Chapter 10: Poverty relief

1. Barr: Economics of the Welfare State: 4e Chapter 10: Poverty relief

2. Organization of the chapter 1. Introduction and institutions 2. Theoretical arguments for state intervention 3. Assessment of poverty relief

3. 1. Introduction and institutions Major benefits aimed at poverty relief • Income support, the final safety net for people under 60 • Pension credit, for people aged 60 or over • Housing benefit • Working tax credit (in the USA the Earned Income Tax Credit) • Child tax credit • Child benefit

4. 2. Theoretical arguments for state intervention

5. 2.1. Arguments for intervention • There are obvious equity arguments for wanting to relieve poverty • There are also efficiency arguments • Social unrest/crime • Poor health (and hence low productivity) • Criteria for assessing redistributive schemes • The level of benefits. • Targeting • Cost

6. The meaning of targeting Poverty relief should aim to assist • All the poor (horizontal efficiency) • Only (or mainly) the poor (vertical efficiency)

7. 2.2 Different approaches to targeting • Income testing • Indicator targeting • Self-targeting

8. Income testing • Income testing identifies poor people via their income • Advantages: can target tightly • Disadvantages • Work disincentives • Stigma • Administratively demanding

9. Indicator targeting • Identify poor people via indicators other than income • The ideal indicator is • Highly correlated with poverty • Exogenous to the individual • Easily observable • Advantages: avoids the ill-effects of income testing • Disadvantages: gaps and leakages

10. Self-targeting • Price subsidies • Conditional benefits

11. 3. Assessment of poverty relief

12. 3.1. Income-tested benefits • Income support • Assistance with housing costs

13. 3.2. Working tax credits • An example of an income test combined with indicator targeting (the work test) • A number of variables are central to the design of such schemes • The size of the maximum benefit • The minimum number of hours a person has to work to qualify for benefits • The rate at which benefit is clawed back as a person’s earnings rise • How soon benefits respond to changes in income • Whether entitlement is assessed on the basis of individual earnings or family earnings

14. 3.3. Family support • Child tax credit – a mixture of income-testing and indicator targeting • Child benefit – an example of indicator targeting

15. 3.4. The poverty and unemployment traps • The intensity of the poverty trap • How many people face the poverty-trap? • Mitigating factors: the importance of fixed-period awards

16. 3.5. Empirical issues and evidence • How effective is poverty relief? • Incentive effects • Does the benefit increase the number of hours worked by people who are in the labour force • Does the benefit encourage non-participants to join the labour force

17. 3.6 Conclusion • The ultimate constraint on policy design is the shape of the income distribution • Thus there is an inescapable need to withdraw poverty relief as a person/ family becomes less poor