Chapter 10 Outline
A. Policies for the Working Poor
1. Over 6 million workers head families with incomes below the poverty line. This poverty occurs because of inadequate public assistance, low pay, and lack of jobs.
2. Medical Protection
a. Medical protection is one method of reducing poverty among the working poor.
b. Increased medical protection could be provided by extending Medicaid to everyone in families whose incomes are below some designated level. This would significantly increase the tax costs of medical care, possibly increase the opportunity cost of medical care, and possibly decrease work effort.
c. Increased medical protection could be provided by requiring employers to provide it as a fringe benefit. This may be counterproductive as employers may simply reduce wages by the amount of the fringe benefit, or reduce the number of people employed.
d. Increased medical protection could be provided by having a government- supported residual insurance plan that required people who do not receive adequate insurance from employers or who do not purchase it privately to purchase government medical insurance.
1. The poor could pay a "premium" equal to some percentage of their income or be wholly subsidized by the taxpayer.
2. The premium may decrease the work effort of the poor while the subsidy may decrease the work effort of the non-poor.
3. Earnings Supplements
a. Poverty among the working poor could possibly be decreased by providing earnings supplements, by increasing minimum wages, by providing wage subsidies, or by expanding the earned-income tax credit.
b. A higher minimum wage (minimum wage employers must pay employees) can increase unemployment and is target inefficient. It is target inefficient because a small percent of workers covered by the minimum wage are household heads of poor families.
c. A program of wage subsidies would provide low-wage workers with a subsidy payment for each hour worked.
1. The subsidy payment would equal some percentage of the difference between a designated maximum wage and the worker's wage.
2. A wage subsidy will not necessarily increase work effort. The subsidy increases the opportunity cost of leisure, but also enables the individual to maintain a given standard of living by working less.
d. The Earned Income Tax Credit allows taxpayers with dependents and with a relatively low adjusted gross income to receive a credit against income tax liability.
1. The current EITC outlined in the budget law passed by Congress in 1990 has an ambiguous impact on work effort.
4. Child Care Assistance
a. Child care assistance could reduce poverty among the working poor. The lack of affordable child care can be a significant hindrance to labor market participation for adults in poor farnilies.
5. Employment and Training Assistance
a. Employment and training assistance could reduce poverty among the working poor.
b. The working poor are more likely to be unemployed, work part-time rather than full-time, and be employed at such low wages that even fulltime employment does not raise their family income above the poverty line.
c. The working poor are often excluded from participat'mg in programs which provide training.
6. Stabilization Policies
a. Macroeconomic policies designed to stabilize the economy and reduce unemployment may decrease poverty among the working poor.
B. Policies for Female-Headed Families
1. Workfare
a. Instead of providing transfers which decrease work effort, there has been growing interest in establishing workfare programs which require recipients to enhance their employment prospects in exchange for assistance. Studies indicate that workfare has resulted in smaller welfare outlays, reduced the use of welfare services for both single parents and unemployed heads of intact families, and increased the employment and earnings of single parents.
2. Child Support Assurance
a. Child support assurance, which would insure that custodial parents receive some minimum amount in the form of child support from the absent parent, could decrease poverty among female-headed households.
C. A Negative Income Tax
1. A negative income tax would establish a federally-funded, income-tested transfer.
a. Federal funding would ensure uniform payments to individuals at the same income level, regardless of where they live.
b. The program could be administered at a relatively low cost by the Internal Revenue Service.
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