Public Policy Paper

Question

Write a public policy research paper about poverty with regards to unemployment with policy alternatives to solve the problem. For instructions and format, see the addition materials.

Answer

Title: PUBLIC POLICY ALTERNATIVES TO UNEMPLOYMENT AND POVERTY

 

Contents

Introduction. 2

First Policy Alternative: Welfare Programs. 3

Second Policy Alternative: Wage Subsidies. 6

Third Policy Alternative: Tax and Benefit Systems. 8

Fourth Policy Alternative: Income “Support” Policies. 9

Proposed Policy Alternatives: Wage Subsidies and Income Support Policies. 10

Conclusion. 11

References. 12

 

Introduction

Unemployment and poverty constitute a major problem that no government has been able to deal with.  Poverty and unemployment are closely related concepts because poor people in most cases tend to be unemployed. Lower unemployment rates tend to be associated with low poverty levels.[1] In a 2010 survey, two public policy researchers, Austin Nichols and Thomas Callan, found out that 30 percent of people who were in long-term unemployment were also poor.[2] It is important to clarify this relationship because such a clarification has far-reaching implications for public policy. For instance, measures aimed at reducing unemployment also tend to lead to a reduction in poverty levels. In public policy, it is sometimes necessary for trade-offs to arise between unemployment reduction and poverty alleviation.[3]

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A number of policy alternatives to deal with the problem of unemployment and policy have been proposed by academic researchers, think tanks, legislators, and editors of various publications. These welfare programs include welfare programs, wage subsidies, and tax and benefit systems, and income “support” policies. This paper discusses all these policy alternatives before identifying the most appropriate public policy options in the fight against the twin challenges of poverty and unemployment.

A major challenge with some of these policy alternatives is on how to deal with the conflict between efficiency and equity. In all these alternatives, the objective is to redistribute incomes high income-earners to low income-earners. Most policies aimed at reducing poverty and unemployment tend to reduce incentives for both the high-income and low-income groups.[4] This phenomenon is sometimes referred to as the “poverty trap” or the “unemployment trap”.[5] The most appropriate policy alternatives are those that reduce poverty while at the same time increasing work incentives. In this paper, I argue that income support policies and wage subsidies are the best policy alternatives because they help reduce poverty while at the same time increasing work incentives, thereby dealing with the problems of both poverty and unemployment traps.

First Policy Alternative: Welfare Programs

Welfare programs constitute an important policy alternative in the fight against poverty and unemployment. In the developed world, welfare programs are often relied upon to provide a safety net to millions of unemployed people who are affected by poverty. The welfare programs normally take the form of tax credits, social security, unemployment insurance, and food stamps. In the US, expensive welfare programs have been put in place to ensure that poor people do not languish in desperation and starvation for lack of permanent employment, a decent wage, or a stable income.

The Supplemental Nutritional Assistance Program (SNAP) is a popular welfare program that was launched in the US to address poverty. Although it is difficult to determine the precise number of Americans who have been lifted out of poverty through welfare programs such as SNAP, such programs should not be dismissed as inappropriate. According to the 2013 Census Bureau reports, social security kept 15.3 people in the United States out of poverty.[6] Moreover, 1.7 million people were kept out of poverty by unemployment insurance while SNAP protected some 4 million people from slipping into poverty.[7]

Although welfare programs may keep people out of poverty, it is not clear for how long they can be taken care of by the government. In other words, concerns have been raised regarding the sustainability of welfare programs. They seem unsustainable because poverty can only be eradicated only when the affected population is self-supporting. To become self-supporting, the affected population should be given jobs. The programs also seem unsustainable because they are based on the undesirable notion of introducing laws that benefiting some people (those who are considered poor) at the expense of the rest of the population. By failing on the issue of fairness and equity, welfare programs provide a disincentive for employment and production. Those who benefit from these programs may easily become complacent to the extent of refraining from seeking employment or even opting out of poorly-paying jobs. Similarly, those who are employed in jobs that they do not like doing may easily quit as a way of attaining eligible for the benefits outlined in various welfare policies.

Critics of welfare also point out that it addresses the visible, short-term effects of poverty at the expense of hidden, long-term implications.[8] For instance, it may discourage people from engaging in production, thereby making the economic unsustainable. It is impossible for the goal of prosperity for everyone to be realized if people are opting out of employment to benefit from food stumps. At any given time, different people will end up becoming more economically endowed. In this regard, poverty becomes a relative term, one that may even be said to be socially constructed. Rather than becoming preoccupied with the social construction of poverty and what it means for welfare reform, countries should focus more on principles of sustainable economic engagements. Poverty-reduction strategies should focus on aspects of both production (supply) and consumption (demand). From an economic perspective, welfare policies are unsustainable because they focus on just the consumption (demand) side of the economy.

