The Center's work on 'Poverty and Income' Issues

The Center analyzes major economic developments affecting low- and moderate-income Americans, including trends in poverty, income inequality, and the working poor. In addition, we analyze the asset rules in various public benefit programs that can discourage low-income people from building modest savings and highlight potential reforms.


The Basics of the Minimum Wage

August 29, 2014 at 11:00 am

As Labor Day approaches, it’s worth taking a closer look at the important role that the minimum wage plays for millions of workers nationwide, its contribution to the economy, and how it could be strengthened.  Our new Policy Basic explains these key facts.

The federal minimum wage — the lowest hourly rate an employer can legally pay workers under the law — is now $7.25.  Where states and municipalities have enacted their own higher minimum wage laws, employers must pay at least the state or local minimum.  As of August 1, 2014, 23 states and the District of Columbia have minimum wages above the federal minimum wage.

In 2013, 5.5 million workers earned within 25 cents of the federal minimum wage, according to the Congressional Budget Office.  Three-quarters of these workers were at least 20 years old and two-fifths of them worked full time.  The median family income of workers in this range was about $30,000.

President Obama proposed raising the minimum wage to $9 an hour in his 2013 State of the Union address.  More recently, the Administration announced its support for the Fair Minimum Wage Act, which would raise the hourly minimum wage from $7.25 to $10.10 over the course of two years.  After that, the minimum wage would be indexed to inflation, eliminating the gradual erosion of minimum wage workers’ purchasing power (see chart) and the need for periodic, potentially contentious legislative debates to restore it that have been a feature of the minimum wage since its inception.

Although standard supply and demand theory suggests that an increase in the minimum wage reduces employment, empirical studies generally find that any such employment effects are modest.  Some studies have found no impact or even an increase in employment — at least for minimum-wage increases within the range of historical experience and those contemplated in recent proposals.

Click here to read the full backgrounder.

CBPP

Why the Ryan Plan Should Worry Those Concerned About the Affordable Housing Crisis, Part 2

August 5, 2014 at 11:52 am

House Budget Committee Chairman Paul Ryan’s proposal to consolidate 11 safety net and related programs, including the four largest federal rental assistance programs, into a single block grant to  states risks significant funding cuts to housing assistance that helps 4.7 million low-income families, as we explained last week.  Today, we’ll describe how the combination of those cuts, and the possible elimination under Ryan’s plan of program rules that ensure housing stability and affordable rents, could undercut rental assistance programs’ effectiveness and put substantial numbers of vulnerable families at risk for homelessness.

Federal rental assistance programs are effective.  They sharply reduce housing instability and homelessness and lift 2.8 million people out of poverty (with the bulk of these impacts coming from the programs included in the Ryan plan).  These effects, in turn, are linked to educational, developmental, and health benefits that can improve children’s long-term life chances.

But Chairman Ryan’s proposal, which would give states broad latitude in spending block grant funds, could enable states to jettison federal rules that are essential to the rental assistance programs’ success, or even to eliminate one or more programs.  The drops in funding that likely would occur over time would increase the risks that states would make damaging changes to housing assistance programs.  The following actions are among those states could take:

  • They could cut the number of families receiving rental assistance.  Such cuts would cause the long waiting lists to grow longer and could occur despite Ryan’s promise that his plan would honor existing rental assistance contracts. Most assistance included in the proposed Opportunity Grant is provided through the Housing Choice Voucher and Public Housing programs, which are typically funded annually (with assistance provided through annual contracts).  Most contracts with private owners under the other two rental assistance programs that Ryan would fold into the block grant also are short term, so this protection would not last long.  Moreover, if states seek to shift some funds from housing programs to other uses and don’t renew a substantial share of these contracts or maintain public housing properties, cities and towns — which may have little say in state decisions on how to use the Opportunity Grant funds — could see housing developments become unaffordable for many low-income households.  And if there is a perception that a state could fail to renew contracts or maintain rental subsidies, that almost certainly would make it more difficult and costly to attract private investment for affordable housing.
  • They could reduce per-unit subsidy levels, since the rules that set those levels in existing rental assistance programs would no longer apply.  In the Housing Choice Voucher program (which allows most participants to rent modest units of their choice in the private market), such cuts could force families to rent lower-priced units in higher-poverty neighborhoods with high crime rates and poor schools.  The other three programs that Ryan would include in the Opportunity Grant (Public Housing, Section 8 Project-Based Rental Assistance, and rural rental assistance, which the U.S. Agriculture Department administers) tie subsidies to particular developments; in those programs, subsidy cuts could make it difficult to pay for adequate building maintenance — already a major problem among Public Housing developments — or for owners to make units available to poor families at an affordable rent.
  • They could shift costs to participating families by raising rents.  Rent rules currently require most assisted families to contribute 30 percent of their income for housing, a share consistent with commonly accepted standards of affordability.  Rental assistance fills the gap between this contribution and actual costs, within reasonable limits that the federal and local agencies set.  Some poor families who may not be able to pay higher rents might find they could no longer afford their apartments if their rents rose substantially.

Why the Ryan Plan Should Worry Those Who Are Concerned About the Affordable Housing Crisis, Part 1

July 31, 2014 at 12:33 pm

A centerpiece of House Budget Committee Chairman Paul Ryan’s poverty plan is the proposal to consolidate 11 safety net programs — including four housing assistance programs — into a single, flexible block grant to states.  Among its downsides, this proposal threatens to lead to reductions in funding that provides housing assistance to millions of low-income families and individuals.

