Nonworking Poor

SINCE THE FEDERAL definition of poverty is the in-come-based Orshansky measure, it is no surprise that there is a correlation between not working and poverty. In 2003 nearly two-thirds of those aged 25 to 65 did not work in the week prior to being surveyed by the Current Population Survey (CPS), compared to one-quarter of the entire CPS sample.

However, the term nonworking includes both the unemployed and those out of the labor force, which are very different outcomes. For example, within the unemployed are those without work for cyclical reasons, which tend to be short spells. Those out of the labor force and living below the poverty line represent a more interesting paradox since they are choosing not to use employment to climb out of poverty.

Economists use the reservation wage to explain this phenomenon. The reservation wage is the minimum acceptable wage for someone to take a job. A potential worker compares the reservation wage with the wage offer, which could be an actual offer or just information about the wage for a given job. If the wage offer is below the reservation wage, then it is rational not to work.

The reservation wage represents the value of one's time. Several factors, including those specific to the individual and a geographic area, affect the reservation wage. Individual factors include attitudes/preferences toward work and leisure, education level, opportunities for home production, number of children, marital status, and household income.

In general, as education increases, the reservation wage increases since a highly educated worker views [Page 784]him/herself as more productive. As family size increases, the effect on the reservation wage is unclear. As the number of children increases, so do family budgetary needs but also childcare costs if working is done in place of staying home with the children. Geographic factors include idiosyncratic attitudes about the types of available jobs (for example, the industry and occupation). This rationale is the compensating differentials theory of wage determination.

Several of the above factors also affect the wage offer. As education increases, the worker is likely to be more productive and therefore receive a higher wage offer. The wage offer could also vary across industries and/or occupations because of productivity differences, perhaps stemming from differences in the capital stock. The geographic market also affects the wage offer. If a potential worker lives in an area with high unemployment and/or few employment prospects, firms may be able to bid the wage down because of the surplus of available workers.

It is these geographic differences that create pockets of unemployment and poverty, such as inner cities, Appalachia, and the Mississippi Delta. Since the wage offer includes both job offers and information about a wage, information differences also affect the wage offer. For example, there is evidence that job seekers differ in the ability to gather job market information.

Fluctuations in the rates of poverty, the unemployed, and those out of the labor force are often driven by macroeconomic trends. The majority of the literature examining this link focuses on the relationship between unemployment and poverty, though employment growth is obviously an important part of this relationship. In general, macroeconomic expansions that create jobs increase employment and lower unemployment and poverty, though this relationship does not always hold. Some experts argue that expansion in the mid-1980s did not lower poverty as much as earlier expansions because of real wage declines for low-skilled workers.

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