Labour markets, social transfers and child poverty

Bruce Bradbury, Markus Jäntti and Lena Lindahl b.bradbury@unsw.edu.au, markus.jantti@sofi.su.se and lena.lindahl@sofi.su.se

Objectives

o Both earnings and social transfers are important determinants

of the living standards of disadvantaged children and their

families

o How do the relative disposable incomes of the most

disadvantaged fifth of children vary across nations?

o What is the role of transfers, wages and hours of work in

contributing to this?

o How does this vary across the economic cycle?

Previous work

o Our previous work on child poverty in the 1990s (B&J, 2001):

• Variations in market income explained more of the cross-national

variation in child disadvantage than transfers

o Chen and Corak (2008) (data for 1990s) and Bitler, Hoynes and Kuka

(2014), Chzhen (2014) (recent crisis)

• Transfers often do not increase sufficiently (or at all) to mitigate the

impacts of recessions.

o Whiteford and Adema (2007):

• Low joblessness does not necessarily imply low poverty

• English-speaking: Higher benefits more joblessness

• Not the case for Nordic countries

o Wage inequality

• Strong cross-national correlation with poverty, but

• Weak impact of minimum wage increases on poverty

• Wages transfers?

Methods

o We examine the living standards of disadvantaged children, both

in real terms and relative to the norm in their society

o Dependent variable

• Mean income of the bottom fifth:

• Mean disposable income of the one-fifth of children in families

with the lowest disposable income

• Real (PPP 2013 USD)

• Relative: Relative to the overall median income in their country.

• All incomes equivalised

• Scale = (Nadults+0.75*Nchildren)^0.8

Average incomes and poverty rates

o Relative income of the bottom fifth is strongly correlated with

relative child poverty

o Real income of the bottom fifth is strongly correlated with (the

logit of) poverty based on the US poverty line (r = -0.98 in both

cases)

o For cross-national comparisons, we focus on relative income

• Indication of the degree of exclusion experienced by the poor.

• Relative to national capacity to intervene.

o When looking at trends over time, both relative and real

measures are relevant

LIS income data and decomposition

o Initial decomposition

• M: Market income (wage, self-employment, capital, private

transfer income)

• T: Net social transfers (Transfers minus income taxes and

social insurance contributions)

• M + T = D (Disposable income)

o Adjustments

• Income components truncated at zero

• Tax liabilities truncated at 90% of gross income

o Problems

• Italy, Greece. Some transfers paid through the wage

system => M too high and T too low.

• Less important: Belgium, France, Russia Slovenia. Taxes

deducted from M => M too low, T too high

OECD wage inequality data

o Better source of wage inequality data than LIS

• We use the OECD wage inequality data to decompose the

LIS earning income inequality into that due to wage rates

and that due to hours differences

o Limitations

• Some cross-national definitional variations

• A cross-check with a sub-set of LIS data gives us some

confidence that these are not substantial

• OECD wages are for all workers – not just parents

Decomposition identity (all incomes relative to overall median income)

𝐷𝑡𝑐 = 𝑀𝑡𝑐 + 𝑇𝑡𝑐

𝑀𝑡𝑐 = 𝐾𝑡𝑐 + 𝐸𝑡𝑐

𝐸𝑡𝑐 = 𝑤𝑡𝑐ℎ𝑡𝑐𝐸𝑄3𝑡𝑐

where

𝐷𝑡𝑐 = mean disposable income of bottom fifth

𝑀𝑡𝑐 = mean market income of bottom fifth

𝑇𝑡𝑐 = mean net social transfers of bottom fifth

𝐾𝑡𝑐 = mean capital and private transfer income of bottom fifth

𝐸𝑡𝑐 = mean earnings of bottom fifth

𝐸𝑄3𝑡𝑐 = mean earnings of middle fifth

𝑤𝑡𝑐 =𝑤10𝑡𝑐

𝑤50𝑡𝑐 , wage rate of 10th relative to 50th percentiles

ℎ𝑡𝑐 =𝐸𝑡𝑐𝑤10𝑡𝑐

𝐸𝑄3𝑡𝑐𝑤50𝑡𝑐 , (imputed) relative hours of bottom to middle

Difference from cross-national mean

𝐷𝑡𝑐 − 𝐷 = 𝑇𝑡𝑐 − 𝑇 + 𝐾𝑡𝑐 − 𝐾 + (𝐸𝑡𝑐 − 𝐸 )

