Earnings Capacity and the Target Efficiency of Alternative Transfer Programs
Abstract
The standard indicator of family economic status is annual money income (A MI). The official Social Security Administration (SSA) definition of poverty is based on AMI, as are analyses of economic inequality among families. The limitations of A MI as an indicator of economic position are well known. It fails to incorporate the value of human and physical capital, in-kind public transfers and other public services, intrafamily flows of income and services, and leisure time.' The ranking of families by A MI thus may yield a distorted picture of the relative economic status of any given family. One problem of A MI is its dependence on the taste for income: a family with a strong taste for income will rank higher than an identical family with a weaker taste. Thus, if the wife in but one of two identical families chooses to work, or if the head chooses to be a craftsman rather than a farmer, that family will rank higher than the other family. In these cases, the difference in ranking reflects a difference in tastes for using economic resources rather than a difference in the level of economic resources. Evaluation of the equity effects of alternative income transfer programs depends on the measure of the economic status of beneficiaries which is employed. One evaluative criterion-that of efficiency concerns the extent to which programs focus their benefits on specified target groups.2 When the target group is the poverty population, and when families are classified as poor or nonpoor by the AMI measure, the results of the evaluation may be misleading. Evaluation of program alternatives by this measure may bias choice away from programs which assist families with few economic resources but relatively high tastes for money income. In this paper, we develop an alternative indicator of family economic position, based not on family AMI but rather on a family's ability to generate income when it uses its human and physical capital at capacity. We call this measure earnings capacity. This indicator both purges tastes for work from the measurement of economic position and abstracts from temporary fluctuations in income.3 The compo* Associate professor of social work and staff member of the Institute for Research on Poverty, University of Wisconsin-Madison, and professor of economics and director of the Institute for Research on Poverty, University of Wisconsin-Madison, respectively. David Betson assisted with the paper. 1 Efforts to develop a more comprehensive indicator of a family's command over goods and services include: James Morgan, Martin David, Wilbur Cohen, and Harvey Brazer; Burton Weisbrod and W. Lee Hansen; and Michael K. Taussig. 2 The concept efficiency-the percent of program benefits to pretransfer poor families-was suggested by Weisbrod. I Such fluctuations can substantially influence a family's ranking in the money income distribution. By
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