Markets, Wages, and Fighting Poverty

My colleague Elise Gould recently showed that to lessen poverty is to lessen income inequality by raising wages of low and moderate income workers. This post adds some more data to the argument that raising wages for low-wage workers is an essential component of any anti-poverty strategy.

The recently released Council of Economic Advisers report on the War on Poverty highlights this by noting that ‘market poverty’—measuring poverty without accounting for government aid in the form of transfers and tax credits—is higher now than in 1967, and that only increased government support allowed poverty to fall:

“A measure of “market poverty,” that reflects what the poverty rate would be without any tax credits or other benefits, rose from 27.0 percent to 28.7 percent between 1967 and 2012. Countervailing forces of increasing levels of education on the one hand, and inequality, wage stagnation, and a declining minimum wage on the other resulted in “market poverty” increasing slightly over this period. However, poverty measured taking antipoverty and social insurance programs into account fell by more than a third, highlighting the essential role that these programs have played in fighting poverty.”

To gauge the importance of market-based incomes, which for most households is simply the wages they earn, an even better comparison is to look at non-elderly households, the group that primarily depends on wages earned in the labor market. The figure below traces the market-based poverty rate and the post-tax, post-transfer poverty rate since 1967. (Much thanks to Liana Fox, a former EPI staffer and a co-author of the fabulous new study on poverty trends, for supplying these data.) Market-based poverty was essentially the same in 2007 (18.9 percent) as in 1967 (18.4 percent), but then escalated in the recession to 24.4 percent in 2012. The reduction in poverty over this period, from 17.2 percent in 1967 to 13.9 percent in 2007, was entirely due to social insurance and other government aid and tax credits. Government assistance was especially powerful in preventing increased poverty during the recession—the 5.5 percentage point growth of market-based poverty translated to a 2.2 percentage point growth in post-tax, post-transfer poverty.

The stability of market-based poverty between 1967 and 2007 was not because the economy failed to grow and provide greater incomes: after all, inflation-adjusted average wages (including all workers, from top to bottom) grew by 58 percent, and productivity grew by 99 percent. Moreover, low-wage workers also have far more education now than they did in 1967. The failure of market-based poverty to decline, even before the recession, was because wages for low-wage workers have not fared well, especially since 1979, and we have seen a growth of workers earning poverty-level wages (the $11.29 wage in 2012 needed to support a four-person family above poverty while working full-time, and full-year). The figure below looks at the share of workers earning poverty-level wages during child-rearing years (25-34 and 35-44 years old) for both men and women in both 1979 and 2012. Among men there has been a dramatic doubling of poverty-level work to more than a fourth among those ages 25-34 years old and to 15.3 percent among those ages 35 to 44 years old. There has been progress for women workers, though a very high share of women still earns poverty-level wages: in 2012 31.1 percent and 25.1 percent of women earned poverty-level wages among those, respectively, aged 25-34 and 35-44 years old.

 In short, I agree with the CEA report: “Work that pays enough to support a family is the most central antipoverty measure” (page 43).