Makers and takers
Molly Michelmore
Journal of Policy History, Fall 2012, Pages 709-740
"Ron Pramschuffer and Robert Johnson, two enterprising Maryland businessmen of the 'Archie Bunker persuasion,' had an idea. They would turn the rage, frustration, and alienation of the white working and lower middle class into a board game. Their brainchild, Public Assistance: Why Work for a Living When You Can Play This Great Welfare Game, hit stores just in time for the 1980 holiday shopping season. Modeled after Monopoly, the game retailed for about $16 and included a game board, four playing pieces, four identical pieces representing each player's live-in or spouse, a set of cardboard pieces representing illegitimate children, and a supply of play money. The rules were straightforward. Players rolled a set of dice and moved accordingly along one of two tracks: the 'Able Bodied Welfare Recipient's Promenade,' or the 'Working Person's Rut.'...Conservatives most certainly endorsed and nurtured this victimization narrative. But its origins lie in a long history of choices made by liberal state builders to obscure and even deny the role that public policy played in creating and protecting middle-class economic security. Liberals' preference for public policies that privileged the market - a preference evident even during the worst years of the Great Depression - stemmed from these state builders' own deeply held ambivalence and even hostility toward welfare spending. From President Franklin Roosevelt's 1935 pledge to 'quit this business of relief' to Bill Clinton's late twentieth century promise to bring the 'era of Big Government' to an end by 'ending welfare as we know it,' liberals have long matched this ambivalence to a spirited defense of taxpayers' rights and privileges. The New Deal's architects, for example, rejected any effort to expand the federal income tax base to pay for the New Deal. Likewise, President Lyndon Johnson tied his plans to wage an unconditional War on Poverty to a massive income tax cut. Indeed, low tax burdens for the majority of Americans must be understood as a central element of the liberal social compact itself. American liberals may have promised to give citizens a Fair Deal, to build a Great Society on the New Frontier, to redress the deprivation of the Other America, and to remove the barriers that had for too long walled some Americans within a 'gate-less poverty,' but these same policymakers consistently yoked these commitments to a policy agenda that promised to protect the majority's rights to economic security, individual mobility and low taxes. Liberal policymakers generally reconciled these competing commitments by doubling down on the New Deal's foundational free market myths...This kind of politics, mobilized by liberals to justify new social and economic interventions, effectively increased the visibility and political vulnerability of welfare, which, combined with the suspect moral and racial character of its recipients, played a vital role in obscuring the extent to which government policies have long helped to underwrite middle-class prosperity and mobility...The popular iteration of conservative antitax politics thus drew significantly on the legacies of postwar liberalism, and ultimately reproduced many of the same contradictory impulses and promises that had once sustained the liberal state but ultimately contributed to its collapse."
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American Public Opinion on Economic Inequality, Taxes, and Mobility: 1990-2011
Greg Shaw & Laura Gaffey
Public Opinion Quarterly, forthcoming
Abstract:
As the Great Recession has unfolded in the United States, Occupiers, Tea Partiers, and even the Congressional Budget Office have brought discussion of economic inequality and government intervention to the forefront. An examination of polls focused on inequality, taxes, and mobility conducted between 1990 and 2011 reveals that American public opinion has remained fairly stable on these issues, despite changing political and economic conditions. Though subtle responses to events are evident, such as slightly greater support for income taxes, there have been no dramatic shifts of public opinion on these issues. Economic inequality, the government's role in redistribution, and taxation policies will likely remain divisive political issues in coming years in light of no decisive evolution of public opinion on how to address growing economic inequality.
