Poverty:

Facts, Causes and Consequences

Joe Tiao Lecture, Kansas State University

Hilary Hoynes
University of California, Davis

April 2012
• In 2010, more than 1 in 5 children lived in
poverty and 15.1 percent of all persons were
poor.
• Government spending on anti-poverty
programs includes $30 b. on TANF, $51 b. on
the EITC, and $50 b. on Food Stamps.
• In this talk, I discuss what we know about the
causes of poverty and its consequences for
children and families.

2
 Outline
• How do we define poverty?
• Facts: Poverty in the U.S.
• Impacts of poverty on children and families
• The causes of poverty and how government
policies can help

3
• How do we define poverty?
• Facts: Poverty in the U.S.
• Impacts of poverty on children and families
• The causes of poverty and how government
policies can help

4
 What is the Official Poverty Measure?
• A family is poor if their family income is less than the
federal poverty threshold
– Poverty lines vary by family size and are adjusted for changes
in prices each year
– Based on the cost of food in the 1960s (mult by 3)
• Poverty is a family concept—all persons in the same
family have the same poverty status

Poverty Thresholds by Family Type,

2010 By comparison, 2010
median family income
1 parent, 1 child $15,030
was $49,400.
1 parent, 2 children $17,568
2 parents, 2 children $22,113
5
 Concerns about official poverty measure
• Income measure is pre-tax family income; includes only
cash income
– Does not include Food Stamps (SNAP) or Earned Income Tax
Credit
– Not adjusted for work-related expenses
• Not adjusted for regional variation in costs of living (e.g.,
housing)
• Definition of poverty has not changed since measure
developed in early 1960s
• Recent Supplemental Poverty Measure released by
Census; addresses these concerns

6
• How do we define poverty?
• Facts: Poverty in the U.S.
• Impacts of poverty on children and families
• The causes of poverty and how government
policies can help

7
 Poverty Rate, All Persons
30

In 2010, 46 million persons

25
or 15.1 percent of the
population was poor
20

15

10

0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

8
 Children have the highest poverty rates
60%

50%

40%
Poverty Rate
30%
Share of Poor

20%

10%

0%
Age < 18 Age 18-64 Age 65+
9
 Note the
60% differences
between the
poverty rate and
50% the group’s share
of all poor
40%
Poverty Rate
30%
Share of Poor

20%

10%

0%
Age < 18 Age 18-64 Age 65+
10
U.S. “success” in improving poverty varies by age
Poverty Rate, By Age
40
Children
Age 18-64
30
Age 65+

20

10

0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
11
Latinos and African Americans have high poverty rates
50%
Poverty Rate
Share of Poor
40%

30%

20%

10%

0%
White Black Asian Hispanic

12
Female headed households have high poverty rates
60%

Poverty Rate
50%
Share of Poor

40%

30%

20%

10%

0%
Married-Couple Single with kids Single without kids
Families
13
Poverty dramatically declines with education
30%

25% 24%

Poverty Rate
20%
18% Share of Poor
16%
15%
12% 12%

10% 8%
5%
5% 4%

0%
Less than high High school Some college, Bachelor's degree
school graduate graduate associate's or higher
(includes degree
equivalency)

14
 Non-citizens have higher poverty rates
30%

Poverty Rate

20%

10%

0%
Native born Foreign born, Foreign born, Not a
Naturalized Citizen Citizen
15
• How do we define poverty?
• Facts: Poverty in the U.S.
• Impacts of poverty on children and families
• The causes of poverty and how government
policies can help

16
• Poverty is measured and watched by virtually
all developed countries.
• It is an important indicator of economic well-
being
• In the U.S., poverty is associated with many
adverse outcomes

17
 Children who grow up poor are more likely to
• Not attend preschool
• Perform worse in school
• Drop out of high school, have lower educational attainment
• (Girls) Have a teen birth
• (Boys) Be incarcerated
• Live in poverty as adults
• Receive government assistance as adults
• Have connection to the child welfare system
• Have worse health and shorter life expectancy

