Reducing Poverty while Increasing Employment: A Primer on Alternative Strategies, and a Blueprint

Policy to reduce poverty has often foundered on the issue of work incentives. The issue is a manifestation of the traditional conflict between equity and efficiency; the redistribution of income from higher to lower income people typically leads to reduced incentives for both groups to supply labor to the market, or to exercise initiative. This conflict is also known as the "poverty trap"--with income transfer (welfare) programs in place, those with low earned income have a reduced incentive to seek and accept employment, and as a result appear trapped in poverty. This paper discusses the primary policy strategies for reducing poverty while maintaining work incentives that have been analyzed in the literature. These strategies have been presented in a context in which a structure of income support policies and labor market constraints already exists. Existing policies typically have two characteristics: they are categorical and piecemeal in their coverage, and they contain serious work disincentives. Hence the proposed policy strategies seek to both increase the comprehensiveness and uniformity of program coverage, and to improve the structure of work incentives. Section I describes in general terms the policy setting in which the discussion of alternative strategies is nested. Section II identifies these policy strategies, and presents prototypical plans that embody these strategies. Section III identifies some of the primary pros and cons of these prototypical plans, and in some cases discusses their cost and labor supply implications. The final section presents a blueprint for a policy program that is comprised of the strategies that have been discussed in previous sections, designed to mitigate some of the negative economic effects of the existing structure of welfare state and labor market policies in several OECD countries.