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Does Inequality Erode Social Trust? Results from Multilevel Models of U.S. States and Counties
Malcolm Fairbrother & Isaac William Martin
Social Science Research, forthcoming
Abstract:
Previous research has argued that income inequality reduces people's trust in other people, and that declining social trust in the United States in recent decades has been due to rising levels of income inequality. Using multilevel models fitted to data from the General Social Survey, this paper substantially qualifies these arguments. We show that while people are less trusting in U.S. states with higher income inequality, this association holds only cross-sectionally, not longitudinally; since the 1970s, states experiencing larger increases in inequality have not suffered systematically larger declines in trust. For counties, there is no statistically significant relationship either cross-sectionally or longitudinally. There is therefore only limited empirical support for the argument that inequality influences generalized social trust; and the declining trust of recent decades certainly cannot be attributed to rising inequality.
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Philip Mazzocco et al.
Journal of Consumer Psychology, October 2012, Pages 520-528
Abstract:
The current research examines whether direct and vicarious identification with a low-status group affects consumers' desire for objects associated with status. Experiment 1 found that individuals who belonged to and identified with a status social category associated with relatively lower status (Blacks) exhibited an enhanced desire for high-status products compared to Blacks who did not identify with their race or individuals who belonged to a social category associated with higher status (Whites). In Experiments 2 and 3, White participants led to vicariously identify through perspective taking with Blacks (Experiment 2), or a low-status occupational group (Experiment 3) exhibited an increased desire for high-status products. Experiment 4 provided meditational evidence for a status based explanation for the relationship between identification with a low-status group and a desire for high-status products. The present work makes new inroads into understanding one factor that might lead minorities to engage in greater conspicuous consumption and provides evidence that conspicuous consumption can be elicited vicariously.
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John Griffin, David Nickerson & Abigail Wozniak
Journal of Economic Behavior & Organization, forthcoming
Abstract:
The distinct historical and cultural experiences of American blacks and whites may influence whether members of these groups perceive a particular exchange as fair. We investigate racial differences in fairness standards using preferences for equal treatment in the ultimatum game. We focus on whether responders choose to accept a proposed division of a monetary amount or to block it. We use a sample of over 1600 blacks and whites drawn from the universe of registered voters in three states merged with information on neighborhood income and racial composition. We experimentally vary proposed divisions as well as the implied race of the proposer. We find that acceptance in both groups is strongly influenced by the level of inequity in a proposed division, but blacks are also influenced by the offer amount while whites are not. This is driven by the lowest income group in our sample, which represents the 10th percentile of the black income distribution. We are able to reject that blacks and whites in this group share a common, simple utility function. We also find that blacks are more sensitive to unfair proposals from other blacks.
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Changes in the Characteristics of American Youth: Implications for Adult Outcomes
Joseph Altonji, Prashant Bharadwaj & Fabian Lange
Journal of Labor Economics, October 2012, Pages 783-828
Abstract:
We examine changes in the characteristics of American youth between the late 1970s and the late 1990s, with a focus on characteristics that matter for labor market success. The current generation is more skilled than the previous one. Blacks and Hispanics have gained relative to whites, and women have gained relative to men. However, the skill distribution has widened overall. Shifts in parental education generate many of the observed changes. We also provide speculative estimates suggesting that if recent trends in technology and the supply of human capital continue, wage inequality will increase substantially by 2025.
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Bruce Meyer & James Sullivan
Journal of Economic Perspectives, Summer 2012, Pages 111-136
Abstract:
We discuss poverty measurement, focusing on two alternatives to the current official measure: consumption poverty, and the Census Bureau's new Supplemental Poverty Measure (SPM) that was released for the first time last year. The SPM has advantages over the official poverty measure, including a more defensible adjustment for family size and composition, an expanded definition of the family unit that includes cohabitors, and a definition of income that is conceptually closer to resources available for consumption. The SPM's definition of income, though conceptually broader than pre-tax money income, is difficult to implement given available data and their accuracy. Furthermore, income data do not capture consumption out of savings and tangible assets such as houses and cars. A consumption-based measure has similar advantages but fewer disadvantages. We compare those added to and dropped from the poverty rolls by the alternative measures relative to the current official measure. We find that the SPM adds to poverty individuals who are more likely to be college graduates, own a home and a car, live in a larger housing unit, have air conditioning, health insurance, and substantial assets, and have other more favorable characteristics than those who are dropped from poverty. Meanwhile, we find that a consumption measure compared to the official measure or the SPM adds to the poverty rolls individuals who are more disadvantaged than those who are dropped. We decompose the differences between the SPM and official poverty and find that the most problematic aspect of the SPM is the subtraction of medical out-of-pocket expenses from SPM income. Also, because the SPM poverty thresholds change in an odd way over time, it will be hard to determine if changes in poverty are due to changes in income or changes in thresholds. Our results present strong evidence that a consumption-based poverty measure is preferable to both the official income-based poverty measure and to the Supplemental Poverty Measure for determining who are the most disadvantaged.
