Essay: Poverty based on market income
Longstanding debate about the size and policy implications of transfers’ adverse behavioral responses, which pit supporters of the expansive welfare state against critics, sometimes has a tendency to neglect or take for granted the primary functions of income transfers – cushioning income losses from unemployment, illness, etc. and ensuring a minimum income to persons unable to earn it in the market. These equity effects need to be balanced against whatever efficiency costs are created by transfers.
Experience clearly shows that greater spending on income transfers pays off in terms of less relative poverty. Poverty based on market income is roughly comparable among OECD countries. Countries such as Denmark, France, and Sweden that spend heavily on transfers, including significant universal programs, cut the market poverty rate by 60 to 70 percent. Low spending countries such as Canada, Ireland, and the U.S. cut the rate by just 24 to 40 percent. The result is levels of post-transfer, post-tax relative poverty that differ by a factor of two to three between high and low spending societies. Economists correctly observe that the percentage of families moved over any specific poverty line is a crude measure for judging an income support system’s success and that these estimates ignore recipients’ adjustments in behavior induced by transfers and taxes.
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