Policies That Increase Economic Opportunity

Dan Paley

One of the forces thought to have propelled President Trump to the White House is a desire for more and better paying jobs among those American workers still struggling since the recession. The President has promised, among other things, to bring jobs back to America and to revitalize both towns with shuttered factories and the nation’s inner cities. Exactly how he plans to do this remains to be seen, but a recent gathering of ESSPRI affiliates and community leaders proposed ways to increase economic opportunity more generally, covering policies regarding income inequality, education, and incarceration.

Minimum Wage and the Earned Income Tax Credit

ESSPRI director and economics professor David Neumark presented an overarching and growing problem: rising earnings inequality and persistent poverty. Simply put, over the last forty years, those in the top 10% are running away from everyone else, while those in the bottom half have seen their earnings remain stagnant.

According to Neumark, an appropriate response to rising inequality is redistribution through government policy. Two popular policies have been employed to that end with varying success. The minimum wage is perhaps the most well-known. However, based on Neumark’s research, it does not target the poor very well, it raises prices for things low-income families buy, and it almost surely does not redistribute from the richest. Moreover, the minimum wage can make things harder for those already struggling to get a foothold in the labor market.

A second, and more effective policy, according to Neumark’s research, is the Earned Income Tax Credit. The EITC subsidizes earnings of workers in low-income families, hence increases incomes of those families while encouraging work. The EITC also targets low-income families because it is based on family income, and, because it is financed by taxes, it can more effectively redistribute income from those with the highest incomes.

The EITC has proven its effectiveness at increasing employment and increasing the proportion of families that earn their way out of poverty. The pro-work orientation of the EITC also means that it may be the redistributional policy most likely to receive bipartisan support.

Economic Development in Poor Neighborhoods

Economics professor Matthew Freedman highlighted three things to keep in mind in formulating policies to spur economic development in poor neighborhoods. First, one size does not fit all. Different low-income neighborhoods are struggling with different problems such as crime, a lack of skilled workers, or bad infrastructure. Freedman notes that, to the extent possible, policies should be tailored to local need, which may require leveraging the expertise of local policymakers and incorporating input and feedback from members of affected communities themselves.

Second, Freedman warns of crowd-out and spillovers. Policymakers need to be cognizant of the potential for taxpayer dollars to be funneled to developers or businesses for doing things they would do even in the absence of subsidies. Also, neighborhoods are not islands, and encouraging activity in one neighborhood may have adverse effects on other, nearby places, shifting economic activity among locations without increasing overall activity.

Third, Freedman reminds us to put people first. After all, the end goal is to help low-income people who live in these neighborhoods, not to help the neighborhood per se. While place-based programs that target locations may in some instances be beneficial and often can be complementary to people-based policies, providing access to better schools, decent and affordable housing, and good jobs can often be achieved more directly and efficiently by reaching out to people directly with, for example, expanded access to housing choice vouchers, job training opportunities, etc.

Investing in Early Childhood Education

Education professor Jade Jenkins stressed the need for investment in children, because the gains from doing so can pay long-term dividends throughout their working lives.

She noted the rapid neurological development that takes place during the first five years of a child’s life, meaning that investments in children can be most advantageous at these ages.

These years, however, are often an opportunity overlooked by our school system. As an indicator of the lack of sufficient early childhood investments, evidence suggests that the portion of five-year-olds in the U.S. not ready to learn at kindergarten entry is 40%. Some statistics suggest this may be the result of a lack of investment in early childhood infrastructure: The portion of childcare centers in the U.S. that are accredited is 1 in 10. Further, among rich nations, the U.S. ranks 22nd on the quality of childcare, 16th on the affordability of childcare, and 31st on the availability of childcare; overall, the international rank of U.S. child well-being is 26th out of 36 countries. This may be partly a function of low-pay for childcare workers, for whom the median wage in the U.S. is $19,600.

Despite the clear childhood development evidence, we spend 3 time less money per pupil at age 4 than we do at age 5 (when children enter the K-12 system.)

Some policy solutions put forth by Jenkins are to think beyond pre-k by drastically expanding infant and toddler program quality and training. The key ingredients that make preschool programs effective should be examined, including developmentally-appropriate curriculum and higher working wages for teachers. Jenkins also suggests targeting those who are the most disadvantaged, because well-targeted programs have a higher rate of return with respect to long-run economic outcomes, and are a more effective policy lever than mediocre universal programs.

Incarceration Policies That Think Beyond Those Incarcerated

Sociology professor Kristin Turney presented findings from her research on incarceration policies and their effects on families. She has documented negative spillover effects of incarcerated mothers and fathers on the economic well-being of children, romantic relationships, parenting, and the physical and mental health of everyone involved. Her research shows a dampening effect of economic well-being during and after incarceration — a stigma that makes obtaining employment difficult. In brief, incarceration of a family member may exacerbate social inequality.

Policies related to punitive sentencing, such as mandatory minimum sentences and re-incarcerating parolees for technical conditions of parole, have negative effects on family economic well-being, which need to be given more weight by policy makers who might otherwise focus only on the implications of incarceration in reducing or deterring crime. To increase economic self-sufficiency, Turney suggests reducing incarceration, legal debt, and financial barriers to family contact, and focusing on mitigating the social factors that lead to incarceration (e.g., poverty, substance abuse).

Policy in Action

Max Gardner brought to bear on the discussion his experience on the ground as President and CEO of United Way Orange County. He has seen up close the adverse impacts of the rising inequality that the researchers have documented. He argued that the solutions proposed by the new administration must be creative and inclusive.

While the political climate may not lend itself to compromise and bipartisan agreement, the great problems facing our communities and country demand that our leaders work together to develop policies that give more Americans a chance to become economically self-sufficient.

ESSPRI is a public policy research institute at UC Irvine funded with generous support from the Laura and John Arnold Foundation. It studies the effectiveness of policies and programs designed to support economic self-sufficiency. ESSPRI is committed to objective, high-quality research, with a focus on policy impact. To learn more, visit esspri.uci.edu.