18
The challenge for social science research is in
identifying:
1. The role played by poverty in these correlations.
2. What policies can improve outcomes.
• How do we define poverty?
• Facts: Poverty in the U.S.
• Impacts of poverty on children and families
• The causes of poverty and how government
policies can help

20
 (1) The Labor Market
• Most poor families contain workers
• Poverty is very closely tied to the conditions of
the labor market
– Availability of jobs
– Wages paid at those jobs

21
 Poverty varies with job availability
Poverty Rate, All Persons
30
15 percent poor in recessions:
25
1983, 1993, 2010
20

15

10

0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
22
Poverty increased more in states that experienced
larger increases in unemployment
AZ
6

IN

KS
KY
MN MO
4

OH
GA
MS MI
SC
SD NH
PA RI
FL
2

NE VA NV
NJ MECA
NM
IL TNMA
ND MD NC
IA DE CO
HI AL
AK
TX NY WI CT
0

UT
WV ID OR
WA
WY
VT
MT OKAR
-2

-2 0 2 4 6
Change in Unemployment Rate 2000-2008

23
Earnings is a large share of income for the poor
60

50
Official Poverty

40 Extreme Poverty

30

20

10

0
Earned Cash Food Unemp., Child Cash
income Welfare Stamps Worker's Support, Welfare for
(AFDC, Comp., Alimony Disabled,
TANF) Veteran's SSI
Payments 24
• Importance of wages paid at those jobs
– Wages and earnings for less skilled workers is a
key determinant of poverty
• What has happened to earnings for less skilled
workers?

25
 Wages for lower education groups have been falling

Real Median Earnings by Education

26
http://www.stanford.edu/group/scspi/cgi-bin/fact4.php
 No growth in family income at the bottom of the distribution
(and significant growth at the top)

80

60
90th

40 75th

20 Median

0 25th

10th
-20

-40
1969 1974 1979 1984 1989 1994 1999 2004

27
Source: Debbie Reed, PPIC
How does this relate to the current
attention to the 99% (and the 1%)?

28
 The top 1%: Share of total US income Top 1% (incomes above $352,000 in 2010)

25%
Share of total income accruing to each group

20%

15%

10%

5%
Top 1% (incomes above $352,000 in 2010)

0%
1913

1953

1993

2008
1918
1923
1928
1933
1938
1943
1948

1958
1963
1968
1973
1978
1983
1988

1998
2003
29
Source: Emmanuel Saez, UC Berkeley
 Share of total income to top decile
25%
Share of total income accruing to each group

20%

15%

10%

5% Top 1% (incomes above $352,000 in 2010)

Top 5-1% (incomes between $150,000 and $352,000)
Top 10-5% (incomes between $108,000 and $150,000)
0%
1913

1928
1933
1938

1953
1958
1963

1978
1983
1988

2003
2008
1918
1923

1943
1948

1968
1973

1993
1998
30
Source: Emmanuel Saez, UC Berkeley
31
(2) Economic Growth (?)

32
 Poverty persists despite economic growth

Poverty Rate, All Persons

30
15 percent poor in recessions:
25
1983, 1993, 2010
20

15

10

0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
 Poverty persists despite economic growth

Poverty Rate, All Persons GDP per capita (thousands of 2005 $)

30 50
15 percent poor in recessions:
25 Strong GDP growth 1983-2010
1983, 1993, 2010 40
63% increase
20
30
15
20
10

10
5

0 0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
• These figures show that economic growth
does not necessarily translate into reductions
in poverty

35
Government policies that reduce poverty
or don’t

(and why)

36
 The U.S. Social Safety Net for Families

• TANF: cash welfare

• Food Stamps (now SNAP): vouchers for food
• Earned Income Tax Credit: tax-subsidy for low
earners
• Medicaid: health insurance
• Subsidized housing
• WIC, free or reduced price lunch

• Unemployment insurance (not limited to low

income families)
 Recent changes in the U.S. Safety Net

• The U.S. safety net for low income families has

dramatically changed:
– More assistance through the federal taxes (the Earned
Income Tax Credit)
– More assistance through in-kind support (Food
stamps, Medicaid/SCHIP)
– Less assistance through traditional cash welfare
• Much of my research focuses on estimating the
effects of the safety net on low income families.
Cash and Near Cash Safety Net Spending per Capita, 2009$
250
Contractions

