6
Work-Related and Child Care Expenses

The current official poverty measure does not explicitly take into account people’s work-related expenses, such as child care and commuting costs. Since the thresholds were devised by multiplying the cost of a basic food plan by three to account for other expenses, it could be said, as with medical expenses, that the thresholds indirectly account for them. Nevertheless, there have been striking social changes since the early 1960s that have increased families’ work-related expenses. The growth in the number of mothers in the labor force, both single and married, has spurred an increase in the demand for child care (and raised other family work-related expenses as well). Child care costs among those who incur them have also risen over time (in real dollars). The result is that the poverty thresholds have become increasingly outdated over time because they have not been adjusted to reflect increases in these basic expenses.

Recognizing this weakness of the official poverty measure, the 1995 National Research Council (NRC) report recommended that families’ work-related expenses should be subtracted from their incomes in determining their poverty status. The reasoning was that the definition of family resources should consist of disposable money and near-money income, and people often incur commuting and other work-related expenses when they earn labor market income. Likewise, for many families with children, child care costs often must be paid if both parents are to work or a single parent is to work. The money for these expenses is not available for purchasing the basic goods contained in the thresholds.



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Experimental Poverty Measures: Summary of a Workshop 6 Work-Related and Child Care Expenses The current official poverty measure does not explicitly take into account people’s work-related expenses, such as child care and commuting costs. Since the thresholds were devised by multiplying the cost of a basic food plan by three to account for other expenses, it could be said, as with medical expenses, that the thresholds indirectly account for them. Nevertheless, there have been striking social changes since the early 1960s that have increased families’ work-related expenses. The growth in the number of mothers in the labor force, both single and married, has spurred an increase in the demand for child care (and raised other family work-related expenses as well). Child care costs among those who incur them have also risen over time (in real dollars). The result is that the poverty thresholds have become increasingly outdated over time because they have not been adjusted to reflect increases in these basic expenses. Recognizing this weakness of the official poverty measure, the 1995 National Research Council (NRC) report recommended that families’ work-related expenses should be subtracted from their incomes in determining their poverty status. The reasoning was that the definition of family resources should consist of disposable money and near-money income, and people often incur commuting and other work-related expenses when they earn labor market income. Likewise, for many families with children, child care costs often must be paid if both parents are to work or a single parent is to work. The money for these expenses is not available for purchasing the basic goods contained in the thresholds.

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Experimental Poverty Measures: Summary of a Workshop The NRC report recommended the following method of accounting for work-related expenses and child care. For families in which both parents work (or the single parent works), actual child care expenses should be subtracted from income, per each week worked, not to exceed the earnings of the parent with the lower earnings or a cap that is adjusted annually for inflation.1 In addition, for each working adult, a flat amount per week worked should be subtracted (adjusted annually for inflation and not to exceed earnings) to account for work-related transportation and other miscellaneous expenses (such as tools or work uniforms) that workers incur. Because the Current Population Survey (CPS) (the current source of official poverty statistics) does not collect information on the amount of child care expenses actually incurred, the NRC report recommended modeling child care expenses with data on reported expenses in the Survey of Income and Program Participation (SIPP).2 The report proposed subtracting a flat amount for other work-related expenses because people often make a tradeoff between housing and commuting costs, such as by choosing a more expensive home closer to work or a less expensive one farther away (see Short, 2004 for more details). Since the same expenses are assigned to all workers, they represent expected amounts rather than actual expenses incurred, though the expenses are capped to not exceed workers’ earnings. The Census Bureau reports on experimental poverty measures have implemented alternative ways of valuing child care expenses. The main difference in methods has to do with accounting for actual or expected expenses. This issue reflects the discussion of medical out-of-pocket expenses: conceptually, the central question is whether the poverty measure should take into account people’s actual reported child care expenses or their expected work-related expense needs, based on their demographic characteristics and labor force participation. A disadvantage of the method of using people’s actual expenses is that it overestimates nondiscretionary child care expenses for families who spend a lot on child care. If some families cannot afford to buy child care, it may also underestimate the number of 1   The caps were recommended because the report noted that some child care or work-related expenses may be discretionary. 2   Work-related expenses include: annual expenses, such as union dues, licenses, permits, special tools, and uniforms; mileage expenses, based on the number of miles people usually drive to work; and other expenses, such as bus fares and parking fees.

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Experimental Poverty Measures: Summary of a Workshop families who are able to meet their basic child care needs, since these families show up in the data as not having spent on (and thus not having a need for) child care. The expected expense approach rests on the view that child care and other work-related expenses are to some extent a basic need for those families that have to earn labor market income. Work-related expenses other than child care are treated with the expected expense approach in all experimental poverty measure methods. The method, as recommended by the NRC report, involves subtracting 85 percent of the median of work-related expenses reported in the SIPP from all workers for every week they worked. Total family work-related expenses are capped to not exceed the earnings of the lower-earning parent in a family. Short (2004) indicates that while 64 percent of households actually report work-related expenses, about three-quarters have expenses under the NRC-recommended method of assigning expected expenses to families. As a way of better capturing non-discretionary spending, the NRC method, however, assigns expense values that are, in aggregate, about half as much as actual reported expenses. When accounting for child care expenses, subtracting actual expenses involves using SIPP data to estimate how much CPS families are spending on child care (since the CPS does not contain information on how much families spend). This estimate is based on the age and number of children, the marital status of the parents, and—using statistical models that improve on the ones originally used by the NRC—other characteristics of the family, such as number of hours worked, education, and region of residence. One technical problem with this general approach is that the statistical models (even the more refined ones) are only moderately successful at predicting the variation in expenses across families. The alternative method that accounts for expected child care expenses mirrors the method used to account for other work-related expenses: a flat amount equal to 85 percent of the median cost of child care paid by families as reported in the SIPP is subtracted from all families with children under 12 years old if both parents (or the single parent) work(s). Different medians are used, depending on the number and ages of the children. As with other work-related expenses, this approach assigns child care expenses to more families than actually report incurring them, though expenses per family are in the aggregate lower with this method than when subtracting actual expenses. The effect of these alternative methods on estimated poverty rates is small. The first Census Bureau report on experimental poverty measures

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Experimental Poverty Measures: Summary of a Workshop (Short et al., 1999) indicated that the overall poverty rate using the actual expense approach in 1997 was 15.4 percent, or about 0.5 percentage points lower than when using the expected expense approach (15.9 percent). As expected, the difference produced by alternative methods is larger for the poverty rates of groups who are more likely to incur such expenses. For example, among full-time working families with children, the poverty rate using the actual expense approach was about 1.2 percentage points lower than the rate subtracting expected expenses (Iceland, 2000: Detailed Table 1). Although many workshop participants supported the idea that work-related expenses should be taken into account in a new poverty measure, Douglas Besharov (American Enterprise Institute) expressed concern about the quality of data on child care expenses in the SIPP. Because of these data quality concerns, he favored taking the simpler approach to accounting for expenses—subtracting a flat amount based on a few characteristics (or expected expenses)—rather using a measure that claims to accurately capture actual expenditures. Diana Pearce (University of Washington) and others favored the expected expense approach for conceptual reasons, viewing these expenses as a basic expenditure, or need, for working families. It appeared that many of the workshop participants supported this approach—incorporating expected work-related expenses rather than estimating actual expenses in a new poverty measure. Rebecca Blank (University of Michigan) offered her summary of the discussion: “… [T]here was a strong belief [that] we should indeed account for child care work expenses in assessing poverty, and the idea was rather than trying to distribute that to individuals, that we should focus on more aggregate calculations where we assign fixed amounts to specific groups.”