Why don’t the poor work more?

Reading for next Monday!

•Schiller Ch. 6: The Working Poor • DeParle, Ch. 6, The Establishment Fails:

Washington, 1992-1994

•(Optional, Ehrenreich, “Serving in Florida,” eReserves; Newman, “Working Lives,” eReserves

• Description of Research project due in class

Today’s readings

• Schiller Ch.5: Labor Force Participation

• Current Population Report, P60-235, pp. 4-15, focus on labor force participation and earnings

• DeParle, Ch. 5, The Accidental Program, 1953-1991

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 Supply Side theory)– A theory of LFP for individuals– A theory of LFP for groups

• Other supply side factors– Pavetti and Olson--barriers to employment

the importance of earning$Source: US Census Bureau

Compare to Schiller, Tables 5.1 and 5.2

CY 2007, P60-235 Percent of Families Receiving

Income Source Two-Parent Families Single Female Head

Poor Nonpoor Poor Nonpoor

Wages and Salaries 75.5 97.3 59.2 93.9

Interest, dividends 13.6 58.5 7.4 34.5

Pensions 1.6 4.0 1.2 5.7

Social Security 9.3 5.8 11.5 14.3

Means-tested

Cash Transfers24.8 6.5 26.0 8.2

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– 3 out of 4 poor two-parent families have earning$– 3 out of 5 poor female-headed families have

earning$

the importance of welfare$ (Source: Schiller, pp. 80,82)

Percent of Families Receiving Earnings

Income Source Two-Parent Families Single Female Head

Poor Nonpoor Poor Nonpoor

Means-tested Cash Transfers, 2007

24.8 6.5 26.0 8.2

Welfare, 2000

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

the importance of welfare

• Not surprisingly, poor families are more likely to receive means tested cash transfers 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)

What percentage of a families total income is:earnings? welfare$? Other sources?

01020304050

60708090

100

Earnings Welfare$ Other

poor two-parent

nonpoor two-parent

poor female head

nonpoor femalehead

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: $15,000 vs. $100,200– Female head: $9,200 vs. $48,900

• 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)Earnings=hours x wages

• Terms– Labor force: all people working for pay + those

actively looking for work

• LF = employed + unemployed

– Reservation wage: the wage at which a person is indifferent to entering 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– Too few hours– Overtrained for job responsibilities

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 HighlightsHighlights 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-databook2007.htm

labor force participation trends, 2006Highlights: Hours of workHighlights: Hours of work

• The labor force participation rate for all women aged 16 years and older was 59%

• Among those who worked: – 75% Full-time, full-year– 25% Part-time

• About 60 percent of women worked full-time all year • The percentage of married couples with both

husband and wife working climbed steadily from 44% in 1967 to 57% in 2005.

• Only the husband worked in 18% of married couples.• 5.5% of women held multiple jobs

labor force participation trendsHighlights: Mothers’ LFP ratesHighlights: Mothers’ LFP rates

• LFP rates of mothers with children less than 18 years rose from 47 percent in 1975 to 73% in 2000, then receded to 71% in 2004-06.– 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 (77%) than married mothers (68%).

labor force participation trendsHighlights: Educational Attainment of women in Highlights: Educational Attainment of women in

the labor force, 2006the labor force, 2006

1970 2006

At least a bachelor’s

degree10% 33%

High school dropout

34%8%

labor force participation trendsHighlights: Occupational AttainmentHighlights: Occupational Attainment

• Women held half of all management, professional, and related occupations in 2006

• Women accounted for more than half of all workers in:– Financial activities– Education and health services (91% of RNs)– Leisure and hospitality

• Women were underrepresented in mining, construction, and transportation and utilities.

labor force participation trends Highlights: WagesHighlights: Wages

• The median wage for women who worked full-time in 2006 was 81% of the men’s median.

• In 1970 wives’ earning accounted for 27% of their families income at the median; by 2005 their share was 35%.

labor force participation trends Highlights: Working PoorHighlights: Working Poor

• 1.1 million or 3% of all women had earnings below or at the Federal minimum wage

• Women who were in the labor force for 27 weeks or more in 2007 were slightly more likely than men to live in poverty: 6.1% vs. 4.8%.

• Black and Hispanic women were more than twice as likely as whiter and Asian women to live in poverty.

labor force participation trendsHighlights: Unemployment RatesHighlights: Unemployment Rates

• Since the early 1980s, the unemployment rates for men and women have been roughly similar.

• The unemployment rates for Asian (3.1) and White women (4.0) have been much lower than those of their Hispanic (5.9) and Black (8.4) counterparts.

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

0 Work Hours

(maximum leisure hours)

Leisure hours (l)

Work hours (L)

Income (Y)

0 Leisure hours

(maximum work hours)

U1

U2

U3

B

A

labor force participation for individuals, cont.

• For any level of utility (e.g.. 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

B

A

Y = total income

C

Z1

0 hours of work (L)0 leisure hours (l)

On budget constraint ABC, AB = Z1= income not due to market work BC = earnings at different amounts of

market work Slope of BC = -(∆Y/∆l) = w = hourly wage

rate w = opportunity cost of another hour of

leisure

O

labor force participation for individuals, cont.Budget Constraints

D

B

A

Y

C

Z2

Z1

hours of work leisure hours

E

F

•Budget constraint ADE

The individual has higher nonwage income (Z2 = AD) and the same market wage rate

O

•Budget constraint ADF

The individual has higher nonwage income (Z2 = BD) but a lower market wage (DF is less steep).

labor force participation for individuals, cont.Individual Chooses To Work

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

Utility is maximized at D where MRCS = w

L1

Y1

labor force participation for individuals, cont.Individual Chooses Not To Work when nonwage income increases

0 Work Hours

(maximum leisure hours)Leisure hours (l) Work hours (L)

Income (Y)

0 Leisure hours

(maximum work hours)

Un

U2U1

A

B

C

D

Utility is maximized at F where:

MRCS = w = reservation wage

F is a corner solution

Work hours fall from L1 to 0

(pure income effect: Yl)

L1

Y1

F

labor force participation for individuals, cont.Individual Chooses To Work Less as Wage rate falls

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

•Utility is maximized at E

•Hours worked falls from L1 to L2

Y2

L2L1

Y1

E

LY

•income effect: L1 - LY

•Substitution effect L2 - LY

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, contChanges 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 of leisure 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.

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 wage rates raise the LFPR of a group– A higher wage rate 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 an decrease in the minimum wage affect the LFPR of poor single mothers? An increase?–1998 $6.31 per hour (2006$)–2006 $5.15 per hour–2008 $6.55 per hour (nominal $)–2009 $7.25 per hour (nominal $)

Source: Jared Bernstein and Isaac Shapiro, “BUYING POWER OF MINIMUM WAGE AT 51-YEAR LOW,” Economic Policy Institute, http://www.epinet.org/issuebriefs/224/ib224.pdf

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/, specifically http://www.urban.org/publications/406850.html

•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?

• We will consider this question next week!