Upping the Anti

I spoke this morning at a seminar organised by the Youth Coalition of the ACT, for Antipoverty Week. I argued that cutting effective marginal tax rates (or introducing a wage subsidy) is a better way of tackling poverty than raising the minimum wage. They asked me for a few references, so I thought I’d post them here too.

My academic scribblings:

Blog scribblings:

Powerful stuff I’ve read about US poverty recently:

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4 Responses to Upping the Anti

  1. Don Arthur says:

    Andrew – I can’t get that wage subsidy paper link to work.

  2. Andrew Leigh says:

    Apologies. Link fixed.

  3. backroom girl says:

    Andrew – a few thoughts, first on poverty, and later on wage subsidies.

    On poverty, it’s possible to argue round and round forever over whether poverty should be conceptualised primarily in absolute or relative terms – I think most people would go for a bit of both (perhaps that is a challenge to someone to develop such a concept). But if we opt finally for the relative poverty/inequality approach, there are some significant problems when it comes to analysing this, at least in the Australian context.

    First, the ABS income data on which this analysis has to be based (because we have nothing better) is notorious for its underenumeration of income transfers – both in terms of number of recipients and amounts received. The two income support payments most likely not to be reported are unemployment benefits and single parent payments. Given that these are the income support payments most likely to be received by families with children (and which are BTW highly likely to make the difference between being in poverty and not being in poverty), this is a not inconsiderable problem for poverty analysis, particularly as it relates to children.

    A second problem is that quite a bit of poverty analysis is based not on the household (the traditional unit for poverty analysis), but on income units. In a majority of cases, households contain only one income unit and so this isn’t really too much of a problem. However, when it comes to low wage earners, my guess is that quite a few of these live in households containing more than one income unit. One key group is young people (or even adults) who are no longer full-time students but live with their parents – that is, the household contains only one family, but contains two or more income units. The other key group is people who live in group households – while these can’t be conceptualised as a family, they nonetheless benefit considerably from economies of consumption (particular in regard to housing), which should be taken into account when equivalising their income in order to determine whether they are in poverty or not. If this has not been done, any conclusions about the propensity of such income units to be in poverty are likely to be flawed.

    You and your readers may be interested to know that an OECD analysis of the interactions of wages and benefit systems (Benefits and Wages: OECD Indicators, 2004) found that Australia does in fact a very good job (among the best in the world) of protecting low wage earners from poverty. What’s more, unemployed Australians generally have to earn less income to get themselves above a ‘60% of median income’ poverty line than in any other country (except, in a couple of cases, for New Zealand). And this is based on data from before 2000, when the current government really started throwing money at families with children.

  4. backroom girl says:

    On the other issue of wage subsidies.

    Your reference to wage subsidies in the US is, I think, to their earned income tax credit (EITC) rather than to the type of wage subsidy arrangement that we have traditionally had in Australia, which involves paying money to an employer to subsidise an award wage for a person who (theoretically, at least) would otherwise not be able to get a job.

    This kind of wage subsidy suffers from two fairly significant problems – deadweight if it is not tightly targeted enough (ie many employers use it to employ people they would have employed anyway) and, where subsidies are tightly targeted to people who would otherwise be ‘unemployable’, a labelling effect that can effectively reduce their chances of employment even further.

    So in the light of that, subsidising people’s wages through the tax/transfer system looks pretty sensible – if subsidies are means-tested they are cheaper (only people with low enough income, including partner income, are eligible) and employers don’t necessarily know whether a particular person is eligible for a subsidy.

    This leaves you, then, with two questions –
    1. do you deliver your ‘subsidy’ though the tax system or through the transfer system? and
    2. do you target it only to people with earnings, or to low-income people more generally?

    In the US, they have gone for a tax provision targeted only to people with earnings whereas we have, for a variety of reasons, opted for transfers targeted to low-income people, including those in low-paid work. Both systems work pretty well (better for some family types than for others) and I would argue that both probably fit their respective country’s political and social culture. In the end, I think most Australians are pretty comfortable with the system we have here and as I mentioned in my earlier comment, it seems to do a very fine job of protecting low-paid Australians from poverty.

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