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Richard Burkhauser, Jeff Larrimore & Kosali Simon
Contemporary Economic Policy, forthcoming
Abstract:
A substantial part of the U.S. inequality literature focuses on yearly levels and trends in pre-tax, post-transfer cash income and its distribution over time and finds that median income appears to be stagnating, with income growth primarily coming at higher income levels. When we use data from the Current Population Survey for 1995-2008 and add the value of employer- and government-provided health insurance coverage, not only does it increase the upward trend in the level of resources controlled by Americans, but also reduces the level of inequality in these resources and its upward trend. We then provide a highly stylized example of this broader income measure's value in capturing the impact of two key provisions of the Affordable Care Act of 2010 - an expansion in Medicaid and the provision of subsidies to lower-income families for purchasing private coverage on state-run exchanges. Even though these incremental expansions build on existing systems of government-provided health insurance, we find that the vast majority of the benefits would still accrue to the bottom three deciles of the income distribution when we include the value of employer- and government-provided health insurance in our expanded yearly income measure.
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An International Comparison of Lifetime Inequality: How Continental Europe Resembles North America
Audra Bowlus & Jean-Marc Robin
Journal of the European Economic Association, forthcoming
Abstract:
We compare earnings inequality and mobility across the United States, Canada, France, Germany and the United Kingdom during the late 1990s. A flexible model of earnings dynamics that isolates positional mobility within a stable earnings distribution is estimated. Earnings trajectories are then simulated, and lifetime annuity value distributions are constructed. Earnings mobility and employment risk are found to be positively correlated with base-year inequality. Taken together they produce more equalization in countries with high cross-section inequality such that the countries in our sample have more similar lifetime inequality levels than cross-section measures suggest.
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Greater Wage Inequality Reduces Average Hours of Work
Urban Sila
Economica, October 2012, Pages 680-702
Abstract:
I argue that rising inequality in offered wages lowers average working hours. If labour supply is concave in wages, a decrease in the working hours of low-paid workers is greater than an increase in working hours of high-paid workers. Furthermore, due to low market opportunities, some low-paid workers may leave the labour force. Using CPS-MORG data for prime-age men, I find evidence in support of this explanation. I establish empirically the concavity of the labour supply and find evidence that after controlling for the average wage, wage inequality has a negative effect on labour supply.
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The spatial dynamics of growth and inequality: Evidence using U.S. county-level data
Bebonchu Atems
Economics Letters, forthcoming
Abstract:
Based on an estimated dynamic spatial Durbin model, we find that the direct effect of a one-point increase in a county's inequality is associated with a 3.3% decrease in its growth, while one-point increases in inequality in a county's neighbors decrease its growth by 4.8%.
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Christopher Rider
Administrative Science Quarterly, forthcoming
Abstract:
This paper investigates how organizations' reliance on employees' prior educational and employment affiliations for both employment relationships and interorganizational relationships contributes to inertia in organizational networks. Analyses of data from U.S. venture capital and private equity firms support the theory I develop. First, increasing differences in educational prestige decrease both interpersonal co-employment rates and interorganizational co-investment rates. Second, two individuals who share a prior educational or a prior employment affiliation are more likely to be employed by the same organization than are two individuals who do not share such an affiliation. Third, the likelihood of two organizations forming a co-investment relationship increases with the number of prior educational or employment affiliations shared by their employees. I propose that these tendencies stabilize advantaged organizations' positions and limit disadvantaged organizations' positional mobility, thereby constraining change in interorganizational networks. Implications for studies of network evolution and socioeconomic inequality are discussed.
