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Loosening the poverty trap: reducing government assistance by 50 cents for every $1 earned

The graph shows a downward sloping line that extends from $28,000 on the y-axis to $18,000 on the y-axis (from 0 to 2,500 on the x-axis). Two points R and S appear on the line. Another line starts at (0, $20,000) and ends at (2,500, 0). A dashed plum line extends horizontally from $18,000 on the y-axis and meets with the vertical line extending from 2,500 on the x-axis. Another dashed plum line extends from $16,000 on the y-axis and intersects with the vertical line extending from 500 on the x-axis at point P. Beneath the x-axis is an arrow pointing to the right indicating leisure (hours) and an arrow pointing to the left indicating labor (hours).
On the original labor-leisure opportunity set, the lower budget set shown by the smaller dashed line in the figure, the preferred choice P is 500 hours of leisure and $16,000 of income. Then, the government created an antipoverty program that guarantees $18,000 in income even to those who work zero hours, shown by the larger dashed line. In addition, every $1 earned means phasing out 50 cents of benefits. This program leads to the higher budget set shown in the diagram. The hope is that this program will provide incentives to work the same or more hours, despite receiving income assistance. However, it is possible that the recipients will choose a point on the new budget set like S, with less work, more leisure, and greater income, or a point like R, with the same work and greater income.
The labor-leisure tradeoff with assistance reduced by 50 cents for every dollar earned
Amount Worked (hours) Total Earnings Government Support Total Income
0 0 $18,000 $18,000
500 $4,000 $16,000 $20,000
1,000 $8,000 $14,000 $22,000
1,500 $12,000 $12,000 $24,000
2,000 $16,000 $10,000 $26,000
2,500 $20,000 $8,000 $28,000

The next module will consider a variety of government support programs focused specifically on the poor, including welfare, SNAP (food supplement), Medicaid, and the earned income tax credit (EITC). Although these programs vary from state to state, it is generally a true statement that in many states from the 1960s into the 1980s, if poor people worked, their level of income barely rose—or did not rise at all—after the reduction in government support payments was factored in. The following Work It Out feature shows how this happens.

Calculating a budget constraint line

Jason earns $9.00 an hour, and a government antipoverty program provides a floor of $10,000 guaranteed income. The government reduces government support by $0.50 for each $1.00 earned. What are the horizontal and vertical intercepts of the budget constraint line? Assume the maximum hours for work or leisure is 2,500 hours.

Step 1. Determine the amount of the government guaranteed income. In this case, it is $10,000.

Step 2. Plot that guaranteed income as a horizontal line on the budget constraint line.

Step 3. Determine what Jason earns if he has no income and enjoys 2,500 hours of leisure. In this case, he will receive the guaranteed $10,000 (the horizontal intercept).

Step 4. Calculate how much Jason’s salary will be reduced by due to the reduction in government income. In Jason’s case, it will be reduced by one half. He will, in effect, net only $4.50 an hour.

Step 5. If Jason works 1,000 hours, at a maximum what income will Jason receive? Jason will get the government assistance of $10,000. He will net only $4.50 for every hour he chooses to work. If he works 1,000 hours at $4.50, his earned income is $4,500 plus the government income of $10,000. Thus the total maximum income (the vertical intercept) is $10,000 + $4,500 = $14,500.

Key concepts and summary

A poverty trap occurs when government-support payments for the poor decline as the poor earn more income. As a result, the poor do not end up with much more income when they work, because the loss of government support largely or completely offsets any income that is earned by working. The bite of the poverty trap can be reduced by phasing out government benefits more slowly, as well as by imposing requirements for work as a condition of receiving benefits and a time limit on benefits.

Problems

Susan is a single mother with three children. She can earn $8 per hour and works up to 2,000 hours per year. However, if she does not earn any income at all, she will receive government benefits totaling $16,000 per year. For every $1 of income she earns, her level of government support will be reduced by $1. Create a table, patterned after [link] . The first column should show Susan’s choices of how many hours to work per year, up to 2,000 hours. The second column should show her earnings from work. The third column should show her level of government support, given her earnings. The final column should show her total income, combining earnings and government support.