≈ 𝑇𝑡𝑐 − 𝑇 + 𝐾𝑡𝑐 − 𝐾 + 𝐸 𝑤𝑡𝑐−𝑤

𝑤 +ℎ𝑡𝑐−ℎ

ℎ +𝐸𝑄3𝑡𝑐−𝐸𝑄3

𝐸𝑄3

Relative poverty and mean relative income of bottom-fifth

Children in the bottom fifth: Average market income (M), net social transfers (T) and disposable income (D=M+T): All relative to median disposable income

Children in the bottom fifth: Average market income (M), net social transfers (T) and disposable income (D=M+T): Real 2013 USD

Trends since the 1990s: 2013 USD

Trends since the 1990s, income relative to median

Income components relative to median disposable income (countries with >1m children and non-missing w)

Identities: D = T + M; D = T + K + E; D = T + K + w.h.EQ3

D T M K E w h EQ3

Denmark 2010 0.54 0.20 0.34 0.02 0.33 0.69 0.39 1.20

Finland 2013 0.54 0.19 0.35 0.02 0.33 0.68 0.48 1.01

Sweden 2005 0.53 0.24 0.30 0.04 0.25 0.74 0.37 0.95

Norway 2013 0.51 0.17 0.34 0.00 0.34 0.62 0.54 0.99

Netherlands 2010 0.48 0.06 0.42 0.01 0.41 0.62 0.57 1.16

Ireland 2010 0.47 0.37 0.10 0.02 0.09 0.52 0.23 0.71

Czech Republic 2010 0.46 0.14 0.32 0.04 0.28 0.52 0.62 0.86

United Kingdom 2013 0.46 0.25 0.21 0.01 0.20 0.56 0.55 0.67

Germany 2013 0.46 0.20 0.25 0.03 0.22 0.55 0.41 0.99

South Korea 2006 0.45 0.01 0.44 0.05 0.40 0.47 0.83 1.00

Japan 2008 0.42 0.02 0.40 0.01 0.39 0.61 0.66 0.97

France 2010 0.42 0.25 0.17 0.01 0.16 0.67 0.34 0.69

Australia 2010 0.42 0.27 0.15 0.02 0.13 0.60 0.27 0.84

Poland 2010 0.41 0.14 0.27 0.02 0.25 0.51 0.68 0.72

Canada 2010 0.41 0.20 0.20 0.01 0.19 0.51 0.42 0.90

Greece 2010 0.34 -0.02 0.35 0.02 0.33 0.62 0.51 1.04

United States 2013 0.31 0.13 0.18 0.01 0.17 0.48 0.42 0.84

Israel 2010 0.29 0.12 0.17 0.03 0.14 0.53 0.36 0.72

Italy 2010 0.29 0.05 0.24 0.01 0.23 0.69 0.45 0.75

Spain 2013 0.27 0.09 0.17 0.01 0.16 0.54 0.39 0.77

Mean 0.42 0.15 0.27 0.02 0.25 0.59 0.47 0.89

Correlation with D 1.00 0.44 0.43 0.21 0.42 0.36 0.12 0.50

Decomposition summary

Note:: Right-hand panel is a decomposition of E in left-hand panel

Conclusions: Cross-national variation

o Market incomes and net transfers ‘explain’ similar proportions

of the cross-national variation in the relative living standards of

the bottom fifth of children

o Strong negative correlation between the two. Only partly due to

variations across the cycle

• Labour supply issues? Transfer vs service policies?

o English-speaking countries have similar (less than average)

market incomes, but with substantial variation in transfers

• Relatively low employment hours in all, plus

• Relatively low wages in the US and Canada

o Nordic countries have similar disposable income, but with

variations in the market-transfer income mix

Conclusions: Changes over the last 2 decades

o Relative income

• Most common: increases in transfers compensating for

decreases in market income

• Especially when considered relative to the fall in median

income

o Real income trends after the 2008 financial crisis

• Dramatic decrease in Spain

• Substantial in Ireland

• Small decline in Australia, the US, the UK, Germany and

the Netherlands

• Increase in Norway, Finland, Canada and Denmark