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Shoham Choshen-Hillel & Ilan Yaniv
Judgment and Decision Making, September 2012, pp. 618-627
Abstract:
The construction of social preferences often requires one to reconcile various social motives, such as concern with unfavorable inequality and maximization of social welfare. We propose a novel theory whereby people's level of agency influences the relative intensities of their social motives, and thus their social preferences. Agency in this context refers to decision makers' active involvement in the processes that produce social outcomes. Nonagentic decision makers are not involved in creating the outcomes. Therefore, the comparison between self and others is highly informative for them and they shun settings in which their outcome appears to be inferior. Conversely, agentic decision makers, who take action to influence social outcomes, care more about others' outcomes and are more inclined to promote social welfare. We report five studies testing the agency hypothesis. Participants were presented with realistic scenarios involving outcomes for themselves and another person. In each scenario, the outcome for oneself was fixed, while the outcome for the other person varied. The participants' task was to indicate their satisfaction with the other person obtaining either the same outcome as their own or a better one. We found that participants who were involved in creating the outcomes (agentic condition) were more satisfied with the other getting the better option than were participants who were not involved (nonagentic condition). Even low levels of influence on the outcomes were sufficient for a strong agency effect to occur. We discuss the agency hypothesis in relation to theories of social preference, the effects of voicing and participation in decision processes, and trade-offs in public policy.
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Liquidity, Risk, and Occupational Choices
Milo Bianchi & Matteo Bobba
Review of Economic Studies, forthcoming
Abstract:
We explore which financial constraints matter most in the choice of becoming an entrepreneur. We consider a randomly assigned welfare program in rural Mexico and show that cash transfers significantly increase entry into entrepreneurship. We then exploit cross-household variation in the timing of these transfers and find that current occupational choices are significantly more responsive to the transfers expected for the future than to those currently received. Guided by a simple occupational choice model, we argue that the program has promoted entrepreneurship by enhancing willingness to bear risk as opposed to simply relaxing current liquidity constraints.
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The effect of the minimum wage for tipped workers on firm strategy, employees and social welfare
Ofer Azar
Labour Economics, October 2012, Pages 748-755
Abstract:
Millions of workers derive much of their income from tips and are subject to the "tipped minimum wage" that differs from the regular minimum wage. This article examines the implications of the tipped minimum wage and shows that increasing it may lead restaurants to adopt a compulsory service charge in lieu of tipping to extract the economic rent enjoyed by waiters under tipping. Because servers are better off with tipping, this implies that increasing the tipped minimum wage in an attempt to increase servers' income may achieve the opposite result. Moreover, increasing the tipped minimum wage may reduce social welfare.
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Daniel Potter, Andrew Mashburn & David Grissmer
Social Science Research, forthcoming
Abstract:
Current explanations of social class gaps in children's early academic skills tend to focus on non-cognitive skills that more advantaged children acquire in the family. Accordingly, social class matters because the cultural resources more abundant in advantaged families cultivate children's repertories and tool kits, which allow them to more easily navigate social institutions, such as schools. Within these accounts, parenting practices matter for children's academic success, but for seemingly arbitrary reasons. Alternatively, findings from current neuroscience research indicate that family context matters for children because it cultivates neural networks that assist in learning and the development of academic skills. That is, children's exposure to particular parenting practices and stimulating home environments contribute to the growth in neurocognitive skills that affect later academic performance. We synthesize sociological and neuroscience accounts of developmental inequality by focusing on one such skill - fine motor skills - to illustrate how family context alters children's early academic performance. Our findings support an interdisciplinary account of academic inequality, and extend current accounts of the family's role in the transmission of social inequality.