Moreover, welfare does not always bring about the intended effects. In many instances, they tend to move towards the direction in which the beneficiaries, for some reason, are relatively unproductive. On the other hand, the funds to pay for it tend to come from people who are relatively more productive through taxation. In the long run, these effects may drift towards discouraging people from being productive. The effects create the impression that people are being punished for being more productive while those who are less productive are being rewarded. In real-world contexts, one would expect things to be the other way round for everyone to become prosperous. This is because no economy has ever thrived by encouraging unproductiveness. Furthermore, welfare exposes a country to the serious risk of accepting unemployment as something to live with and to benefit from rather than a problem to be solved.

Welfare programs can only be a viable public policy alternative if they enable government to achieve the goals of reducing both poverty and inequality. Government bureaucrats tend to lack the incentive to ensure efficiency in the implementation of welfare programs. This is because their own wage benefits are not tied to the outcomes of these programs, at least not directly. The salaries of these bureaucrats are paid using tax revenues, which are always being collected even when the bureaucrats have not done a good job by maintaining high standards in terms of implementation. On the other hand, governments allocate funds to different welfare programs based on their perceived importance as opposed to viability. Consequently, implementers spend too much time creating perceptions that lead to increased funding instead of address the real issues affecting poor and unemployed citizens. The persistence of this problem leads to overall government failure.

Second Policy Alternative: Wage Subsidies

            Wage subsidies are normally used as a way of raising employment levels. Countries with massive unemployment problems resort to this public policy option as a way of creating jobs. This policy option also faces implementation problems especially in developing countries. A major challenge arises from the fact that the employment sources obtained through wage subsidies may not be sufficient to deal with the wider problem of unemployment.[9] This means that it may be inappropriate for the government to elevate this option to a position of dominance in public policy.

For wage subsidies to be effective, they should entail structured workplace training. They should be targeted to specific industries where employment is responsive to the dynamics of labor costs. Moreover, they should focus on the employment needs of the youth. Governments should look at long-term goals, such that the policies put in place should promote economic growth as well as the employment absorption capacity of the economy. Priority should be on raising the skills of new entrants into the labor market while at the same time reducing labor rigidities. The policies should facilitate the promotion of effectiveness in job search efforts particularly among unemployed youth.

In developing countries, where failure in the labor market is characterized primarily by unemployment, it is important for firm-side subsidies that promote labor demand to be introduced. Similarly, in situations where there is a close association between poverty and unemployment, wage subsidy schemes may constitute an effective strategy for fighting poverty. This strategy may work well where a large section of the population is unemployed and majority of the citizens live below the poverty line.

Wage subsidy schemes may also take the form of worker-side strategies, whereby workers who successfully obtain employment are given subsidies. The main objective of worker-side subsidies is to encourage more people to participate in the labor market. For example, the Working Families Tax Credit program was introduced in the UK to encourage more people to seek employment.[10] The same objective motivated the launch of Canada’s Self-Sufficiency Program. In both the UK and Canada, the programs were targeted at parents with children. In developing, the suitability of worker-side strategies may be questionable considering that the main cause of unemployment is low demand for labor.[11] In the developed world, many people refuse to seek employment because the wages are too low.

The basic principle that guides firm-side wage subsidies is simple: the subsidies lower the cost of employment for firms without affecting the take-home pay of workers. This enables the firms to raise both output and employment. This strategy is also desirable because its benefits are likely to spill over into the economy, thereby contributing to overall poverty reduction. Countries with higher employment rates tend to have higher aggregate household incomes. Moreover, the subsidies lead to a reduction in average unit production costs. With time, this translates into a decline in consumer prices.

Third Policy Alternative: Tax and Benefit Systems

Like firm-side employment subsidies, tax and benefit systems are designed to change the way the labor markets function with a slant towards spurring of economic incentives, job creation, and employment. Many European Union (EU)member states have embarked on a process of reforming their tax and benefit systems as a way of reducing poverty and unemployment.[12] The need for this public policy has been created by the presence of immense tax pressure in the labor market, which especially affects the low paid in very significant ways. Although EU member states have started making progress in easing the tax burden subjected to labor, a trend of unequal reform has emerged because of the benefit systems are not readily accessible to workers compared to tax systems.[13] Benefit reforms hardly receive any attention because most of the time emphasis is on the tax side.

In tax and benefit systems, most states pursue the ambitious goal of full employment. In developing countries where the goal of full employment is not yet tenable, this policy alternative may not be given priority.[14] However, in the developed world where such an ambitious goal may be within reach, this policy option may serve as an appropriate mechanism or reducing structural unemployment and increasing labor supply. Nevertheless, this option may need to be complemented with more comprehensive strategies aimed at increasing the take-home pay for workers without reducing the economic incentive for firms to hire more people.

