Inequality, Poverty, and Discrimination

3. The Economics of Poverty

3.5. Explaining Poverty

Just as the increase in income inequality begs for explanation, so does the question of why poverty seems so persistent. Should not the long periods of economic growth in the 1980s and 1990s and from 2003 to late 2007 have substantially reduced poverty? Have the various government programs been ineffective?

Clearly, some of the same factors that have contributed to rising income inequality have also contributed to the persistence of poverty. In particular, the increases in households headed by females and the growing gaps in wages between skilled and unskilled workers have been major contributors.

Tax policy changes have reduced the extent of poverty. In addition to general reductions in tax rates, the Earned Income Tax Credit, which began in 1975 and was expanded in the 1990s, provides people below a certain income level with a supplement for each dollar of income earned. This supplement, roughly 30 cents for every dollar earned, is received as a tax refund at the end of the year.

Figure 19.6 Percentages of Population in Eight Countries with Disposable Incomes Less Than 1/2 the National Median

Figure 19.6

Taken together, though, transfer payment and tax programs in the United States are less effective in reducing poverty than are the programs of other developed countries. Figure 19.6 "Percentages of Population in Eight Countries with Disposable Incomes Less Than 1/2 the National Median" shows the percentage of the population in eight developed countries with a disposable income (income after taxes) less than one-half the national median. The figure shows this percentage both before and after tax and transfer payment programs are considered. Clearly, the United States is the least aggressive in seeking to eliminate poverty among the eight countries shown.

Poverty and Work

How does poverty relate to work? Look back at Figure 19.4 "The Demographics of Poverty in the United States, 2010". Many of the poor are children or adults over age 65 and some are already working full time. Taken together, these three groups represent more than half of those in poverty. Also included amongst the poor are people who are ill or disabled, people who do not work due to family or home reasons, and people who are in school. The Census Bureau found in 2010 that of the nation's 46.2 million poor people, nearly 3 million reported they were not working or worked only part of the year or part time because they could not find full-time work. Current Population Survey, Annual Social and Economic Supplement 2010, Table POV24. So, while more employment opportunities would partly alleviate poverty, reducing unemployment is clearly only part of the answer.

Poverty and Welfare Programs

How effective have government programs been in alleviating poverty? The Census Bureau's supplemental poverty measure begins to answer that question. For example, those calculations show a reduction of two percentage points in the poverty rate, from 18% to 16%, when the earned income tax credit is included, ceteris paribus. Inclusion of the Supplemental Nutritional Assistance Program reduced the poverty rate by 1.7%, and housing subsidies reduced it by 0.9%. Other programs each had smaller effects on poverty reduction. But it is also important to distinguish between the poverty rate and the degree of poverty. Cash programs might reduce the degree of poverty but might not affect a family's income enough to actually move that family above the poverty line. Thus, even though the gap between the family's income and the poverty line is lessened, the family is still classified as poor and would thus still be included in the poverty-rate figures.