Unemployment insurance generally replaces more than half of the lost net income of those who receive benefits, and the earnings of second earners in the household of the unemployed help to stabilize total household income. While the unemployed may not have access to formal lines of credit, they are often able to defer payments during part or all of their unemployment spells.
The situation is, of course, different in Europe where unemployment rates tend to rise during recessions but not to fall during a recovery. Cyclical unemployment there becomes long-term unemployment because of the adverse incentives in the European system of unemployment benefits and welfare payments.
Reform of the American unemployment system in the 's led to a decline in the rate of unemployment. One important aspect of those reforms was subjecting unemployment benefits to the personal income tax, a reform that obviously did not affect the poor who do not pay income tax. However, this measure did reduce the very high replacement rates that previously made it possible for some individuals in higher-income households to have more net income by being unemployed than by working.
Lack of earning ability. The most commonly recognized reason for poverty in the United States is the inability of poor individuals to earn more than a very low hourly wage. This low earnings ability, is often attributed to inadequate schooling or training. It is clear that inadequate schooling can limit an individuals earning ability and that the obvious remedy is more or better schooling. Many economists and educators who are studying how to improve our educational system have concluded that decentralization and competition are essential.
Research by Larry Katz and Claudia Goldin of Harvard shows that the historic spread of high-school education and vocational education in the United States reflected decisions of local governments rather than the actions of the states or federal government. Research by Caroline Hoxby and others shows that the quality of local public education today improves as measured by graduation rates, continued education, post-school wages, etc. The importance of competition has increased interest in vouchers to promote individual choice. A second reason for low earnings ability is inadequate training.
Experience suggests that on-the-job training is best. The German system of formalized apprenticeships appears to allow Germany to escape the high youth-unemployment rates that plague much of Europe; the system may also reduce poverty in later years.
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In the United States, in contrast, minimum-wage legislation limits the ability of individuals with low skills, low education, and low ability to obtain on-the-job training. Although someone who comes to a job with good ability and. The evidence on government-sponsored training programs for the middle-aged unemployed is very discouraging. For women, participation in training programs raises employment and wages by more than the cost of the training, but the impact on employment and poverty for the trainees is very small.
For men, the results are even worse: The gains from training are less than the costs. The problem of low human capital as a source of poverty is not just a matter of schooling and training, but also low cognitive ability.
As I read the evidence, while variations in cognitive ability IQ close to the mean score do not have much impact on individuals wage rates, individuals with extremely low levels of cognitive ability IQ levels below 80 have a very hard time earning a decent wage rate. This is not a fashionable view. Americans like to think that all men and women are quite literally created equal and that education can therefore solve the problem of low human capital and low earnings. Unfortunately, however, very low cognitive ability is likely to be a serious cause of poverty that cannot be remedied by education and training.
Only when this is accepted will it be possible to develop appropriate new policies. Finally, there are those for whom low earnings ability reflects pathologically dysfunctional life styles - drug abuse, alcoholism, and mental illness. Policies that deal with these specific problems, if they are successful, will do much to reduce human suffering as well as to alleviate poverty. The role of individual choice. Not all poverty can be attributed to involuntary unemployment or to the lack of earning ability. Individual choices, rational or irrational, can lead to poverty.
Failures of the Unemployment Insurance System
Some individuals who are in poverty may be making considered choices. For example, some individuals may choose leisure not working or working very little over cash income even though this leaves them poorer than they otherwise would be. Choosing not to work may be an increasingly important source of poverty.
Over time the standard of living that is possible without working has increased for some segments of the population as a result of the rise in the real value of cash and in-kind welfare benefits. Often the real value of these welfare benefits has increased more rapidly than the real value of wages available to low-skilled workers, increasing the likelihood that the appeal of such benefits would exceed the attractiveness of work.
This is reinforced to the extent that transfer rules reduce the incentive to work.
