little, however, both under the new social welfare system and the alternative reform proposal.     

A reinterpretation of the traditional income–leisure model,with application to in-kind subsidy programs

The traditional income–leisure model treats income as a composite commodity; it is not appropriate for studying commodity subsidies which alter relative prices within the composite. I suggest reinterpreting the traditional model as a special case of a utility function weakly separable with respect to leisure and all other commodities. This interpretation allows the work incentive effects of any subsidy program to be inferred from the terms of the program and data on the work effort effects of any other subsidy program, most notably income maintenance experiments. I illustrate the approach by estimating the work incentive effects of public housing. The model implies that even if special complementaries between leisure or work and the subsidized good are neglected, in-kind transfers will have different work incentive effects than equivalent cash transfers. In practice, in-kind transfers will generally stimulate work effort vis-à-vis equivalent cash grants.     

How does reciprocal behaviour of workers influence the wage setting of unions?

Traditional wage setting models assume that unions maximise the total income of workers, whereas actually they should maximise worker utility. These models implicitly equate utility with income, but this is not valid if workers’ utility depends on their sense of fairness and includes a non-pecuniary benefit from work. This paper presents a model combining efficiency wages with bargaining theory, drawing inspiration from the gift-exchange approach by Akerlof [Q J Econ 97(4):543–569, 1982]. It shows that the mutual gift exchange between firms and workers generates a non-pecuniary benefit which contributes to the workers’ utility in a non-monotonic way depending on the strength of workers’ sense of fairness. The model shows that if an employment subsidy is paid to workers it generates more jobs than when paid to firms. This paper is based on research which was performed while the author was employed at the University of Maastricht (The Netherlands). The author wishes to thank Thomas Ziesemer, Erik de Regt, Sabine Fuss and Kristin Vetter for many helpful comments and assumes full responsibility for any remaining flaws.     

FINDING THE POOR

As a basis for judging how public policy affects the poor, this article explores how "poor" families may be defined and how well such families can be distinguished from other families in the less developed countries. This is done by seeking proxies for poverty which are relatively easy to measure, accurate in discriminating between the poor and the non-poor, and relevant to public policy. To this end, a highly parsimonious model is developed, based on truncation and regression procedures, using only family size and number of wage earners in addition to either income or an education-age combination. Application of this model to data from household surveys in three major cities of Latin America shows that the model is highly effective in pinpointing poverty households, although the pattern of errors is not random, the most frequent type of error being to classify poverty households as non-poor.
Especially significant is that the model is nearly as effective for discriminating poverty households from others when financial variables are excluded as when they are included. This would suggest that a good deal of flexibility exists in deciding what variables to include in future studies of this type. The results also suggest that even better results should be possible if more complete information is obtained on the employment status of the different members of the household and on the contribution of each to household income. Ideally, the data collection and model development should proceed in an iterative manner since there are numerous possible variables as well as alternative model formulations.     

TESTING POVERTY LINES

In theory, a poverty line can be defined as the cost of a common (inter‐personally comparable) utility level across a population. But how can one know if this holds in practice? For groups sharing common consumption needs but facing different prices, the theory of revealed preference can be used to derive testable implications of utility consistency knowing only the “poverty bundles” and their prices. Heterogeneity in needs calls for extra information. We argue that subjective welfare data offer a credible means of testing utility consistency across different needs groups. A case study of Russia's official poverty lines shows how revealed preference tests can be used in conjunction with qualitative information on needs heterogeneity. The results lead us to question the utility consistency of Russia's official poverty lines.     

WEALTH HOLDINGS AND POVERTY STATUS IN THE U.S.

Families below the poverty line are better off in terms of wealth than income. In 1962, the ratio of mean income between families below and above the poverty line is 0.19 and the ratio of mean wealth is 0.29. The corresponding ratios for 1983 are 0.16 and 0.19. On average, the elderly poor are better off in terms of wealth than the younger poor, particularly relative to their own income. However, the poor have become worse off in terms of wealth between 1962 and 1983, when their real income grew by 6 percent and their real wealth declined by 11 percent. The inclusion of pension and social security wealth in the household portfolio narrows the wealth gap between the poor and non-poor, particularly for families under 65 years of age. Alternative poverty rates are also calculated based on the inclusion of annuity flows from wealth in household income. The reduction in the poverty rate between 1962 and 1983, from 21 to 15 percent on the basis of the official rate, is considerably lower with these alternative definitions.     

Unemployment Risk, Labour Force Participation and Savings

This paper analyses labour force participation and precautionary savings in the presence of risks of being fired or failing to secure a job offer when out of the labour market. We use a finite horizon framework with two employment states and a stage utility function which is CARA in consumption but non-separable in leisure. The results are that there is precautionary labour force participation: employment risk lowers the reservation wage; generally it also reduces consumption. However due to the non-separability assumption, precautionary savings, as usually defined, may not be positive. We characterize the reservation wage and contrast the results with those in which the stage utility is additive in leisure and consumption. We extend the analysis to study the effects of cyclical variation in employment risk, of stochastic future wage rates, and of adding a third employment state of search.     

Knightian uncertainty and poverty trap in a model of economic growth

This paper explores how Knightian uncertainty affects dynamic properties in an economic growth model. The decision-making theory employed in the analysis is the theory of expected utility under a non-additive probability measure, i.e., the Choquet expected utility model of preference. We apply this decision-making theory to an overlapping generations model where producers face “uncertainty” in their technologies. When the producer is averse to uncertainty, the firm's profit function may not be differentiable. Therefore, the firm's decision to invest and hire labor becomes rigid for a certain measurable range of real interest rates. In dynamic equilibrium, the existence of firm-level rigidity causes discontinuity in the wage function; this makes multiple equilibria the more likely outcomes under the log utility and Cobb–Douglas production functions. In this paper, we show that even if aversion to uncertainty is small, the “poverty trap” can arise for a wide range of parameter values.     

