Jobless families face three times the risk of falling into poverty than do working households, but having a job doesn't guarantee an adequate standard of living. In the US, more than 10% of the working population is poor. The same goes for Japan, Mexico, Poland, Portugal and Turkey. Even before the economic crisis hit, most people of working age in the OECD area living in poverty were part of a household in which at least one person worked. In fact, some 7% of people living in households with at least one breadwinner are poor-meaning the household's disposable income is below half the national median.
While it may be tempting to assume in-work poverty is mainly caused by low wages, evidence shows otherwise. Most people working for low wages are not poor: on average, fewer than one in 10 low-wage workers in 21 European countries lives in a poor household. Rather, underemployment is the main culprit. Among all adults living in a poor household, only slightly more than 20% have a full-time job, and almost 70% of those work six months or less, on average, during the course of one year. In contrast, slightly more than half of adults living above the poverty line work full-time, and only a quarter work an average of six months or less during the year.
These statistics are particularly troubling in this economic downturn. In an attempt to save jobs during this recession, some employers have opted to reduce working hours. That could cause in-work poverty rates to soar over the coming months.
So, what can governments do to help the working poor? Social welfare and tax transfers to households can nearly halve the poverty rate among the entire working-age population. In some countries, like Denmark, France and Sweden, the reduction is even greater. However, social transfers tend to be less effective in reducing poverty among families with children than among childless households. The income support given to jobless parents-which reaches, on average, 40% of the median income in OECD countries- considerably reduces the depth of poverty, even if the recipients still live below the poverty line. The trouble is that the net amount of these transfers declines rapidly once people become employed, so it often makes financial sense for unemployed people not to accept a low-paying job. On average, full-time employment in a low-paid job brings two-earner couples with children to only 65% of the national median income. In this recession, it would be diffi cult for these families to stay above the poverty line if both spouses worked fewer hours, even if it meant holding onto their jobs.
To counter this, more than half of OECD countries already offer benefits that top-up the earnings of low-income workers. These in-work schemes have a major advantage over normal social transfers: they make employment more attractive for workers with low earnings potentials, since they are conditional on having a job. There are two kinds of in-work benefits: those targeting low-paid individuals, which provide stronger incentives to work, and those targeting low-income families, which focus more on income redistribution.
Given the constraints on national budgets during this economic downturn, these benefit programmes need to be carefully targeted to have any real impact on the working poor. It is easier to reach only low-income families if, for example, in-work benefits are means-tested, based on their income. The downside is that these types of benefits tend to undermine any incentive for other people in the household to work. While benefits for the individual worker get around this problem, both types of schemes may reduce financial incentives to climb the wage ladder, work more or invest in further training or education.
Minimum wages seem the perfect vehicle to lift workers out of poverty. After all, earnings from work make up the bulk of a family's income. But minimum wages offer little support to the large majority of the working poor who cannot find a full-time job. In addition, high minimum wages tend to reduce employment among low-skilled workers, since employers are generally not inclined to spend more for workers who produce less.
Still, if minimum wages are set at reasonable levels so as not to undermine job creation, they could help the working poor in several ways. Setting a wage floor prevents employers from lowering wages and thus "pocketing" the value of any in-work benefi ts that are provided to individual workers. When combined with in-work benefit schemes, minimum wages can boost the earnings of low-wage workers. As a result, spending on benefits could be reduced-as could the taxes required to fi nance them. In-work poverty would fall too. MA
OECD (2009), "In-Work Poverty: What Can Governments Do?" Policy Brief, September, available at www.oecd.org/publications
Martin, John and Herwig Immervoll (2007), "The minimum wage: Making it pay", in OECD Observer, No. 261 May, available at www.oecdobserver.org/news/fullstory.php/aid/2217
Atkinson, A.B.(2008), "Unequal growth, unequal recession?" in OECD Observer, No. 270/271 December 2008-January 2009, available at www.oecdobserver.org/news/fullstory.php/aid/2751