DEPAUL UNIVERSITY

Midterm Paper
ECO 395 Kallen
Peter Drogos Phyall 1/27/2014

Drogos 2 Poverty Research and Proposals 2014 marks the 50th Anniversary of LBJs great War on Poverty. Journalists and policy-makers alike have commended the US on its significant progress against poverty. Where the country stands today on the topic is mixed. Key Facts: Researchers at Columbia University found adjusting for inflation (using the 2012 SPM poverty line) and looking back to 1967, overall poverty fell from 26% to 16% (Parrott). Severe child malnutrition has dropped. Government safety net programs have kept more than 40 million people (9 million of them children) out of poverty (Parrott). Food stamps (SNAP) alone kept 4.9 million people out of poverty in 2012 (see graph 1). These programs work. Current problems subsist: nearly 50 million Americans were poor in 2012, 13 million who are children (Parrott). 16 million of these people lived below half of the poverty line (Parrott). Question: What are the major issues behind poverty in the US? Answer: Labor conditions (minimum wage, Earned Income Tax Credit (EITC), and unemployment insurance (UI). Minimum wage. The US Government has adjusted minimum wage level over the years, but one thing that remains constant is that minimum wage is not adjusted for inflation. This means that buying power is lower, since prices have predominantly risen historically. The minimum wage has dropped quite significantly since the late-1960s. The Center for Budget and Policy Priorities (CBPP) finds that the current minimum wage stands 22% short of its 1960s peak (Bernstein and Parrott) (see graph 2). The decline in minimum wage has increased income inequality, widening the gap between wage-earners. The trend is especially prevalent among women populations (Bernstein and Parrott). The gap will continue to rise, as the top percent of income-earners will see greater income increases and lower-income earners will fall to the wayside. Solutions? A proposal called the Fair Minimum Wage Act of 2013 (FMWA). It is designed to raise the minimum wage from $7.25 to $10.10 in three annual increments, followed by a future index to inflation (Bernstein and Parrott). It will increase workers paychecks and stabilize the decade-old income inequality gap. It also aims to raise the subminimum wage (for those who reliant on tips, such as restaurant waiters) upward from where it has stood at $2.13. Counterarguments across the aisle feel that to account for a higher minimum wage, it will cost employers more. To account for higher labor-prices, employers will be forced to hire fewer workers and more workers will face lay-offs. These claims are not entirely true. The CBPP finds that of the extensive research that has been done to address this issue so far, the effect of increasing minimum wages to workers hours is not significant, having little or no effect on the number of jobs available or hours worked (Bernstein and Parrott). Job-loss and worker-hour reduction is expected and certainly noteworthy, but the overwhelming net gain in earnings experienced by a higher minimum wage is estimated to counter worker-related losses. Another

Drogos 3 way to reduce potential employer labor-costs is to increase the efficiency of production, raise prices, and lower profits (Bernstein and Parrott). EITC. The EITC is a wage-subsidy in the form of a refund that rewards working lowincome workers. Eligibility for the credit is based off of individuals income, marital status, and number of children (Marr). Partnered with the Child Tax Credit (making up the nations strongest anti-poverty plan), EITC helped bring 10.1 million people out of poverty in 2012, 5.3 million of which were children (see graph 3). EITCs current problem: it does little to offer aid for low-income childless workers. Those who qualify, on average, receive $270 (Marr). The issue has been addressed from both sides of the aisle. Liberals and Conservatives advocate providing stronger incentive for childless workers will counter poverty and increase worker incentive and responsibility. This dialogue isnt recent; its been supported for decades since being signed into law by President Ford. Solutions? Re-direct a majority of the funding toward childless-working adults. Currently, this demographic earns too much to be eligible. Widen the age restriction for those who receive EITC. Those under age 25 are ineligible to receive the credit, as EITC is restricted to those aged 25-64 (Marr). The need is stronger for younger workers because employment rates for this group are much lower. Young workers are needed to grow the economy in the future, especially as the elderly population continues to grow. Counterproposals suggest using the EITC as an alternative supplement to minimum wage. Both programs should work in tandem to grow the labor force. UI. Declining levels of UI is one reason why poverty levels have changed little. In 2012, UI kept 1.7 million people above the poverty line, fewer than in previous years (see graph 4). A quick interpretation suggests that less people unemployed. The US experienced a 16% drop in unemployed workers (Sherman). But is this good news? Not entirely. The fact is that unemployed workers numbers have dropped in part because of workers left the workforce entirely. This consequently affects the number of people who apply for UI. The CBPP finds a 46% drop in the number of people whom UI kept out of poverty (Sherman). What explains the loss in UI? The weak job market and government funding. Workers were unable to find jobs before their benefits expired. Jobless workers who do not receive UI benefits at all are higher than they were in 2009 and are rising quickly (Sherman). Federally-funded unemployment benefits were cut, and the current debate in Congress to reinstate them is at a standstill. Solutions? Extend the time period of UI, both federally and state-wide. This means extending the EUC (Emergency Unemployment Compensation) program (federal program). It expired in December and was recently voted down in the Senate. A motion to reconsider was passed. Pass the bill. In addition to this, most states need to increase their 26 week-period UI programs. The only downside of the programs is cost, but these resources have proven their value in contributing toward the decline of poverty.

Drogos 4 Appendix Graph 1

Graph 2

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Graph 3

Graph 4

Drogos 6 References Bernstein, Jared, and Sharon Parrott. "Center on Budget and Policy Priorities." Proposal to Strengthen Minimum Wage Would Help Low-Wage Workers, With Little Impact on Employment . Center on Budget and Policy Priorities, 7 Jan. 2014. Web. 27 Jan. 2014. "Center on Budget and Policy Priorities." Policy Basics: The Earned Income Tax Credit . Center on Budget and Policy Priorities, 1 Feb. 2013. Web. 27 Jan. 2014. Marr, Chuck. "Center on Budget and Policy Priorities." Commentary: One Anti-Poverty Initiative Both Sides Can Agree On . Center on Budget and Policy Priorities, 24 Jan. 2014. Web. 27 Jan. 2014. Parrott, Sharon. "Center on Budget and Policy Priorities." Commentary: War on Poverty: Large Positive Impact, But More Work Remains . Center on Budget and Policy Priorities, 7 Jan. 2014. Web. 27 Jan. 2014. Sherman, Arloc. "Center on Budget and Policy Priorities." Why Isn't Poverty Falling? Weakening of Unemployment Insurance Is a Pivotal Factor . Center on Budget and Policy Priorities, 7 Oct. 2013. Web. 27 Jan. 2014.