What you’ll learn to do: explain poverty and the poverty trap
Firms hire workers because they value the workers’ productivity. Employees get paid based on the value of their productivity to their employer. Labor productivity depends on a worker’s talents, skills and abilities. This means that people who lack marketable skills tend to be qualified only for low wage jobs, if they are employed at all.
Poverty is what we call the condition of people who do not earn enough income to be able to afford the necessities of life, which is measured by the poverty line. The poverty rate is what percentage of the population lives below the poverty line. In this section, we will examine poverty. Later we will take a closer look at income inequality, which refers to the disparity between those with higher and lower incomes.
- Explain how the poverty line is determined
Introduction to Poverty
The labor markets that determine what workers are paid do not take into account how much income a family needs for food, shelter, clothing, and health care. Market forces do not worry about what happens to families when a major local employer goes out of business. Market forces do not take time to contemplate whether those who are earning higher incomes should pay an even higher share of taxes.
However, labor markets do create considerable income inequalities. In 2014, the median American family income was $57,939 (the median is the level where half of all families had more than that level and half had less). According to the U.S. Census Bureau, the federal government classified almost nine million U.S. families as below the poverty line in that year. Think about a family of three—perhaps a single mother with two children—attempting to pay for the basics of life on perhaps $17,916 per year. After paying for rent, healthcare, clothing, and transportation, such a family might have $6,000 to spend on food. Spread over 365 days, the food budget for the entire family would be about $17 per day. To put this in perspective, most cities have restaurants where $17 will buy you an appetizer for one.
This section explores how the U.S. government defines poverty, the balance between assisting the poor without discouraging work, and how federal antipoverty programs work.
Drawing the Poverty Line
Comparisons of high and low incomes raise two different issues: economic inequality and poverty. Poverty is measured by the number of people who fall below a certain level of income—called the poverty line—that defines the income needed for a basic standard of living. Income inequality compares the share of the total income (or wealth) in society that is received by different groups; for example, comparing the share of income received by the top 10% to the share of income received by the bottom 10%.
In the United States, the official definition of the poverty line traces back to a single person: Mollie Orshansky. In 1963, Orshansky, who was working for the Social Security Administration, published an article called “Children of the Poor” in a highly useful and dry-as-dust publication called the Social Security Bulletin. Orshansky’s idea was to define a poverty line based on the cost of a healthy diet.
Her previous job had been at the U.S. Department of Agriculture, where she had worked in an agency called the Bureau of Home Economics and Human Nutrition. One task of this bureau had been to calculate how much it would cost to feed a nutritionally adequate diet to a family. Orshansky found that the average family spent one-third of its income on food. She then proposed that the poverty line be the amount needed to buy a nutritionally adequate diet, given the size of the family, multiplied by three.
The current U.S. poverty line is essentially the same as the Orshansky poverty line, although the government adjusts the dollar amounts to represent the same buying power over time. The U.S. poverty line in 2015 ranged from $11,790 for a single individual to $25,240 for a household of four people.
Figure 1 shows the U.S. poverty rate over time; that is, the percentage of the population below the poverty line in any given year. The poverty rate declined through the 1960s, rose in the early 1980s and early 1990s, but seems to have been slightly lower since the mid-1990s. However, in no year in the last four decades has the poverty rate been less than 11% of the U.S. population—that is, at best about one American in nine is below the poverty line. In recent years, the poverty rate appears to have peaked at 15.9% in 2011 before dropping to 14.5% in 2013.
Table 1 compares poverty rates for different groups in 2013. As you will see when we delve further into these numbers, poverty rates are relatively low for whites, for the elderly, for the well-educated, and for male-headed households. Poverty rates for females, Hispanics, and African Americans are much higher than for whites. While Hispanics and African Americans have a higher percentage of individuals living in poverty than others, most people in the United States living below the poverty line are white.
|Under age 18||19.9%|
|Ages 65 and older||9.5%|
The concept of a poverty line raises many tricky questions. In a vast country like the United States, should there be a national poverty line? After all, according to the Federal Register, the median household income for a family of four was $102,552 in New Jersey and $57,132 in Mississippi in 2013, and prices of some basic goods like housing are quite different between states. The poverty line is based on cash income, which means it does not account for government programs that provide assistance to the poor in a non-cash form, like Medicaid (health care for low-income individuals and families) and food aid. Also, low-income families can qualify for federal housing assistance. (We will discuss these and other government aid programs in detail later in this chapter.)
Should the government adjust the poverty line to account for the value of such programs? Many economists and policymakers wonder whether we should rethink the concept of what poverty means in the twenty-first century.
Any poverty line will be somewhat arbitrary, and it is useful to have a poverty line whose basic definition does not change much over time. If Congress voted every few years to redefine what poverty means, then it would be difficult to compare rates over time. After all, would a lower poverty rate mean that the definition had been changed, or that people were actually better off? Government statisticians at the U.S. Census Bureau have ongoing research programs to address questions like these.
- income inequality:
- when one group receives a disproportionate share of total income or wealth than others
- the situation of being below a certain level of income one needs for a basic standard of living
- poverty line:
- the specific amount of income one requires for a basic standard of living
- poverty rate:
- percentage of the population living below the poverty line