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Research | Training | Policy | Practice
Causes of Poverty
Robert Haveman For
Teaching Poverty 101 June, 2013
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A Difficult Topic
• No comprehensive evidence enabling assignment of responsibility to various causes.
• Lots of studies of individual possible factors. • Peoples views are mixed up with political
values. • We will discuss the primary factors, using a
broad brush.
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Causes of Poverty
• Labor market issues • Education • Demographic Characteristics: Age and Family
Structure • Race • Poverty-related Policies • Cultural Factors
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Causes of Poverty
• Labor market issues
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Labor Market Opportunities and Poverty
• 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
5
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Earnings is a large share of income for the poor
6
05
10152025303540455055
Earnedincome
Cash Welfare(AFDC, TANF)
Food Stamps Unemp.,Worker'sComp.,
Veteran'sPayments
Child Support,Alimony
Cash Welfarefor Disabled,
SSI
Official Poverty, 2010
Extreme Poverty, 2010
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Unemployment Rates are much higher for Low-skilled Workers
Unemployment Rate by Educational Attainment (1979 to 2010)
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Less than High School
High School Only
Some College
Bachelor's
Advanced Degree
Source: Authors' Analysis of CPS ORG Files (various years), CEPR extracts.
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Poverty increased more in states that experienced larger increases in unemployment
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How about Changes in Income/Wages over Time? Real Median Earnings by Education
11 Source: Russell Sage Foundation, Chartbook of Social Inequality
Less than HS
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Figure 2. Growth in Hourly Wage Inequality (Indexed 1979=100), 90/10, 90/50, and Gini, 1979-2010
Notes: Wage percentile and gini values are adjusted to smooth the 1994 series break.
Source: Authors' Analysis of CPS ORG Files (various years), CEPR extracts.
95
100
105
110
115
120
125
130
135
140
1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
90/5090/10GINI
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No growth in family income at the bottom of the distribution (and significant growth at the top)
13 Source: Russell Sage Foundation, Chartbook of Social Inequality
Bottom 20%
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Causes of Poverty
• Labor market issues • Education
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Education Provides Protection against Poverty (poverty rates by educational attainment)
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Fewer ‘Low Education’ Workers associated with Lower Poverty Rates
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Causes of Poverty
• Labor market issues • Education • Demographic Characteristics: Age and Family
Structure
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Causes of Poverty
• Labor market issues • Education • Demographic Characteristics: Age and Family
Structure • Race
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Source: U.S. Census Bureau Current Population Survey, Annual Social and Economic Supplement
Large Differences in Racial Poverty Rates
%
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Income levels vary by Race/Ethnic Group
• Overall US children’s poverty rate = 21% – 46% for Blacks – 40% for Hispanics
• Not all minorities have low incomes. – Asian families have higher incomes than all other
ethnic groups. In 2005, median income of Asian families was $68,957; median income of white families was $59,124.
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Racial Discrimination in Wages
• Issue: To what extent are differences in wages by race due to economic factors (skills, experience) relative to discrimination?
• Difficult to parse out – Discrimination is a residual, after controlling for other factors – How do you identify and measure the many things other than race
that are relevant to labor market performance? • Using large data sets researchers attempt to control for as many of
these relevant factors as possible, attributing remaining wage differences to economic discrimination.
• Estimates are very imprecise—range is from very small to about 25% of the wage gap attributed to employer wage discrimination.
• However, much of lower black and Hispanic wages is due to lower school attainment and skills.
• Question: Is the distribution of these factors also related to discriminatory behavior—but at earlier levels?
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Causes of Poverty
• Labor market issues • Education • Demographic Characteristics: Age and Family
Structure • Race • Poverty-related Policies
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The U.S. Social Safety Net for Families
• TANF: cash welfare • Food Stamps (now SNAP): vouchers for food • Earned Income Tax Credit: tax-subsidy for low earners • Medicaid: health insurance • Subsidized housing • WIC, free or reduced price lunch • Minimum wages • Unemployment insurance (not limited to low income
families) • Social Security (not limited to low income families);
could be relevant for multi-generation households
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Cash and Near Cash Safety Net Spending per Capita, 2009$
0
25
50
75
100
125
150
175
200
225
250
1980 1985 1990 1995 2000 2005 2010
Per C
apita
Rea
l Exp
endi
ture
s
ContractionsAFDC/TANF Cash Grants Per CapitaFood Stamp Total Expenditures Per CapitaEITC Total Expenditures Per Capita
Federal welfare reform
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Government policies can help
• Case Study: Contrast two policies aimed at reducing poverty – The success story: Earned Income Tax Credit – The contrasting program: Welfare/TANF
• The key distinction
– EITC targets those in-work – Welfare/TANF targets those out-of-work
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How the EITC reduces poverty
1. Key design feature of EITC (and what distinguishes it from traditional income support programs) is that eligibility requires work and earnings. – As a result, the EITC supplements the income of low
income families with children WHILE encouraging work.