Equity in Poverty Program Evaluations

Poverty‐reducing programs often use indicators other than household income to transfer resources to the poor which has important implications in terms of equity of the program. This paper offers a decomposition methodology to analyze the horizontal and vertical equity components of a redistribution policy for subgroups defined according to policy‐relevant characteristics. Our measures are derived by comparing the cost of inequality in terms of equally distributed equivalent poverty gaps in the pre‐transfer income and post‐transfer income distributions. An application to the poverty‐reducing program Oportunidades in Mexico in 2006 reveals that the use of indicator variables more strongly correlated with pre‐transfer incomes in rural households can improve the redistributive effect while it also points out the difficulties of the program in targeting different levels of support among the poor, both within and between groups.     

The Development of Government Policies on Poverty and Income Distribution

This paper discusses trends in poverty in Australia over the last two decades, as indicated by changes in the number and composition of income units with incomes below the Henderson poverty line as well as by trends in the circumstances of the population in receipt of social security payments. This analysis suggests that there have been significant changes in the nature of poverty in Australia, which has increased among those of workforce age. Families with children have been particularly affected by these developments. The paper describes the development of policies designed to achieve the government's pledge that by 1990 no child need live in poverty. Despite the usefulness of the Henderson poverty line in identifying trends in economic vulnerability, the paper identifies a number of practical objections to using this indicator to assess the total effect of government initiatives. The paper concludes with a discussion of a broad approach to poverty alleviation, which would include income support, labour market and community services policies.     

Creating low skilled jobs by subsidizing market-contracted household work

The paper analyses the determinants of household work contracted in the German shadow economy. The German socio-economic household panel, which enumerates casual domestic employment, is used to estimate the demand for such household work. The regressors include regional wage rates, household income and several control variables for household composition. It is found that the demand for household work in the shadow economy is very income elastic. This suggests that targeted wage subsidies, linked to household work agencies, would be very effective in raising the legal demand for domestic help. A wage subsidy of 50% of wage costs could thus establish up to 500?000 new jobs for previously unemployed or non-working low skilled workers. The net fiscal costs of such a scheme are about 6.200 Euro per full-time job. In addition, society benefits from more law enforcement and from a raised female labour supply, especially by highly qualified mothers.     

POLICY EVALUATION IN THE PRESENCE OF OUTSOURCING: GLOBAL COMPETITIVENESS VERSUS POLITICAL FEASIBILITY

We analyze the effects of outsourcing in the presence of a minimum wage by presenting a general-equilibrium model with an oligopolistic export sector and a competitive import-competing sector. An outsourcing tax is politically popular because it switches jobs to unemployed natives. It is also economically sound because it raises national income. An export subsidy may or may not be justified on welfare grounds. Increased international competition has no effect on the level of outsourcing, but the direction of its effect on unemployment and national income depends on the relative factor intensities of the two sectors.     

Assessment of the effects of targeted poverty alleviation policy on differently poverty-stricken households: A multi-propensity score weighting model

Eliminating poverty is a multifaceted global challenge and a focal point of global development governance. With the implementation of targeted poverty alleviation (TPA), China's poverty alleviation efforts have had significant achievements. This study provides a new perspective by classifying poverty-stricken households based on poverty root causes at the household level, a multi-propensity score weighting model based on counterfactual inference is employed to examine the poverty reduction effect and policy precision on six non-equivalent poverty-stricken household groups in a Chinese county. The results reveal that the poverty reduction effects differed among poverty-stricken households with different root causes of poverty. Specifically, households impoverished due to disability have the lowest income of the six groups. The assistance policy effects also vary significantly and are found to be poorly suited to poverty-stricken households a lack of labor force and funds. A robustness test confirms this conclusion and a more nuanced analysis reveals that these differences are reflected in the wage and transfer incomes. Therefore, to ensure the stability of poverty reduction and the sustainability of income for poverty-stricken households, relevant associated aid policies need to place different emphases based on their household characteristics.     

Decomposing the changes in poverty: Poverty line and distributional effects

When measuring poverty in developed countries, the poverty line used to identify the poor is usually relative and set as a percentage of the median (or of the mean) of the total income. In consequence, when poverty is analyzed over a period of time, changes in the poverty level depend on the impact of evolving standards. To eliminate this effect, sometimes, an anchored poverty line is used. Furthermore, changes in the mean of the distribution and in the inequality among the poor may also affect the poverty levels. This note proposes a decomposition of the changes in poverty as the sum of four terms. The first two reflect the impact in poverty of changes in living standards and the other two measure the effect of the distributional growth and redistribution. This decomposition will help policymakers in the implementation of a more specific antipoverty agenda. An application with data from the European Union Survey on Income and Living Conditions shows the potential of the decomposition proposed.     

Financial development and poverty: evidence from the CFA Franc Zone

The financial liberalization in the 1980s and early 1990s led the CFA Franc Zone countries to deepen reforms in their financial systems. These reforms fostered financial development, which in turn may have reduced income poverty, as emphasized by several theoretical arguments in the literature. This study aims at estimating the contribution of financial development to poverty alleviation in the CFA Franc Zone. Results based on a panel of CFA Franc Zone countries show that financial development is associated with a drop in the proportion of poor population. Next, financial development reduces the extent to which the income of individuals falls below the poverty line. Moreover, in some cases, the effect of financial development on poverty may be subject to nonlinearities. Finally, financial instability or unstable financial development leading to crises may mitigate the favourable effect of financial development on poverty reduction. These findings are robust to the use of alternative measures of financial development and hold after controlling for a potential simultaneity and a small sample biases.