Poverty Lecture 9
Why don’t the poor work more?
Today’s readings
• Schiller Ch.4: Labor Force Participation
• Current Population Report, P60-229, p. 8
• DeParle, Ch. 6, The Establishment Fails:
Washington, 1992-1994
Today’s Topics
• The importance of earnings
• Terms
– Labor force participation vs. unemployment
– Reservation wage
• Labor Market data
• Labor Force Participation Trends
– Men
– Women
– Mothers
• With children
Today’s Topics, cont.
• Why is labor force participation among the
poor low?
– A theory of LFP for individuals
– A theory of LFP for groups
• Other supply side factors
– Pavetti and Olson--barriers to employment
• Demand side factors: will anyone hire lowskilled workers?
the importance of earning$
(Source: Schiller, pp. 66-68)
Percent of Families Receiving Earnings
Income Source
Two-Parent Families
Single Female Head
Poor
Nonpoor
Poor
Nonpoor
77.7
97.7
66.3
95.3
Cash Transfers
15.5
2.5
37.4
9.3
Food stamps
34.6
4.7
58.5
12.2
Housing Assistance
12.5
2.1
32.6
8.2
Earning$
Welfare
the importance of earning$
• Observations:
– Virtually all nonpoor two-parent families earn
some wages, and
– Earning$ from work are universally present for
nonpoor female-headed families
– 7 out of 9 poor two-parent families have earning$
– 6 out of 9 poor female-headed families have
earning$
the importance of welfare
• Not surprisingly, poor families are more likely
to receive welfare in all forms than nonpoor
families
– Families with female heads are more likely to
receive welfare than two-parent families. Why?
• Significant proportions of poor families of both
types receive no welfare
• The most common source of welfare income
for all poor families is food stamps.
relative importance of income sources
(Source: Schiller pp. 69-71)
100
90
80
poor two-parent
70
60
nonpoor two-parent
50
poor female head
40
30
nonpoor female
head
20
10
0
Earnings
Welfare$
Other
relative importance of income sources
• Earning$ are the primary source of income
for all families
• The difference in average income between
poor and nonpoor families is huge:
– Two-parent families: $12,500 vs. $83,300
– Female head: $8,400 vs. $39,000
• The income gap between the poor and
nonpoor is largely explained by earning$.
why are the earnings of poor families so low?
the role of labor force participation
Subtitle: They don’t work (enough)
• Terms
– Labor force participation: all people
working for pay + those actively looking for
work
• LF = employed + unemployed
– Reservation wage: the lowest wage that
will induce a person to enter the labor force
terms, cont.
– Subemployment:
• Unemployment--those not working but who are
actively looking for a job
• Discouraged workers--nonparticipants who
cease to look for a job believing they will not
find one
• Marginal worker--nonparticipants who want a
job but cite personal reasons for not working
• Underemployment--not working to capacity
where can I find data on labor force
participation and employment?
• Homepage for the Bureau of Labor Statistics:
– http://www.bls.gov
• Historical tables: See handouts
– Source for the handouts and the Highlights on the following
slides: U.S. Department of Labor, Bureau of Labor Statistics,
Women in the Labor Force: A Databook, available at
http://www.bls.gov/cps/wlf-databook2005.htm
labor force participation trends
Highlights
• Since the early 1980s, the unemployment
rates for men and women have been roughly
similar.
• The unemployment rates for white and Asian
women have been much lower than those of
their black and Hispanic counterparts.
• LFP rates of mothers with children less than
18 years rose from 47 percent in 1975 to 73
percent in 2000.
labor force participation trends
Highlights, cont.
– Mothers with older children (6 to 7) are more likely
to be in the labor forces than are mothers with
children less than 6 years.
– Unmarried mothers have higher participation
rates than married mothers.
• Educational attainment of women age 25 to
64 rose substantially from 1970 to 2004.
labor force participation trends
Highlights, cont.
• Women held half of all management,
professional, and related occupations in 2004
• Women accounted for more than half of all
workers in:
– Financial activities
– Education and health services
– Leisure and hospitality
• Women were underrepresented in mining,
construction, and transportation and utilities.
labor force participation trends
Highlights, cont.
• The percentage of women working part-time (< 35
hrs per week) has held steady over the past 35
years: 26 % of employed women in 2004
• The median wage for women who worked full time in
2004 was 80 percent of the men’s median.
• About 60 percent of women worked full-time all year
round in 2004.
• The percentage of married couples with both
husband and wife working climbed steadily from 44%
in 1967 to 58% in 2004.
labor force participation trends
Highlights, cont.
• In 1973 wives’ earning accounted for 26% of
their families income at the median; by 2003
their share was 35%.
• Women who were in the labor force for 27
weeks or more in 2003 were slightly more
likely than men to live in poverty: 6.0 % vs.
4.7%.
• Black and Hispanic women were more than
twice as likely as whiter and Asian women to
live in poverty.
a theory of labor force
participation for individuals*
• T = L + l + s, where
–
–
–
–
T = total time
L = time spent at work
l = leisure
s = time spent in subsistence activities (sleep)
• U = f(Y, l), where
– U = utility or satisfaction from leisure
– Y = income
• *Source: T Hyclak, G. Jones, and R Thornton, Fundamentals of
Labor Economics, Houghton Mifflin, 2003.
labor force participation for individuals, cont.