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Questions & Answers

what are free good
Maillot Reply
how do you determine price change
Matri Reply
what is economics?
Yaya Reply
what is economic
Nana Reply
Economics is the study of how Individual consumer, institution and society as a whole uses its available finite resources to satisfy infinite needs and wants
Richard
Explain the following concepts using suitable exemple. 1) National budget. 2) National debt
Rosalie
what is international trade
BOBO Reply
other things remain constant.
Esale Reply
explain scarcity
Richard Reply
scarcity occurs when there are not enough resources to satisfy human's needs and wants therefore we need to allocate our resources using the price mechanism.
Isha
scarcity is when there is inadequate resources to catch the unlimited wants which would compel individual to make choice.
Prince
scarcity simply means when there's a shortages of resources to satisfy Hunan's need and wants in a particular time, which means the demand for it at the moment is higher than the supply
Abu
scarcity simply means when there's a shortages of resources to satisfy humans need and wants in a particular time, which means the demand for it at the moment is higher than it supply.
Abu
😂😂😂
Isha
That escalated real quick😂
Isha
scarcity is sometimes considered as the basic problems of economics resources r scarce because we live in a world of humans in which wants are infinite but the land labor and capital r required to satisfy those wants are limited
Nkwenti
scarcity means unlimited resources
Rena
resources are limited but human wants can not be limited
Himanshu
joint or complementary demand
Ryt Reply
what is demand
Qudus Reply
it maybe define as the amount or quantity of goods and services which a consumer is willing to buy with the ability to pay at a given price at a particular time
Habib
yesoo thanks dear
Gyamfua
Explain 3 reasons why the manufacturer may decide to sell directly to the consumers
Rosalie
why is economics a science
Isaac Reply
Because science is all about thinking by making models whether a computational or Mathematical. Economics is a social sciences because it effects society but to understand Economics we use maths so it is a Science
Amit
hi
Mony
hello
Amit
I hope.......Economic is social science because it makes new new currency of money,it is decided the country’s depend system and the system be repeated others benefits in our ...
Anik
yeah
Habib
so what is the disadvantages of mix economic system
Habib
Economics is regarded as a social science because it uses scientific methods to build theories that can help explain the behaviour of individuals, groups and organisations.
Ali
The question is: why is Economic a "science" and not why is economics a "social science?" Alright folks?
Xavier
In my own understanding of why economics is a science it bcz it deals mainly on human resources just like biology that deals in the human body why economics is science it also deals on the management of human resources all over the world bcz without economics there will be no human resources
Ogbonnaya
what is technology
Nkwenti
my response to the earlier question is, economics is a science but not a pure science like biology, chemistry and physics. The reason is that those pure science study inanimate object while economics study human being, their experiment are predictable.
raimi
Economics is a social science subject that shows the relationship between ends and scarce means with their alternative uses
Ajenifuja
what is Equilibrium?
Fatima Reply
it means equal price and equal quality
Arthur
thank u Arthur!
Fatima
😇🙏
Fatima
Thanks
Moses
Equilibrium is a state of balance in an economy. In as far as market forces are reasonably concerned, equilibrium means the state at which the quantity of goods supplied is equal to the quantity of goods demanded.
Xavier
what is labour
Ayham
labor can be define as a both physical and mental effort of man put forward towards production
Habib
name the types of demand and explain any two
ALIMAMYISLA
Joint demand Composite demand Competitive demand
Ajenifuja
Labourcan be defined as man mental and physical exertion
Ajenifuja
equilibrium is a state of balance especially between opposing forces or influences
Nkwenti
equilibrium means the state of point in which a person is satisfied and after that point if that person consumes more than the satisfaction level will decrease.
Himanshu
Equilibrium is a state of balance in and economy. that mean equal privé and equal quality e.t.c.
Rosalie
Equilibrium is a situation in which economic forces such as supply and demand balance and in the absence of extremal lnfiuences the values of economic variables will not change.
Gyamfua
what is elasticity
Motseoa Reply
difference between demand and supply
Adeyemi Reply
Demand- It is the desire of a buyer and his ability to pay for a particular commodity at a specific price. Supply- It is quantity of a commodity which is made available by the producers to its consumers at certain price.
Ali
yes OK thank you dear
Gyamfua
Demand can be defined as the ability a buyer is willing and able to pay at a specific price and in agiven period of time Supply can be defined as the ability the producer is willing to supply with a specific price
Ajenifuja
thanks
antony
what is labor force
Habib
demand represents the consumer while supply represents the firm
Nkwenti
restriction on international trade
Ayim Reply
formula for price elasticity of demand
Lognyuu Reply

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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