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Alexander Gelber & Matthew Weinzierl
NBER Working Paper, August 2012
Abstract:
Empirical research suggests that parents economic resources affect their children's future earnings abilities. Optimal tax policy, defined as the policy that maximizes the aggregate present-value dynastic utility of existing families, therefore will treat future ability distributions as endogenous to current taxes. We model this endogeneity, calibrate the model to match estimates of the intergenerational transmission of earnings ability in the United States, and use the model to simulate such an optimal policy numerically. The optimal policy in this context is more redistributive toward low-income parents than existing U.S. tax policy. It also increases the probability that low-income children move up the economic ladder, generating a present-value welfare gain of 1.28% of consumption in our baseline case.
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Innovation and spatial inequality in Europe and USA
Neil Lee & Andrés Rodríguez-Pose
Journal of Economic Geography, forthcoming
Abstract:
Innovation is a crucial driver of urban and regional economic success. Innovative cities and regions tend to grow faster and have higher average wages. Little research, however, has considered the potential negative consequences: as a small body of innovators gain relative to others, innovation may lead to inequality. The evidence on this point is fragmented, based on cross-sectional evidence on skill premia rather than overall levels of inequality. This article provides the first comparative evidence on the link between innovation and inequality in a continental perspective. Using micro data from population surveys for European regions and US cities, the article finds, after controlling for other potential factors, good evidence of a link between innovation and inequality in European regions, but only limited evidence of such a relationship in USA. Less-flexible labour markets and lower levels of migration seem to be at the root of the stronger association between innovation and income inequality in Europe than in USA.
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Inequality and the association between involuntary job loss and depressive symptoms
Edward Berchick et al.
Social Science & Medicine, November 2012, Pages 1891-1894
Abstract:
Although socioeconomic status (SES) has been to shown to be associated with susceptibility to involuntary job loss as well as with health, the ways in which individual SES indicators may moderate the job loss-health association remain underexplored. Using data from the Americans' Changing Lives study, we estimate the ways in which the association between job loss and depressive symptoms depends on five aspects of SES: education, income, occupational prestige, wealth, and homeownership. Our findings indicate that higher SES prior to job loss is not uniformly associated with fewer depressive symptoms. Higher education and lower prestige appear to buffer the health impacts of job loss, while financial indicators do not. These results have a number of implications for understanding the multidimensional role that social inequality plays in shaping the health effects of job loss.
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Elizabeth King, Claudio Montenegro & Peter Orazem
Economic Development and Cultural Change, October 2012, Pages 39-72
Abstract:
In 1975 Theodore W. Schultz suggested that the returns to human capital are highest in economic environments experiencing unexpected price, productivity, and technology shocks that create "disequilibria." In such environments, the ability of firms and individuals to adapt their resource allocations to shocks becomes most valuable. In the case of negative shocks, government policies that mitigate the impact of the shock will also limit the returns to the skills of managing risk or adapting resources to changing market forces. In the case of positive shocks, government policies may restrict access to credit, labor, or financial markets in ways that limit reallocation of resources toward newly emerging profitable sectors. This article tests the hypothesis that the returns to skills are highest in countries that allow individuals to respond to shocks. Using estimated returns to schooling and work experience from 122 household surveys in 86 developing countries, the article demonstrates a strong positive correlation between the returns to human capital and economic freedom, an effect that is observed throughout the wage distribution. Economic freedom benefits those workers who have attained the most schooling as well as those who have accumulated the most work experience.
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Decomposing the Sources of Earnings Inequality: Assessing the Role of Reallocation
Fredrik Andersson et al.
Industrial Relations, October 2012, Pages 779-810
Abstract:
This study exploits longitudinal employer-employee matched data from the U.S. Census Bureau to investigate the contribution of worker and firm reallocation to changes in earnings inequality within and across industries between 1992 and 2003. We find that factors that cannot be measured using standard cross-sectional data, including the entry and exit of firms and the sorting of workers across firms, are important sources of changes in earnings distributions over time. Our results also suggest that the dynamics driving changes in earnings inequality are heterogeneous across industries.
