May 21, 2015

Government interventions to reduce poverty in low-income families do work

Research shows that government efforts to support low-income families really do work.

A growing body of evidence shows that government investments in education, housing, health care, and nutrition for poorer working families have significant long-term benefits for children.

In a new paper by Harvard economists, the authors followed children from the US experiment “Moving to Opportunity” in the 1990s as they entered the labor market. They discovered that this government intervention, moving poor families from public housing into private housing in much less distressed communities, increased these childrens' earnings as adults by between 15 and 31 percent.

The additional tax revenue from these higher earnings was enough to repay the program’s cost.

Studies show that the earned-income tax credit may also reduce the incidence of low birth weight, raise numeracy and literacy rates, and boost college enrollment rates.

This research suggests that if governments support less well-off families, by expanding working tax credits, nutrition assistance, health care, housing vouchers and similar programs, this would not only help poorer citizens in the short-term but also grow the economy in the future.

IZA World of Labor author Richard V. Burkhauser writes, “Enhancing the earned income tax credit would do more to reduce poverty, at less cost, than increasing the minimum wage.”

Burkhauser’s article conveys that increasing the minimum wage can actually be detrimental to poor families, as some will lose their jobs as a result. Earned-income tax credit on the other hand raises only the after-tax wages of low income families. This tax credit increases with the number of dependent children which in turn grows employment within this demographic.

Earned-income tax credit has increasingly become an effective way of providing employment-based subsidies to the working poor, with a lower impact on government spending than increasing the minimum wage.

“And that is why,” says Burkhauser, “policymakers interested in reducing poverty in the US (and world-wide) should increase the earned income tax credit rather than the minimum wage.”

Read more here.

Related articles:
The minimum wage versus the earned income tax credit for reducing poverty, by Richard V. Burkhauser
Childcare subsidy policy: What it can and cannot accomplish, by Erdal Tekin