Inequality Is the Main Cause of Persistent Poverty

I couldn’t agree more with Paul Krugman’s blog post this morning when he says, “the main cause of persistent poverty now is high inequality of market income.” We looked at precisely this question in the latest edition of State of Working America. (And the White House Council of Economic Advisors cited our work on this in their War on Poverty 50 Years Later Report, released today.)

In the roughly three decades leading up to the most recent recession, looking at the officially measured poverty rate, educational upgrading and overall income growth were the two biggest poverty-reducing factors, while income inequality was the largest poverty-increasing factor. Relative to these factors, the racial composition of the U.S. population over this period (the growth of nonwhite populations with higher likelihoods of poverty) and changes in family structure (the growth of single mother households) have contributed much less to poverty, particularly in recent years.

The figure below plots the impact of these economic and demographic factors on the official poverty rate from 1979 to 2007. The impact of income inequality and income growth were quantitatively large, but in the opposite directions. Had income growth been equally distributed, which in this analysis means that all families’ incomes would have grown at the pace of the average, the poverty rate would have been 5.5 points lower, essentially, 44 percent lower than what it was. 

This rise in inequality, in turn, has been dominated by inequality of pre-tax, pre-transfer, market incomes. This means that making real progress on pushing the poverty rate down going forward would be helped enormously by checking or even reversing this growth in market income inequality. In concrete terms, this means we need wages to go up for those at the bottom and middle of the income distribution.