Transfers and poverty reduction

Lane Kenworthy has an excellent post on the dynamics of poverty reduction for the bottom percentile. The conventional wisdom that under-pin the trickle-down growth hypothesis places faith on employment creation and income/earnings growth (through both more work hours and higher wages) as the channel to reduce poverty. But Lane Kenworthy marshals an impressive array of statistics from across countries, albeit developed ones, to show that this argument breaks down for those at the bottom decile of income distribution. He writes,

"At higher points in the income distribution they do play more of a role. But for the bottom ten percent there are limits to what employment can accomplish. Some people have psychological, cognitive, or physical conditions that limit their earnings capability. Others are constrained by family circumstances. At any given point in time some will be out of work due to structural or cyclical unemployment. And in all rich countries a large and growing number of households are headed by retirees."

His analysis showed that in most countries, the earnings of low-end households increased little, if at all, over time. Instead, the reason for poverty reduction (or income growth) among the bottom percentile,

"It is increases in net government transfers — transfers received minus taxes paid — that tended to drive increases in incomes... Where economic growth has trickled down to the poor (households in the bottom income decile), it has done so mainly via government transfers rather than via earnings... Advances in real incomes for low-end households hinge on government efforts to pass on the fruits of economic growth."

In an earlier post, Kenworthy had argued that contrary to conventional wisdom with its emphasis on progressive taxation system, inequality reduction is achieved more by government transfers and better quality public services, both of which require higher quantity of taxes.