Econ 144: Poverty and Discrimination Assignment #1

1. What are the main criticisms of the official definition of poverty?

The main criticisms are that what constitutes an “adequate” diet is
arbitrary, it is strictly a measure of absolute poverty, and the failure to take
into account the increasing cost of participating in society will tend to
cause us to underestimate the poverty rate. In addition, because the
official poverty rate is based solely on money income and it’s believed that
the CPI overestimates inflation by 1% per year that the poverty rate might
be overestimated as well.
2. Why does poverty last so long for some people?
The longer people have been poor, the harder it is for them to leave
poverty(state dependence). People who have been poor for a long time
have been in that state precisely because they’re the sorts of people who
have a hard time exiting poverty(individual heterogeneity).
3. Why did poverty programs shift from an emphasis on cash transfers to in-kind
transfers and earned income credits?
Cash transfer programs face a difficult tradeoff between providing a large
basic transfer and generating strong incentives for work. The shift from
cash transfers to tax credit and in-kind transfer is, in part, a response to
conversion about the work disincentives caused by AFDC.
4. How does earned income tax credit (EITC) affect the labor supply decision of an
individual who would be out of the labor force in the absence of EITC?
EITC increases the labor supply of the lowest-earning workers while
reducing the labor supply of higher-earning workers.
5. Why did the official poverty rate fail to decline after 1973 even though GDP per
capita grew rapidly?
Either households became smaller or income inequality increased.
6. Did the increase in the fraction of female-headed households contribute
significantly to the poverty rate in the US?
An increase in one percentage point in female-headed families is
associated with an increase of one-fourth of a percentage point in the
poverty rate.
7. Are job training programs an effective policy tool to reduce poverty?
No, many of the lowest-cost programs focus on very low-cost training
services and these services may provide a large public benefit by reducing
the need for financial assistance to jobless workers, but they’re unlikely to
substantially increase the worker’s long run earning capacity.
8. How does raising the minimum wage affect the poverty rate?
 Raising the minimum wage has no measurable effect on poverty, however
raising the minimum wage has a modest effect on the earnings of
low-earning workers, and that, in turn, has a modest effect on the poverty
rate. We estimate that a $1 increase in the real minimum wage is
associated with a reduction of 0.3 percentage points in poverty
9. How do living wage laws defer from minimum wage laws?
Living wage laws cover a smaller percentage of workers and works at the
municipal level.
10. What has been the US experience with the employment tax credits for lowskilled
workers?
They’re good for unskilled workers but bad for skilled ones as it reduces
their level of employment