Earnings Capacity, Poverty, and Inequality by Irwin Garfinkel

By Irwin Garfinkel

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This analysis is followed in Chapters 4 and 5 by an examination of the composition of those at the bottom of the distribution—the earnings capacity poor—and an evaluation of the effectiveness of various income transfer proposals in targeting their benefits on this same group. 22 The Utilization of Earnings Capacity 23 Although comparison of capacity utilization patterns among various population groups is of intrinsic interest, additional consid­ erations motivate this analysis. First, pervading the national debate on social policy has been the issue of the "worthiness" of the benefi­ ciaries of public programs.

The latter measure is included so that compositional differences attributable only to the 3 child care adjustment can be identified. Examining the composition of current income (CY) poor households and individuals, we see that data on households lead to a serious overstatement of the proportion of the poor who live in small households and, as a consequence, the proportion of the poor who are aged and who live in families with no earners. Measuring poverty in terms of households also understates, though less dramatically, the proportions of the CY poor who are black and live in the South.

Recall that our regressions explain only 50% to 60% of the variance in earnings. Moreover, a large portion of the variance for which we are able to account comes from variation in hours and weeks worked. In judging whether our measure of earnings capacity or actual earnings is a better indicator of a family's real economic welfare, the critical issue is the relative importance of taste and transitory phenomena versus unmeasured determinants of earnings capacity in explaining observed earnings. To compare our measure of earnings capacity with the measure of economic status based on current income, consider two individuals of identical age, sex, race, years of schooling, and location who have actual earnings of $10,000 and $5000.

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