Fourth Policy Alternative: Income “Support” Policies

Income “support” strategies are aimed at encouraging people to seek a source of income that enables them achieve a minimum level of living without having to rely on welfare programs. In essence, this policy option operates like credit income tax. For obvious reasons relating to responsibilities, adults are expected to achieve a higher minimum level of living than children. This type of subsidy is meant to do away with positive taxation of those who are at the lowest income stratum. This provides families with an incentive to ensure that their tax liabilities do not exceed the grants on offer in available “support” policies. It is possible to substitute for such policies in most OECD countries.[15]

This policy option may also take the form of negative income tax. It closely resembles the credit income tax in the sense that it provides incentives for individuals and families to achieve certain minimum level of income to derive benefits. Individuals are assured of a basic benefit that is proportionate to the size of their living units. As the living unit’s income increases, the level of transfer benefit is reduced. At some point, the break-even level of income is reached, at which point the unit becomes a net taxpayer. The objective of this policy is to consolidate all income support policies that are targeted at poor people into one coherent program.

Proposed Policy Alternatives: Wage Subsidies and Income Support Policies

The proposed policy alternatives constitute a blend of wage subsidies and income support policies. Wage subsidies contribute to the reduction of poverty by augmenting low wages of poor workers with wage rate subsidies as a form of sustenance. At the same time, they provide an incentive for those who work for hourly wages to spend more time at their places of work in order to accumulate more wages and subsidies. This approach is better than the traditional support programs that build a “poverty trap” by providing subsidies based on standard levels of income.

It is important to take into account various considerations when evaluating the appropriateness of wage subsidies as an antipoverty policy in different contexts. For example, the policy may increase the supply of labor as more workers compete to end up with a higher take-home pay. As the bidding down of wage rates in the labor market continues, the policy amasses its potentially far-reaching, positive impact on employment. At the same time, it makes low-skilled workers increasingly attractive to employers. For policies that are modeled on wage subsidies to be successful, effective administration is required. Tax authorities need to put in place new structures that not only focus on income and earnings but also the number of hours that employees work.

Similarly, income support policies need to be promoted as a way of reducing poverty and unemployment in contemporary societies.[16] There are many reasons why these policies are desirable. First, the system on which they are modeled is very simple to understand. The only information that public policy implementers require is the one that has been reported to tax authorities. The implementing authorities do not need to put in place new administrative structures to implement the policies. Moreover, it enables government to avoid the “poverty trap” and “unemployment trap” since no social group is branded “welfare recipients”. Therefore, this system promotes social cohesion as opposed to many categorical systems that have been put in place in many countries.

Conclusion

In conclusion, no single public policy aimed at fighting poverty and unemployment can achieve the twin goals of equity and efficiency. It is difficult to find a stand-alone policy that guarantees adequate income support to the poor while at the same time stimulating growth in employment particularly among low-skilled workers. Therefore, it is imperative for public policy professionals to complement a blend of policy alternatives to be able to achieve the best outcomes for citizens facing the twin challenges of poverty and unemployment. The implementers must always be very careful to ensure that the resulting strategies do not lead to the emergence of the “poverty trap” and the “unemployment trap”.

This paper has identified a blend of wage subsidies and income support policies as the best policy alternatives for dealing effectively with poverty and unemployment. Through these policies, no specific social group is targeted, meaning that the fear of stigmatization is eliminated. Moreover, governments need not put in place new administrative structures for purposes of implementation. The only income information required is the one that has already been collected by tax authorities.

 

References

Agénor, Pierre-Richard. Unemployment-Poverty Trade-Offs. Washington, D.C: World Bank, 2004.

Blundell, Richard. “Work incentives and ‘in-work’ benefit reforms: A review.” Oxford Review of Economic Policy 16 no 1, (2000): 27-44.

Carone, Giuseppe. Reforms In Tax-Benefit Systems In Order To Increase Employment Incentives In The EU. European Economy – Economic Papers 160, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission, 2001.

Coverage in the United States: 2012. Current Population Reports, September 2013.

Defina, Robert. “The Impacts of Unemployment on Alternative Poverty Rates.” Review of Income and Wealth, 50 no. 1, (2004): 69-85.

DeNavas-Walt, Carmen., Proctor, Bernadette and Smith, Jessica. Income, Poverty, and Health Insurance, September 2013, retrieved from https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCoQFjAA&url=https%3A%2F%2Fwww.census.gov%2Fprod%2F2013pubs%2Fp60-245.pdf&ei=zqBNU6K8CMO84ASBwIDwBg&usg=AFQjCNE0UWA4B-Y78WRj2_x93TOwFbGB-w&sig2=O-9uBJZaOlFJFq9hcaKRDQ&bvm=bv.64764171,d.bGE&cad=rja  on April 15, 2014

Ellwood, David. “Anti-Poverty Policy for Families in the Next Century: From Welfare to Work — and Worries”, The Journal of Economic Perspectives, 14 no. 1, (2000): 187-198.

