The Economic Well-Being of Low-Income Working Families

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Who is poor in America? Beginning in the late 1960s, the federal government has tried to answer that question with an annual poverty count. Politicians and pundits alike await the government’s numbers, now published each September. The shape of the September numbers and the interpretive stories accompanying their release frequently affect the election debate in November.
Although most people recognize that poverty measurement is subjective and not entirely scientific, ever since Lyndon Johnson’s “War on Poverty,” the United States has tried to put a quantitative gauge on economic deprivation. The government’s poverty line is used to determine eligibility in many means-tested assistance programs such as Medicaid, food stamps and cash welfare. The poverty counts are used to measure the economic well-being of at-risk groups of families and individuals and the effectiveness of government anti-poverty programs. Increasingly, poverty income thresholds are being used in proposals to set minimum wages or living wage mandates.

Increasing Income Mobility of Low-Income Families
One of the most striking findings of this study is the high rate of upward mobility of low-income families, particularly in the mid- and late-1990s. The authors conclude that 30 percent of all low-income families (i.e., those with incomes below twice the official poverty line) in 1997 were no longer in the low-income population one year later. This compares with figures of 23, 26 and 27 percent for the periods 1991-1992, 1993-1994 and 1996-1997, respectively. The figure is even more striking for families in poverty in 1997: Of these, a full 47 percent had moved out of poverty in 1998. Comparable figures for the 1991-1992, 1993-1994 and 1996-1997 periods were 34, 42 and 46 percent, respectively. Figures 1 and 2 show the upward trend of mobility out of the low-income and poverty populations during the 1990s. It is clear based on these mobility indicators, as well as those indicating upward movement within the low-income population, that the income mobility of low-income families increased significantly during that period.

What Factors Affected Poverty During the 1990s?
The authors conclude that earnings from minimum wage work and the EITC both significantly reduced the number of working poor in the 1990s regardless of the location of the poverty line. However, the size of such impacts was sensitive to the income concept and equivalence scale used. Impacts were greater with the use of cash incomes and Orshansky scales, and smaller with the use of comprehensive income and NAS equivalence scales.

They conclude that welfare reform together with the long economic expansion may account for the increasing importance of minimum wage and other low-wage earnings during the 1990s. However, they also conclude “for most low-income families, earnings that do not come from low-wage work continue to be
a more important source of income than earnings from minimum wage work.”

Their analysis of the EITC reveals that increases in tax credits between 1993 and 1994 substantially increased the well-being of low-income families. For example, between 1990 and 1997, average adult equivalent EITC benefits more than doubled for families below the poverty line, and nearly quadrupled for those below one-half of, the official poverty line. However, their analysis of the combined effect of the EITC and payroll taxes revealed that families just above the official poverty line pay (in 1997), on average, as much in payroll taxes as they receive in EITC benefits.

The Effects of Welfare Reform on Poverty
The authors also examine the experience of families who left welfare from 1997 to 1998. On average, these families saw their earnings increase by 67 percent. Among the lowest 40 percent, the increases were even larger, by factors of 2 to 10. While earnings increased dramatically for those families leaving welfare, earnings also increased significantly for those families who remained on the welfare rolls. This is likely due to the strength of the U.S. economy. Those leaving welfare also saw their overall income rise; however, those who remained on welfare also saw their incomes rise thanks to their increased earnings while on welfare.

Measuring Poverty
At the foundation of the author’s research is their treatment of the very important topic of poverty measurement. Measuring poverty is partly scientific and partly judgmental because it must reflect not only families’ resources but also their needs. While it is possible to measure resource availability objectively, measuring needs is far more subjective.

Social Security economist Molly Orshansky began to measure poverty in the 1960s. She defined households as poor if their money income before taxes fell below three times the Department of Agriculture’s economy food budget. The official government poverty measurements follow the Orshansky approach of defining a threshold in terms of Census pre-tax money incomes and then inflating the thresholds for changes in purchasing power based on the Consumer Price Index (CPI).

Census money income was the only reliable measure of family-specific income that was available on an annual basis during the 1960s. While the money income-based definitions of poverty were reasonable, at least in the aggregate, for the 1960s, they are much less so today. This is because of the growth over time in housing subsidies, food stamps and other in-kind transfers, earned income tax credits and payroll taxes.

In 1995, a panel from the National Academy of Sciences (NAS) issued a report (Measuring Poverty: A New Approach) which recommended new ways of measuring poverty. The report recommended that family resources should be defined as the value of money from all sources, plus the value of near-money benefits (such as food stamps and subsidized housing) minus expenses that divert money from satisfying basic needs (such as taxes and child care expenses). It also recommended recalculating the poverty thresholds to incorporate dollar amounts for food, clothing, shelter and a small additional amount to account for other common, everyday needs.

To implement the NAS recommendations, analysts at the Census Bureau and at the Bureau of Labor Statistics worked together to derive new ways of measuring need by family size and geography, and devised other experimental poverty measures. Their research appears in the Census publication Experimental Poverty Measures: 1990 to 1997. When the Census Bureau recomputed poverty for 1997 using the NAS recommendations, poverty rose from 13.3 percent to 15.4 percent. Child poverty rose by only 0.4 percent from 19.9 percent to 20.3 percent; however, poverty among the elderly rose from 10.5 to 17.4 percent.

The authors respond to the debate over poverty measurement by focusing on three central issues. The first is to define and measure basic needs and set a needs threshold, below which a family is considered “poor” (e.g., an income of $17,463 a year). The second is to apply an equivalence scale to adjust the thresholds for differences in family size, composition and circumstance (e.g., a family with two adults and two children is “poor” at $17,463, but a single adult is “poor” at $8,794 a year). The final issue is what resources or “income” should be treated as available to the family (e.g., Should government benefits and taxes be considered?).

In this study, the authors measure changes in family economic status at a number of needs thresholds using different equivalence scales and different resource definitions. For example, they define the thresholds in intervals from 25 percent to 200 percent of the government’s official poverty line. In defining the thresholds, they use both the Orshanky and the NAS equivalence scales. Finally, they use a variety of resource definitions, including money income, comprehensive income (including most government benefits less taxes), and earnings only. The comprehensive income measure adds to money income the market value of food stamps, subsidies for housing, energy and school lunches, the implicit return on home equity and earned income tax credits. It then subtracts federal and state income taxes, payroll taxes and property taxes.