Nova workboard

a blog from young economists at Nova SBE

The Best Social Program Isn’t Work

i-believe-the-best-social-program-is-a-job-quote-1Ronald Reagan famously summarized one of the most influential ideas in combating poverty: the “best social program is a job”. This was the European Commission’s position back in 2011, when they wrote that ‘a job is the best protection against poverty’. (p. 176)  This blog post will seek to assess whether employment is an effective anti-poverty strategy. It should be noted this does not judge whether it ought to be.

Despite economic growth, increasing employment rates and a consolidated welfare state, in a recent working paper for the Luxembourg Income Study, Nieuwenhuis et al. recall that “poverty rates for working-age people and children either rose or stayed stable, with only few countries reporting a significant fall.” (p. 3)

While, “households are consistently found to be less likely to be poor when at least one household member is employed” (p. 4), simulations of the potential impact of reaching the EU2020 75% employment target on poverty have found this increased employment would bring only small decreases or even increases in poverty rates, due to the increase in median incomes and thus the poverty threshold. (p. 480) This is a typical example of the aggregation paradox (p. 6)

The question of employment as an anti-poverty tool has been a gendered one. Using SILC data, Marx and Nolan (p. 142) show that there is almost no income poverty risk for low-paid workers who are the 2nd earner in the household, often women. In recent years, it has been women who have seen the biggest increases in employment, motivating Nieuwenhuis et al. to assess this employment-poverty relationship by focusing on women’s employment.
While “in the majority of countries, a rise in women’s employment rates has been associated with an increase in working-age poverty rates”, (p. 4) Nieuwenheis et al. note that “had women’s employment not become more common, poverty would have risen more; in some countries even substantially more.” (p. 22) Nieuwenheis et al. find that “typically, since the mid-80s (…) a 10 percentage point increase of women’s employment was associated with a poverty reduction of 1 percentage point.” (ibid) While this is a significant relationship, it is not a good indicator for those arguing ‘a job is the best social protection against poverty’. These decreases in poverty took place over a long period of time and were so substantial as to make them unrepeatable.

Poverty and Female Labour Participation Rate

Contrary to popular opinion, Marx and Nolan (2013) find that low pay has remained relatively steady and is not greater in less regulated, more service-based or Anglo-Saxon economies. However, they also find that low pay is not a key driver of in-work poverty. In 2001, the authors found that 80% of low-paid workers in the EU15 were in the 3rd-5th disposable income quintile (p. 140). Instead, they show that in-work poverty is fundamentally caused by low work-intensity, single-earner and single-parent households. Nieuwenhuis agrees, citing de Beer (2007)’s findings that “most of the additionally employed people belonged to work-rich households” and Gregg and Wadsworth conclude that “while the share of households where everyone is in paid work has grown, the share of jobless households did not decrease.” (p. 7)

How can we revigorate the negative work-poverty relationship? Minimum wages (MWs) have been highly popular strategies of keeping work as “the surest way out of poverty”. California and New York increasing to a $15/hour MW, the introduction of a national minimum wage in Germany, and the ‘living wage’ movement in the UK.  In a recent conference presentation (presentation sent by authors to student, available upon request), Marx and Nolan have shown how minimum wages are inadequate to keep workers out of poverty for most countries, except when they are the only person in the household. This is demonstrated in the following graphs:

minwage1

Net incomes of minimum wage workers relative to the povery line, 2012, single persons

minwage2

Net incomes of minimum wage workers relative to the poverty line, 2012: lone parent, 2 children

minwage3

Net incomes of minimum wage workers relative to the poverty line: single earner, 2 children, 2012

Today, employment is not a way out of poverty for many who are in involuntary low work-intensity, a growing proportion of workers and a large share of those recently employed (p. 29). As can be seen in Chart 34 of the European Commission’s Employment and Social Developments 2015 report, a high proportion of those who are unemployed and find work do not leave poverty.  In light of this, a combination of predistribution through minimum wages and redistribution through tax credits and benefits can be effective in making work pay. In this way, we can fix the employment channel out of poverty. However, we ought not to forget that there can be no employment channel unless there are jobs for people to take.

shareofpoorpeopleexitingpoverty

Miguel Oliveira Pires Costa Matos, 25220 / 872

Advertisements

Author: studentnovasbe

Master student in Nova Sbe

Comments are closed.