AFDC/TANF Cash Grants Per Capita

Federal welfare
200 Food Stamp Total Expenditures Per Capita reform
Per Capita Real Expenditures

EITC Total Expenditures Per Capita

150

100

50

0
1980 1985 1990 1995 2000 2005 2010
 Government policies can help
• Case Study: Contrast two policies aimed at
reducing poverty
• The success story: Earned Income Tax Credit
• The contrasting program: Welfare

• The key explanation  EITC targets those in-

work and welfare targets those out-of-work

40
 The Earned Income Tax Credit
• Refundable tax credit for working, low-income taxpayers
with children (single and married)
• [Much smaller credit for childless]
• No credit if no family earnings
• EITC acts to supplement earnings.
• Maximum credit for 2010:
– $3050 for one-child families
– $5036 for families with two or more children

41
KEY: Maximum EITC credit helps families near poverty
threshold!

$5,000

$4,000 Flat
Region
Credit Amount (2006$)

$3,000
Phase in Phase out
Region Region
$2,000

$1,000

$0
$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000
Earned Income 2006$

One Child Two or more Children

42
 How the EITC reduces poverty
1. Key design feature of EITC (and what
distinguishes it from traditional income
support programs) is that eligibility requires
earned income.
– The EITC transfers income to low income
families with children WHILE encouraging
work.
2. The generosity of the EITC increased
substantially with tax reforms in 1986,
1990, and 1993.
43
 Illustrating how EITC encourages work and reduces
poverty
$40,000
Family after-tax and
transfer income

$30,000

$20,000
Poverty
Line, Family
of Three

$10,000

Earnings

$0
$0 $10,000 $20,000 $30,000 $40,000

Family earnings 44
Illustrating how EITC encourages work and reduces
poverty
$40,000

$30,000 Earnings +
EITC

$20,000
Poverty
Line, Family
of Three

$10,000

Earnings

$0
$0 $10,000 $20,000 $30,000 $40,000

45
• So, the EITC has the potential to increase
incomes and reduce poverty through two
channels:
– The EITC represents an increase in income for the
family
– The EITC provides incentives to enter work, and thus
increase earnings which increases family income.

46
Out-of-work cash assistance: welfare programs

47
 Cash Welfare Programs (TANF)
Income support (welfare) programs are unlikely to affect
poverty rates for two reasons:
1. Benefit levels are low, unlikely to increase a
household’s income over the poverty line.
2. Benefits are targeted on those out of work; thereby
discouraging work rather than encouraging it.

[This does not mean the program is not important or

useful. Rather that it simply should not affect poverty
rates. Should affect “extreme poverty.”]

48
 Illustrating why TANF is unlikely to affect poverty
$40,000
Family after-tax and
transfer income

$30,000

$20,000
Poverty
Line, Family
of Three

$10,000

Earnings

$0
$0 $10,000 $20,000 $30,000 $40,000
Family earnings 49
Illustrating why TANF is unlikely to affect poverty
$40,000

Earnings

$30,000

$20,000
Poverty
Line, Family
of Three

$10,000

Earnings +
TANF
$0
$0 $10,000 $20,000 $30,000 $40,000

50
One could use TANF to reduce poverty, but funding would
have to be about four times the current funding

$40,000

Earnings

$30,000

Earnings +
TANF
$20,000
Poverty
Line, Family
of Three

$10,000

$0
$0 $10,000 $20,000 $30,000 $40,000
51
• What we do know, however, is that the
combination of welfare reform and the
expansion of the EITC led to large increases in
employment among female-headed families in
the late 1990s.
• These increases in employment have the
potential to reduce poverty.

