WE - Poverty, inequality and Poverty Relief 1

Two options for redistribution (measures)

1) Cash benefits
2) In-kind benefits

Cash benefits - key purpose

1) risk sharing
2) poverty relief
3) consumption smoothing

In-kind benefits - definition

agent (government) overrides individual preferences
= only possible if individual cannot trade commodity

In-kind benefits - examples

health care
education

Definition of median household income

Income of household in the middle of distribution NOT MEAN

Definition poverty rate (absolut income poverty)

Number of people who’s income falls below the poverty line / all people

Definition poverty line

the minimum level of income considered necessary to afford basic necessities

relative income poverty

half the median household income of the total population

absolute income poverty

absolute threshold for which below someones is deemed to live in poverty

How is the poverty line different in rich countries compared to poor countries?

due to relative nature
--> richer countries have a higher poverty line

Definition of poverty (OECD)

ratio of population whose income falls below the poverty line

Poverty line (OECD)

half the median household income of the total population

Why is poverty higher for older people in some countries?

little consumption smoothing
depends on pension schemes

Why is poverty higher for children and young people in some countries?

1) family size influences consumption
2) young parents = less income
3) less redistributive welfare state
4) employment among younger people lower

Other measurements of poverty/inequality?

1) self-report
2) ratio of top 20% to bottom 20%
3) Financial insecurity
4) Gini coefficient

Definition Disposable Income

market income by all household members

Definition Disposable Income (formula)

gross earnings, self employed income
+ cash transfers
- income tax
- wealth tax
- social security contributions

Def. equivalised income 1

income adjusted by an equivalent scale that divides the income each household by the square root of household size

Why should income be equivalized

to account for economies of scale in household needs

Formula equivalised income

1 + 0.5* (# of hh members > 14 years -1) + 0.3 of hh members < 14 years

Def equivalised income 2

Income adjusted for the number and age of hh members, dividing income by the equivalence scale

Which shocks could push people into poverty

1) unemployment
2) health

Financial insecurity

not income poor but insufficient liquid financial wealth to support them at the level of the income poverty line for more than three months

Lorenz curve and Gini coefficient

showing the (un) equal distribution of income

Gini coefficient

area below lorenz curve
= closer to 1 means more inequality

Lorenz curve

Fraction of total income received by share of individuals

Income inequality Definition

ratio of shares of household disposable income of the top and bottom 20% of the distribution

Inequality Definition

considers the overall dispersion of income distribution

Polarisation Definition

measures of income polarisation examine the concentration of income on several points along the income distribution

Key choices/problems in defining poverty?

1) absolute or relative
2) whose income
3) over what time period
4) equivalised income or disposable income?

Dimensions of poverty

1) how many poor people (count)
2) how far below poverty line (depth)
3) how long in poverty?

What may lead more people being counted as poor?

1) higher poverty line
2) narrower definition of income
3) narrower definition of income unit
4) larger adjustment for household size
5) shorter period over which income is measured

Why does the state intervene?

1) equity
2) efficiency

Efficiency argument to reduce poverty

1) reduce negative externalities from social unrest/crime etc
2) private insurance is ineffective

Assessing effectiveness of poverty relief

1) adequacy
2) coverage
3) cost

Assessing effectiveness of poverty relief - Adequacy

are benefits high enough to allow people to buy an adequate consumption bundle

Assessing effectiveness of poverty relief - Coverage

1) horizontal efficiency
2) vertical efficiency

Poverty relief- horizontal efficiency

avoiding gaps, supporting all poor

Issues with horizontal efficiency

take-up rates and clarity about eligibility

Poverty relief vertical efficiency

benefits should go to only those that need them

Issues with vertical efficiency

implicit high tax rate as benefits decrease in household income
= poverty trap

Assessing effectiveness of poverty relief - Cost

benefits themselves versus administrative costs

Different approaches of state intervention for poverty relief

1) income testing
2) Indicator targeting
3) self targeting

Income testing pro/con

pro= can target tightly
con= disincentives to work, stigma, administratively demanding

Income testing - market failure

Moral hazard effect = welfare raises incentives to be poor

Taper rates

the rate at which an income-tested benefit is withdrawn as earnings rise

Marginal tax rate

amount of additional tax paid for every additional dollar earned as income

Indicator targeting - pro

avoid ill-effects of income testing

Indicator targeting - cons

1) gaps = poor people not included in proxy of poor
2) leakages = rich people included in proxy for poor

Ideal indicator targeting (poverty)

1) very high correlation between indicator and being in poverty
2) exogenous to limit distortionary incentives and easy to observe

Self-targeting - pro/con

efficiency but gaps and leakages

Self-targeting - examples

price subsidies and conditional benefits

Universal Basic Income

flat-rate tax-financed payment to everyone in a country

Poverty trap

no financial incentive to work longer hours
= high marginal tax rate

Unemployment trap

no/little financial incentive to seek work

Incentives effects

1) does benefit increase the number of hours worked by people who are in the labor force
2) does benefit encourage non-participants to join the labour force