Indifference Curves between Income and Hours of Work or Leisure
Income (Y)
U3
U2
U1
A
B
0 Leisure hours
0 Work Hours
(maximum work hours)
(maximum leisure hours)
Leisure hours (l)
Work hours (L)
labor force participation for individuals, cont.
• For any level of utility (eg. U1) various
combinations of (Y) and (l) will provide the
same level of satisfaction.
• The slope of the utility curve at a give point (A
or B) tells us just how much more income a
person would require in return for giving up
an additional hour of leisure if the level of
utility is to remain the same.
– At which point would the individual require more
income to give up an hour of leisure: A or B?
labor force participation for individuals, cont.
Budget Constraints
• Let Y = (w x L) + Z, where
– w = wage rate
– L = hours of work, and
– Z = income from all other sources
(nonwage income)
labor force participation for individuals, cont.
Budget Constraints
Y
E
C
Z2
D
Z1
B
A
0 leisure hours
0 hours of work
labor force participation for individuals, cont.
Budget Constraints
• On budget constraint ABC,
– Z1 = income not due to market work
– BC = earnings at different amounts of market work
– Slope of BC = w =hourly wage rate--how much
more income is earned by giving up an additional
hour of leisure
– w = -(∆Y/∆l)
• Budget constraint ADE
– The individual has higher nonwage income (Z2)
but a lower market wage (the slope in less steep).
labor force participation for individuals, cont.
Individual Chooses No Work
Income (Y)
U3
Highest Utility
reached at B (U2)
U2
U1
C
B
A
0 Leisure hours
0 Work Hours
(maximum work hours)
(maximum leisure hours)
Leisure hours (l)
Work hours (L)
labor force participation for individuals, cont.
Individual Chooses To Work
Income (Y)
U3
U2
C
Highest Utility is
at D (U3)
U1
D
B
A
0 Leisure hours
0 Work Hours
(maximum work hours)
(maximum leisure hours)
Leisure hours (l)
Work hours (L)
labor force participation for individuals, cont.
Response to increase in nonwage income rises
Income (Y)
U3
U2
C
Highest Utility is
at G or E
U1
G
D
E
B
A
0 Leisure hours
0 Work Hours
(maximum work hours)
(maximum leisure hours)
Leisure hours (l)
Work hours (L)
a theory of labor force
participation for groups
• LFPR = f(Z, w, preferences), where
– LFPR = labor force participation rate for a
certain group (welfare moms)
– Z = unearned income
– w = wages, and
– Preferences are reflected in the reservation
wage and other factors that influence the
shape of the utility curve
a theory of labor force participation for groups, cont
Changes in nonwage income
• Focusing on a particular group
– An increase in the average nonwage
income should have a negative effect on
LFPR: ∆(LFPR)/∆Z < 0
– This is the income effect: The part of a the
change in the quantity demanded that is
caused by a change in real income
theory of labor force participation for groups, cont.
Changes in nonwage income
– The increase will probably also encourage
at least some members of the group to
leave the labor force (and party night and
day on First Street) because people use
their increased income to buy more leisure.
– A higher income raises a person’s
reservation wage; a lower income lowers
the reservation wage
theory of labor force participation for groups, cont.
Changes in nonwage income
• The nominal maximum AFDC/TANF
benefit has not be changed in many
states since 1976. How would the
declining real value of AFDC/TANF cash
transfers affect the LFPR of welfare
mothers?
theory of labor force participation for groups, cont.
Changes in average wage$
• Higher wages raise the LFPR of a group
– A higher wage means that the opportunity
cost (or the price) of leisure is higher. An
individual gives up more income for each
hour not worked.
– substitution effect: ∆(LFPR)/∆w > 0
• The expected relationship between wage rates
and participation is positive
theory of labor force participation for groups, cont.
Changes in average wage$
• How would the declining value of the
minimum wage affect the LFPR of poor
single mothers?
– 1998 $6.09 per hour
– 2006 $5.15 per hour
other supply side factors
affecting LFP
• See handout: “Reasons for Low Labor Force
Participation among the Poor and Polices to
Increase Participation”
• Krista Olson and LaDonna Pavetti, Personal
and Family Challenges to the Successful
Transition from Welfare to Work.
Washington, D.C.: The Urban Institute, May
1996, http://www.urban.org/
•Krista Olson and LaDonna Pavetti, Personal and Family Challenges to the
Successful Transition from Welfare to Work. Washington, D.C.: The Urban
Institute, May 1996, http://www.urban.org/
•Krista Olson and LaDonna Pavetti, Personal and Family Challenges to the
Successful Transition from Welfare to Work. Washington, D.C.: The Urban
Institute, May 1996, http://www.urban.org/
the demand side:
will anyone hire welfare mothers?
Source: Harry Holzer, What Employers Want: Job Prospects for Less Educated
Workers. New York: Russell Sage Foundation, 1966
Source: Harry Holzer, What Employers Want: Job Prospects for Less Educated Workers.
New York: Russell Sage Foundation, 1966