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Adverse Selection In Credit Markets and Regressive Profit Taxation
Florian Scheuer
NBER Working Paper, September 2012
Abstract:
In many countries, taxes on businesses are less progressive than labor income taxes. This paper provides a justification for this pattern based on adverse selection that entrepreneurs face in credit markets. Individuals choose between becoming entrepreneurs or workers and differ in their skill in both of these occupations. I find that endogenous cross-subsidization in the credit market equilibrium results in excessive (insufficient) entry of low-skilled (high-skilled) agents into entrepreneurship. This gives rise to a corrective role for differential taxation of entrepreneurial profits and labor income. In particular, a profit tax that is regressive relative to taxes on labor income restores the efficient occupational choice.
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Lucie Schmidt & Sheldon Danziger
Social Science Research, November 2012, Pages 1581-1597
Abstract:
Some of the rapid recent growth in disability income receipt in the United States is attributable to single mothers post-welfare reform. Yet, we know little about how disability benefit receipt affects the economic well-being of single mother families, or how unsuccessful disability applicants fare. We compare disability recipients to unsuccessful applicants and those who never applied among current and former welfare recipients, and examine how application and receipt affect material hardships and subjective measures of well-being. We then examine whether alternative ways of making ends meet mediate differences in well-being. After controlling for alternative sources of support, no significant differences in overall actual hardships or difficulty living on current income remained between the three groups. However, even after controlling for these strategies, unsuccessful applicants were significantly more likely to report that they expected hardships in the next two months. Our results suggest a pervasive level of economic insecurity among unsuccessful applicants.
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The Optimality of Tax Transfers: What does Life Satisfaction Data Tell Us?
Paul Frijters, David Johnston & Michael Shields
Journal of Happiness Studies, October 2012, Pages 821-832
Abstract:
This paper addresses an important policy question: who gets the largest utility gain from income and does the tax system adequately reflect this? We address this question by using Australian panel data and taking life satisfaction as a proxy for utility, allowing us to identify the marginal utility of additional income for different groups of individuals. We find that optimal transfers consist of transfers from the old to the middle aged, and from the married to the unmarried. This optimal utilitarian welfare policy is then contrasted with information on who actually receives transfers and who pays for them in Australia, where we find that taxes are too high for some groups, like the young, and that they are too low for other groups, like the elderly. We believe that the methodology developed in this paper could be fruitfully applied to the issue of optimal taxation in other countries.
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Giedo Jansen, Geoffrey Evans & Nan Dirk de Graaf
Social Science Research, forthcoming
Abstract:
Studies that explain the class voting have often focused on ‘bottom-up" social factors, but paid little attention to ‘top-down' political factors. We argue that party positions on left-right ideology have an effect on the strength of class voting. This argument is tested by estimating the impact of the Left-Right party positions on the class-vote association through a Two-Step Hierarchical analysis of integrated data from 15 countries in Western-Europe, the United States and Australia (1960-2005) supplemented with data from the Comparative Manifesto Project. Although there is a general trend for class voting to decline over time, partially accounted for by the impact of education, we find that most variation in class voting does not take the form of a linear decline. The ideological positions of left-wing parties alone do not have any effect, but the polarization of parties along the left-right dimension is associated with substantially higher levels of class voting.
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Ian Gazeley & Nicola Verdon
Explorations in Economic History, forthcoming
Abstract:
Two important and well-known surveys of the household budgets of the English rural labouring poor were produced by David Davies and Frederick Eden in the 1790 s. We revisit these from the point of view of their original rationale - an investigation of the characteristics and extent of poverty in the countryside. We argue that Davies' standard of ‘tolerable comfort' can lay claim to being the first poverty line based upon the application of a minimum consumption standard to household income. We find that the majority of households fall below this standard, although those in the south of England were worst off, that family size was the largest coefficient and poverty reduced as the age of the first child increased. The incidence of poverty was not highly correlated with the absence of a women wage earner.