Gallie, Duncan., Paugam, Serge. And Jacobs, Sheila. “Unemployment, Poverty and Social Isolation: Is There a Vicious Circle of Social Exclusion?” European Societies 5 no. 1, (2003): 1-32.

Kangas, Olli and Palme, Joakim. “Does Social Policy Matter? Poverty Cycles in OECD Countries.” International Journal of Health Services 30 no. 2, (2000): 335 – 352.

Martin, John and Grubb, David. What works and for whom: a review of OECD countries’ experiences with active labor market policies. Working Paper, IFAU – Institute for Labour Market Policy Evaluation, 2001.

Nichols, Austin and Callan, Thomas. Unemployment and Poverty, Urban Institute, retrieved from http://www.urban.org/publications/412400.html  on April 14, 2014.

Phelps, Edmund. “Low-Wage Employment Subsidies Versus the Welfare State.” American Economic Review 84 no. 3, (2004): 54-58.

Saunders, Peter. “The Direct and Indirect Effects of Unemployment on Poverty and Inequality.” Australian Journal of Labor Economics, vol. 5, no. 4 (2002): 507-529.

Scholz, John. “The Earned Income Tax Credit: Participation, Compliance, and Antipoverty Effectiveness.” National Tax Journal 47 no. 2, (2004): 59-81.

Smeeding, Timothy. “Public Policy, Economic Inequality, and Poverty: The United States in Comparative Perspective.” Social Science Quarterly, 86 no. 1, (2005): 955–983.

End Notes

[1] Defina, Robert. The Impacts of Unemployment on Alternative Poverty Rates. Review of Income and Wealth, 50 no. 1, (2004): 69-85.

[2] Nichols, Austin and Callan, Thomas. Unemployment and Poverty, Urban Institute, retrieved from http://www.urban.org/publications/412400.html  on April 14, 2014.

[3] Agénor, Pierre-Richard. Unemployment-Poverty Trade-Offs. Washington, D.C: World Bank, 2004.

[4] Ibid.

[5] Saunders, Peter. ‘The Direct and Indirect Effects of Unemployment on Poverty and Inequality’. Australian Journal of Labor Economics, vol. 5, no. 4 (2002): 507-529.

[6] DeNavas-Walt, Carmen., Proctor, Bernadette and Smith, Jessica. Income, Poverty, and Health Insurance, September 2013, retrieved from https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCoQFjAA&url=https%3A%2F%2Fwww.census.gov%2Fprod%2F2013pubs%2Fp60-245.pdf&ei=zqBNU6K8CMO84ASBwIDwBg&usg=AFQjCNE0UWA4B-Y78WRj2_x93TOwFbGB-w&sig2=O-9uBJZaOlFJFq9hcaKRDQ&bvm=bv.64764171,d.bGE&cad=rja  on April 15, 2014

[7] Ibid.

[8] Smeeding, Timothy. ‘Public Policy, Economic Inequality, and Poverty: The United States in Comparative Perspective.’ Social Science Quarterly, 86 no. 1, (2005): 955–983.

[9] Phelps, Edmund. ‘Low-Wage Employment Subsidies Versus the Welfare State’. American Economic Review 84 no. 3, (2004): 54-58.

[10] Ellwood, David. ‘Anti-Poverty Policy for Families in the Next Century: From Welfare to Work — and Worries’, The Journal of Economic Perspectives, 14 no. 1, (2000): 187-198.

[11] Blundell, Richard. ‘Work incentives and ‘in-work’ benefit reforms: A review’. Oxford Review of Economic Policy 16 no 1, (2000): 27-44.

[12] Scholz, John. ‘The Earned Income Tax Credit: Participation, Compliance, and Antipoverty Effectiveness’. National Tax Journal 47 no. 2, (2004): 59-81.

[13] Carone, Giuseppe. Reforms In Tax-Benefit Systems In Order To Increase Employment Incentives In The EU. European Economy – Economic Papers 160, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission, 2001.

[14] Gallie, Duncan., Paugam, Serge. And Jacobs, Sheila. ‘Unemployment, Poverty and Social Isolation: Is There a Vicious Circle of Social Exclusion?’ European Societies 5 no. 1, (2003): 1-32.

[15] Martin, John and Grubb, David. What works and for whom: a review of OECD countries’ experiences with active labor market policies. Working Paper, IFAU – Institute for Labour Market Policy Evaluation, 2001.

[16] Kangas, Olli and Palme, Joakim. ‘Does Social Policy Matter? Poverty Cycles in OECD Countries.’ International Journal of Health Services 30 no. 2, (2000): 335 – 352.

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