2. The generosity of the EITC increased substantially with tax reforms in 1986, 1990, and 1993.
3. Based on the Supplemental Poverty Measure, the EITC lowered the poverty rate by about 2.5 percentage points in 2011. The EITC lowered the child poverty rate by about 5.5 percentage points.
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The Earned Income Tax Credit • Refundable tax credit for working, low-income
taxpayers with children (single and married)
• Much smaller credit for childless families • No credit if no family earnings • EITC acts to supplement earnings.
31
Tax credits directly offset taxes; refundable means that a payment is made if taxes are zero
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KEY: Maximum EITC credit helps families near poverty threshold while encouraging work
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$0
$1,000
$2,000
$3,000
$4,000
$5,000
$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000
Earned Income 2006$
Cre
dit A
mou
nt (2
006$
)
One Child Two or more Children
Phase inRegion
Phase outRegion
FlatRegion
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Cash Welfare Programs (TANF)
• Income support (welfare) programs are unlikely to reduce the poverty rate:
– Benefit levels are so low that the income support is unlikely to increase a household’s income from below to above the poverty line. – 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 is unlikely to have a large impact on the overall poverty rate. The programs do affect “extreme poverty” however.]
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• We do know 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 among families headed by a woman.
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Percent of Women Working (by Marital Status and Children)
35
60%
65%
70%
75%
80%
85%
90%
95%
100%
1983 1986 1989 1992 1995 1998 2001 2004
Perc
ent e
mpl
oyed
at a
ll la
st y
ear
Single, No ChildrenMarried, No ChildrenSingle, ChildrenMarried, Children
Beginning in 1992—dramatic increases in employment for single mothers, with little change for other women
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But, the success of the EITC and SNAP is not captured 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
36
Neither SNAP nor the EITC figure into the official poverty statistics. Both of the programs would figure into the the Supplemental Poverty Measure.
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Causes of Poverty
• Labor market issues • Education • Demographic Characteristics: Age and Family
Structure • Race • Poverty-related Policies • Cultural Factors
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The Cultural Perspective • A common line of thought in the U.S. is that a person is
poor because of personal traits. • Supposed traits range from personality characteristics,
such as laziness, to educational levels. Because of these faults, individual personal failure results in poverty.
• This thought pattern stems from the idea of meritocracy--the view that those who are worthy are rewarded and those who fail to reap rewards must lack self-worth. A meritocratic view is entrenched within U.S. thought.
• A belief that personal failure leads to poverty often appears as resistance to social and economic programs such as welfare; a poor person’s lack of prosperity shows a personal failing and should not be rewarded by public benefits.
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Some References • Maria Cancian and Sheldon Danziger, eds. 2009. Changing Poverty, Changing Policies. Russell
Sage Foundation. • Sheldon Danziger and Robert Haveman , editors. 2002. Understanding Poverty. Russell Sage
Foundation. • Sheldon Danziger, Gary Sandefur, and Daniel Weinberg, editors. 1994. Confronting Poverty:
Prescriptions for Change. Cambridge, MA: Harvard University Press. • William Julius Wilson. 1987. The Truly Disadvantaged: The Inner City, the Underclass, and Public
Policy. University of Chicago Press. • People’s views on the causes of poverty: http://www.npr.org/programs/specials/poll/poverty/ • http://www.buzzle.com/articles/causes-of-poverty-in-america.html • A conservative perspective: Robert Rector, “Understanding and Reducing Poverty in America,”
Testimony before the Joint Economic Committee, United States Senate, September 25, 2008, at http://www.heritage.org/Research/Welfare/tst040209b.cfm.
• A liberal perspective: http://www.thenation.com/article/167564/other-america-2012-confronting-poverty-epidemic#
• http://en.wikipedia.org/wiki/Earned_income_tax_credit • Mark Rank. 2009. “Toward a New Understanding of American Poverty.” Washington University
Journal of Law and Policy. Pp. 17-51.