My colleagues have already set out some of the reasons to be concerned by Chairman Ryan’s proposal:

  • Block grants have proven to be easy targets for funding cuts, in part because their inherent flexibility makes it difficult to demonstrate how cuts would affect needy families and communities.
  • Total funding to assist low-income families — from federal, state, and local sources combined — likely would also decline, because broad block grants afford states opportunities to use block grant funds to replace state and local funds now going for similar services.

Because housing assistance and SNAP make up more than 80 percent of Ryan’s Opportunity Grant, any cuts in block grant funding would very likely reduce families’ access to these programs, as my colleague LaDonna Pavetti has explained.

The history of housing and community development program funding shows the risk of funding cuts that rental assistance programs face under Ryan’s plan.  Funding for flexible block grant programs such as the Community Development Block Grant (CDBG), HOME (which helps states and localities develop and preserve affordable homes for owners and renters), and the Native American Housing Block Grant has fallen sharply over time.  Meanwhile, programs that provide more narrowly prescribed forms of assistance to low-income families and that Congress funds separately each year — a category that includes housing vouchers, rural rental assistance, Section 8 Project-Based Rental Assistance, and Public Housing, the four rental assistance programs that Ryan’s proposal targets — have generally avoided reductions (sequestration in 2013 notwithstanding). (See chart.)

The reasons are easy to understand.  For example, HUD provides Congress every year with precise estimates of the cost of renewing the Housing Choice Vouchers that assist more than 2 million low-income families.  If Congress fails to provide sufficient funding to renew the vouchers, some of those families will lose assistance (and possibly their homes).  In contrast, policymakers can justify cutting a block grant by claiming that local agencies can avoid cutting direct assistance to families by using their flexibility to shift funds from other activities.

Cuts in rental assistance would fall mainly on low-income people who are elderly or have disabilities and working-poor families with children.  More than 80 percent of households with rental assistance in 2010 were elderly, had a disability, worked, or had recently worked.  (2010 is the most recent year for which these data are available to us.)

Rising rents and stagnant incomes have left increasingly more low-income Americans unable to afford decent, stable housing without cutting back on other basic needs.  Already fewer than one in four eligible low-income families receive rental assistance due to funding limitations, and waiting lists are long.  The cuts that would likely result from the Ryan plan would make this shortfall more severe and thus leave more families struggling to pay the rent and keep their homes.

IMF and OECD Call for Stronger EITC and Minimum Wage

July 30, 2014 at 11:42 am

The Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF), which have previously recommended expanding the Earned Income Tax Credit (EITC) and raising the federal minimum wage, both issued recent reports underscoring that these measures should be viewed as complements, not competing alternatives.

The reminder that a higher minimum wage can make a stronger EITC more effective at reducing poverty and encouraging work is especially timely given House Budget Committee Chairman Paul Ryan’s new poverty plan.  Ryan commendably recommended expanding the EITC for childless workers and non-custodial parents, but presented this as an alternative to a minimum wage increase.

The IMF report recommends:

An expansion of the EITC (including making permanent the various extensions that are due to expire in 2017) would also raise living standards for the very poor.  Finally, given its current low level, the minimum wage should be increased.  This would help raise incomes for millions of working poor and would have strong complementarities with the suggested improvements in the EITC, working in tandem to ensure a meaningful increase in after-tax earnings for the nation’s poorest households.

The OECD working paper reiterates the OECD’s previous finding that “the EITC is a large and successful antipoverty program” and recommends strengthening the EITC for childless workers and non-custodial adults, along with raising the minimum wage.  Because the EITC is a proven work incentive, it expands the number of people seeking jobs in the low-wage sector, which can put some downward pressure on the wages that employers offer potential workers — meaning that some EITC dollars would effectively flow to employers, not workers.  A higher minimum wage helps offset that effect.  As the OECD explains:

Setting the federal minimum wage at a reasonable level can also help to make the EITC more effective at raising incomes. Although hard to quantify, employers could be capturing part of the credit by paying lower wages than they would in the absence of the EITC (OECD, 2009). Increasing the federal minimum wage would counteract this dead-weight loss by supporting wage levels.

For policymakers of either party striving to expand opportunity and raise the living standards of working-poor families, the policy roadmap is clear:  extend the recent improvements in the EITC and Child Tax Credit, expand the EITC for childless workers, and raise the minimum wage.

What Difference Would Ryan’s EITC Expansion Make for Childless Workers?

July 29, 2014 at 4:07 pm

We’ve explained that House Budget Committee Chairman Paul Ryan’s proposed expansion of the Earned Income Tax Credit (EITC) for childless adults, including non-custodial parents, would encourage work and reduce poverty.  This interactive chart allows you to compare the EITC that childless workers at different income levels would earn under current law and under the Ryan expansion, which mirrors a proposal from President Obama.

For example, the EITC for single childless worker making poverty-level wages (we estimate $12,566 in 2015) would jump from about $170 under current law to about $840 in 2015 under the Ryan and Obama proposals.

The Ryan and Obama plans would, starting in 2015: lower the EITC’s eligibility age for workers not raising minor children from 25 to 21, double the maximum credit to about $1,000, and phase in the credit more quickly as a worker’s income rises.  (Unlike Chairman Ryan, President Obama would also allow workers aged 65 and 66 to claim the credit.)

The big difference between the Ryan and Obama plans, as we’ve noted, is the proposed “offsets” to pay for them (not reflected in the interactive above).  Several of Ryan’s offsets would hit low-income and other vulnerable families, while the President would pay for his EITC expansion by closing tax loopholes for wealthy taxpayers.

Nevertheless, it’s encouraging that leading members of both parties recognize the need to do more for the lone group that the federal tax system taxes into poverty.