52
 Percent of Women Working
(by Marital Status and Children)
100%

95%
Percent employed at all last year

90%

85%

80%

75%

70% Single, No Children

Married, No Children
65% Single, Children
Married, Children
60%
1983 1986 1989 1992 1995 1998 2001 2004

On the eve of welfare reform and EITC increases, much attention is given to
the low employment rates of single mothers.
53
 Percent of Women Working
(by Marital Status and Children)
100%

95%
Percent employed at all last year

90%

85%

80%

75%

70% Single, No Children

Married, No Children
65% Single, Children
Married, Children
60%
1983 1986 1989 1992 1995 1998 2001 2004

Beginning in 1992—dramatic increases in employment for single

mothers, with little change for other women
54
 Employment rates for the single moms have fallen
since their peak in 2000 but are still historically high
100%

90%

80%

70%

Single no children
60%
Single with children
Married with children

50%
1980 1985 1990 1995 2000 2005
55
More on what the government policies can do

56
 Food Stamps (SNAP) has become the
fundamental safety net program
• Eligibility universal
• Reaches working poor and nonworking poor
• Program has been VERY responsive in the
current recession

57
 Food Stamps and TANF in the Great Recession
Which is acting as the safety net?
250
Contractions

AFDC/TANF Cash Grants Per Capita

Federal welfare
200 Food Stamp Total Expenditures Per Capita reform
Per Capita Real Expenditures

EITC Total Expenditures Per Capita

150

100

50

0
1980 1985 1990 1995 2000 2005 2010 58
 Food Stamps and TANF in the Great Recession
Which is acting as the safety net?
2.25
Recession ends
June 2009
Monthly Unemployed and Program Caseloads

2.00

1.75 Unemployed Persons

TANF Cases

1.50 FSP Cases

1.25

1.00

0.75
2007:1 2007:7 2008:1 2008:7 2009:1 2009:7 2010:1 59
 Food Stamps and TANF in the Great Recession
Which is acting as the safety net?
Food Stamps and Unemployment Rate Cash Welfare (TANF) and Unemployment Rate
Change between 2007 and 2009 Change between 2007 and 2009
Percent change in AFDC/TANF caseload per capita
80

40
60

20
40

0
20

-20
0
-20

-40
0 2 4 6 8 0 2 4 6 8
Change in unemployment rate Change in unemployment rate

60
• So the U.S. safety net can reduce poverty.
• How are we doing?
• But …

61
 … The success of the EITC and SNAP is not
measured by official poverty statistics
• Remember our definition of poverty?
• Poverty is based on PRE-TAX family income
• EITC operates through the tax system
• Poverty is based on CASH family income
• SNAP is “in kind” benefit

Therefore neither SNAP nor the EITC figures in to

the official poverty statistics.
62
 Supplemental Poverty Measure

• In November 2011, the U.S. Census released

an alternative measure.
• Uses post-tax family income including inkind
government benefits
• Also accounts for out of pocket medical
expenses and adds geographic dimension to
poverty thresholds.

63
25%
Official Poverty

20% Supplemental Poverty Measure

15%

10%

5%

0%
All Age < 18 Age 18-64 Age 65+
64
 Poverty Rate, All Persons
20 Alternative poverty measure
shows much smaller increase
18 in the recession

16

14

12

10
2007 2008 2009 2010
Poverty Rate, Official Poverty Rate, alternative

• Alternative census poverty measure shows much smaller

increase in poverty during the U.S. recession.
• The safety net can make a difference!
 Change in poverty due to safety net
4

-1

-2

-3
EITC SNAP Housing School WIC LIHEAP Child Federal FICA Work Out of
Subsidy Lunch Support Income Expenses pocket
Paid tax medical
before
credits
66
 Big differences for children and aged
8

6 Age < 18
Age 65+
4

-2

-4

-6
EITC SNAP Housing School WIC LIHEAP Child Federal FICA Work Out of
Subsidy Lunch Support Income Expenses pocket
Paid tax medical
before
credits
67
 Concluding remarks
• Reducing poverty takes a commitment of
resources
• Improve opportunities
– Invest in education from early childhood through
access to college
• Encourage work and supplement income:
– Further expansions of the EITC ; continued support of
SNAP
– Provide the necessary supports for the mothers and
families (child care)

68