Poverty Lecture 10:The Working Poor

Today’s Readings•Schiller Ch. 5: The Working Poor •Newman, “Working Lives,” eReserves•DeParle, Ch. 7: Redefining Compassion: Washington, 1994-1995•(Optional, Ehrenreich, “Serving in Florida,” eReserves)

Today’s topics

• Effects of wages changes on LFP and hours of work

• Finish up a theory of LFP for groups• More on the supply side: Personal and

family challenges to LFP• Examine demand side of the labor

market: Are there enough jobs for the poor?

Today’s topics, cont.

• The Working Poor:– Why are wages so low?

• The Minimum Wage as a solution to poverty

• Living wages

Effects of Wage Changes on LFP and Hours Worked

• Substitution effect– %∆L/%∆w– If income is held constant, and increase in

the wage rate will increase the price of leisure and reduce the amount demanded thereby increasing work incentives.

– The substitution effect is positive: wages and hours move in the same direction

• %∆L/%∆w > 0

Wage increase with substitution effect dominating:The observed change

0 Work Hours

(maximum leisure hours)

Leisure hours (l)

Work hours (L)

0 Leisure hours

(maximum work hours)

A

C

Dobserved changeU2

U1

N1

N2

Y

Wage increase with substitution effect dominating:The income effect

0 Work Hours

(maximum leisure hours)

Leisure hours (l)

Work hours (L)

0 Leisure hours

(maximum work hours)

A

C

D

income effectU2

U1

N1

N3

Y

Wage increase with substitution effect dominating:The substitution effect

0 Work Hours

(maximum leisure hours)

Leisure hours (l)

Work hours (L)

0 Leisure hours

(maximum work hours)

A

C

D

substitution effectU2

U1

N3

N2

Y

Effects of Wage Changes on LFP:Substitution effect cause LF entry

0 Work Hours

(maximum leisure hours)

Leisure hours (l)

Work hours (L)

Income (Y)

0 Leisure hours

(maximum work hours)

U3

U2

U1

A

B

C

D

E

Raising the wage from the slope of BE to the slope of BC increases hours from 0 to d:

Substitution effect > income effect

d

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

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,” and

• 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/

Source: 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/

Source: 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: are there enoughjobs for the poor?

Source: Harry Holzer, What Employers Want: Job Prospects for Less Educated Workers. New York: Russell Sage Foundation, 1966

the demand side: are there enoughjobs for the poor?

Source: Harry Holzer, What Employers Want: Job Prospects for Less Educated Workers. New York: Russell Sage Foundation, 1966

the demand side: are there enoughjobs for the poor?

The working poor: why are wages so low?

• Wage determination in a perfect market– See handout, Graph 1 and Graph 2– Firms and workers are price takers– Perfect information– Perfect mobility

Basic facts about the minimum wage

• Who earns the minimum wage?– http://www.epionline.org/index_mw.cfm – only 2.8% of employees above the

age of 30 – average family income of a minimum

wage employee is $44,331. – Single parent or single earner in a

family with kids account for only 15% of minimum wage earners.

Basic facts about the minimum wage

• http://www.epinet.org/content.cfm/issueguides_minwage_minwagefacts

• A minimum wage increase would raise the wages of millions of workers.

• Minimum wage increases benefit working families.

• Minimum wage increases benefit disadvantaged workers.

Value of Minimum Wage, 1954-2004[in 2001 dollars]

current $ real $2003

1960 $1.00 $5.26

1968 1.60 7.18

1980 3.10 6.551981 3.35 6.471982 3.35 6.111983 3.35 5.871984 3.35 5.641985 3.35 5.461986 3.35 5.361987 3.35 5.191988 3.35 5.001989 3.35 4.80

1990 $3.80 $5.19

1991 4.25 5.60

1992 4.25 5.46

1993 4.25 5.33

1994 4.25 5.22

1995 4.25 5.09

1996 4.75 5.54

1997 5.15 5.89

1998 5.15 5.80

1999 5.15 5.68

2000 5.15 5.50

2001 5.15 4.35

2002 5.155.27

2003 5.155.15

Minimum Wage, 1960-2003

Source: The State of Working America 2004-05, figure 2W.

current $ real $2003

The minimum wage as a solution to poverty:Will raising the minimum wage help the poor?

• See handout• Most minimum wage earners are not poor. • Most people don’t get stuck at the minimum

wage.• Mandated wage hikes do not reduce poverty.

Single parents will see very little of the added income following mandated wage hikes.

• The minimum wage is a blunt instrument for trying to raise the incomes of the poor.

The minimum wage as a solution to poverty, cont.

• http://www.epinet.org/content.cfm/issueguides_minwage_minwagefacts

• A minimum wage increase would raise the wages of millions of workers.

• Minimum wage increases benefit working families.• Minimum wage increases benefit disadvantaged

workers.• A minimum wage increase is part of a broad

strategy to end poverty. • There is no evidence of job loss from the last

minimum wage increase.

State minimum wages

• 16 states have minimum wage rates higher than the federal minimum

• 25 states set their minimum wage rate at the federal rate

• 2 states have minimum wage rates less • 6 states have no minimum wage laws than

the federal rate.– http://www.dol.gov/esa/minwage/america.htm

Why do some states raise their minimum wages above the federal level?

• You tell me

Living wages

• Basic facts– See

http://www.epinet.org/content.cfm/issueguides_livingwage_livingwagefacts

– The living wage level is usually the wage a full-time worker would need to earn to support a family above federal poverty line, ranging from 100% to 130% of the poverty measurement.

– 71 municipalities have enacted living wage laws to date

Living wage as a solution to poverty

• Should Notre Dame pursue living wages as a solution to poverty?– For the two different sides of the story, see– http://www.epionline.org/index_lw.cfm and– http://www.epinet.org/content.cfm/issueguides_livi

ngwage_livingwage

– To see what labor economists think about living wages, see

– http://www.epionline.org/study_detail.cfm?sid=13&group=lw