Reducing such voluntary poverty requires reexamining the structure of welfare programs. The New Deal, in a certain sense, merely introduced types of social and economic reform familiar to many Europeans for more than a generation. Moreover, the New Deal represented the culmination of a 1ong-range trend toward abandonment of "laissez-faire" capitalism, going back to the regulation of the railroads in the s, and the flood of state and national reform legislation introduced in the Progressive era of Theodore Roosevelt and Woodrow Wilson. What was truly novel about the New Deal, however, was the speed with which it accomplished what previously had taken generations.
Many of the reforms were hastily drawn and weakly administered with some actually contradicting others. During the entire New Deal era, public criticism and debate were never interrupted or suspended; in fact, the New Deal brought to the individual citizen a sharp of interest in government.. When Roosevelt took the presidential oath, the banking and credit system of the nation was in a state of paralysis.
With astonishing rapidity the nation's banks were first closed -- and then reopened only if they were solvent. The administration adopted a policy of moderate currency inflation to start an upward movement in commodity prices and to afford some relief to debtors. New governmental agencies brought generous credit facilities to industry and agriculture.
By millions of Americans were out of work Bread lines were a common sight in most cities. Hundreds of thousands roamed the country in search of food, work and shelter. Ah early step for the unemployed came in the form of the Civilian Conservation Corps CCC , a program enacted by Congress to bring relief to young men between 18 and 25 years of age. About 2 million young men took part in this program during the Os.
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During their time in the CCC, they participated in a variety of conservation projects such as "planting trees to combat soil erosion and maintain national forests; eliminating stream pollution; creating fish, game and bird sanctuaries; and conserving coal, petroleum, shale, gas, sodium and helium deposits. The Civil Works Administration was a work relief program that gave jobs to many unemployed people. Although this program was criticized as "make work," the jobs funded ranged from ditch digging to highway repairs to teaching.
It was Created in November ,and was abandoned only a few months later in the spring of Roosevelt and his key officials, however, continued to favor unemployment programs based on work relief rather than welfare. The AAA had a core to plan to raise crop prices by paying farmers a subsidy to compensate for voluntary cutbacks in production. The funds for the payments would be generated by a tax levied on industries that processed crops. By the time the act had become law, however, the growing season was well underway, and the AAA encouraged farmers to plow under their abundant crops Secretary of Agriculture Henry A.
Wallace called this activity a "shocking commentary on our civilization. Between and , farm income increased by more than 50 percent, but only partly because of federal programs. During the same years that farmers were being encouraged to take land out of production, which would displace tenants and sharecroppers, the farm production was significantly reduced due to a severe drought hit the Great Plains states. Violent wind and dust storms ravaged the southern Great Plains in what is known as the "Dust Bowl," throughout the Os, but particularly from to The damages were immense People and animals were harmed, crops were destroyed, cars and machinery were ruined.
Approximately , people; often called "Okies," left Arkansas, Texas, Missouri and Oklahoma during the s and s Most of these travelers headed further west to California, the land of myth and promise.
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The migrants were not only farmers, but also professionals, retailers and others whose livelihoods were connected to the health of the farm communities. California didn't live up to their expectations, however, as conditions in the sunny state were just as bad as those in the places from which the migrants fled.
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Most migrants ended up competing for seasonal jobs picking crops at extremely low wages. Although the AAA had been mostly successful, it was abandoned in ; when the tax on food processors was ruled unconstitutional. Six weeks later Congress passed a more effective farm-relief act, which authorized the government to make payments to farmers who reduced plantings of soil-depleting crops -- thereby achieving crop reduction through soil conservation practices.
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By nearly 6 million farmers were receiving federal subsidies under the farm relief act. The new act likewise provided loans on surplus crops, insurance for wheat and a system of planned storage to ensure a stable food supply.
The prices of agricultural commodities rose, leaving the farmer's with a sense of economic stability. The Great Depression of the s worsened the already black economic situation of black Americans. African Americans were the first people to be fired from their jobs as they suffered from an unemployment rate two to three times that of whites. In early public assistance programs blacks often received substantially less aid than whites, and some charitable organizations even excluded blacks from their soup kitchens.
It was an extremely poor and desperate time for most African Americans.
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