Transition Events in the Dynamics of Poverty. Determinants of Poverty

09/01/2002

This discussion of individuals' choices and the constraints that they face (i.e., our utility maximization framework) provides information on the factors that directly affect families' poverty statuses. They are:

  1. family earned income,
  2. family unearned income, and
  3. family size.

These components are discussed in turn below.

1. Determinants of Family Earned Income

Family earned income is directly determined by the total number of hours family members worked in the wage labor market and the wage rate.

Determinants of hours worked in wage labor market: Total family hours worked in the wage labor are determined by:

  • wages,
  • unearned income,
  • number of adults in the family,
  • number of children in the family,
  • age of the children and adults in the family,
  • family members’ health or disability status,
  • state of the economy, and
  • family preferences.

Higher wages have two offsetting effects on hours worked. On the one hand, higher wages increase hours because the cost of leisure and home production increases.(12) On the other hand, higher wages decrease hours worked because individuals do not need to work as many hours to reach a particular level of income.(13) Higher unearned income has only one effect and is expected to lower family hours spent in the wage labor market.(14) Additional unearned income means family members can spend less time in the wage labor market and consume the same amount of goods. Additional adults in the family should increase family hours spent in the wage labor market by providing another potential wage earner and additional help with home production. The number of children in the family is expected to reduce hours spent in the wage labor market, due to the need for additional time spent caring for the child. This is particularly true for families with young children.

Human capital theory suggests that family labor should also vary with age. As described above, young adults are more likely to invest in human capital and so spend less time in the wage labor market, working-age adults will spend more hours as they reap the benefits of their investments, and adults nearing retirement age will spend fewer hours. Family members’ health status will affect hours worked if a family member misses work due to illness or is unable to work due to a disability. The economy captures demand side effects of the labor market, such as whether part-time, full-time, or over-time jobs are available. Family preferences such as taste for work, taste for government transfers (as it affects unearned income), and the value put on home production will also affect the amount of time family members spend in the wage labor market.

Determinants of wages: The wage rate is another important determinant of family earned income. The wage available to individuals in a family will depend primarily on their:

  • human capital (education level and on-the-job training level),
  • age,
  • gender,
  • race,
  • state of the economy, and
  • government policies.

Human capital theory predicts that individuals with higher levels of education and training will have higher wages. It also predicts wages will be affected by age, where young and older individuals are expected to have lower wage rates. Gender may affect wage rates to the extent that women have taken time out of the labor market to rear children and there is discrimination in the labor market. Similarly, we may see differences in wage rates by race to the extent that our measure of educational attainment does not capture the level of human capital (since school quality differs substantially across the country and minorities are more likely than non-minorities to attend low quality schools) and to the extent that discrimination exists in the labor market. The economy will affect wage rates—a strong economy and high demand for workers will result in higher wages. Finally, government policy such as the minimum wage may also affect wages.

As an individual’s earnings are simply the product of his/her labor market hours and wage, and family earned income is the sum of all individual earnings within a family, the determinants of a family’s earnings will be all the determinants of family wage labor hours and family members’ wages.

2. Determinants of Family Unearned Income

Family unearned income is the sum of government transfers, private transfers, and asset income. The amount of government and private transfers a family receives is in part a function of individuals’ preferences. All else equal, families with little taste for receiving transfers will have less unearned income from either government or private transfers than their counterparts who have more of a taste for transfers. The economy may also play a role in altering family unearned income as returns on investments will affect asset income.

With both the determinants of earned income and unearned income in hand, we have identified the determinants of family income. We now turn our attention to family size, the final component of poverty.

3. Determinants of Family Size

Family size is an important determinant of whether a family or individual is in poverty because the official poverty measure incorporates family size. Family size depends on:

  • family income,
  • cost of children,
  • wages,
  • government transfers, and
  • preferences.

Becker’s (1991) theory of the demand for children predicts that the number of children in a family will depend on family income and the costs of children. Income plays a role in determining family size because families with higher incomes are more able to afford additional children. In terms of the cost of children, direct costs associated with having children include, among others, food, clothing, and health-care expenses. In addition to these direct costs there is also the relative cost. The relative cost of having a child is affected by the opportunity cost of child rearing as measured by the female wage, to a lesser extent the male wage, and government transfers. Government transfers may affect the number of children and adults in a family by altering the relative cost of having a child and creating incentives or disincentives to marry. Finally, individual preferences will affect family size.

Putting It All Together—the Underlying Determinants of Poverty

Combining the determinants of family income and family size, we arrive at the determinants of poverty. Whether a family is in poverty is determined by:

  • health or disability status of family members,
  • age of adults,
  • race/ethnicity of adults,
  • human capital (education and on-the-job training level) of working age adults,
  • gender of adults,
  • number of adults,
  • number of children,
  • age of the children,
  • cost of children,
  • government policies,
  • state of the economy, and
  • family preferences.

Note that some of these factors, such as the number of children, are determined by the family, while others, such as the state of the economy, are not. These variables will be included in the empirical model that examines the relationship between family poverty status, family characteristics, and the events that families experience. We now turn to examine the events that may affect families' poverty status.

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