Feb 26, 2014 - 11:15am

Jobs and Poverty, Not Income Inequality, Are the Real Issues


Former Senior Vice President, Economic Policy Division, and Former Chief Economist

President Obama has reopened the perennial debate over income inequality, proposing in response to raise the federal minimum wage. These are both long-standing, legitimate issues for debate, but raising them today is nevertheless peculiar. The U.S. economy grows steadily, but too slowly to dent the historically high 15% poverty rate or to create jobs rapidly enough to raise wages and salaries substantially for lower- and middle-income workers. Accelerating the recovery would improve lives, but unfortunately the administration has little to offer in that regard.

Income inequality and the federal minimum wage are parts of a larger debate, the logical starting point of which is poverty in America. It would offer no comfort to reduce income inequality as poverty rose. The nation is and should also be concerned about income growth and income mobility—whether incomes are rising and whether individuals in poverty (or the middle class, for that matter) have ample opportunity to raise themselves up to enjoy materially higher standards of living.  

Poverty

A wise man once observed that the poor will always be with us. While true, the details of poverty will likewise always matter a lot: how poverty is measured, how it changes over time, what policies reduce poverty, and what are their unintended consequences.

President Johnson launched a “war on poverty” in 1964. The good news is the poverty rate among seniors fell from about 25% in 1968 to about 9% today thanks mostly to Social Security and Medicare. The bad news, according to Census Bureau data, is in 2012 the official poverty rate remained stuck at about 15%, essentially matching previous highs since the 1970s. Among children, the poverty rate is about twice that, and in total about 46.5 million Americans lived in poverty at some point during the year. 

These figures suggest that in the war on poverty, aside from progress among seniors, poverty is at least holding its own despite as many as 126 federal programs specifically targeted to improving the lives of the poor. In dollar terms, the federal government spent about three-quarters of a trillion dollars on anti-poverty programs in 2012 to which state and local governments chipped in another quarter of a trillion dollars, or about $13,000 for every person in poverty. Government support to a family of four is quite substantial, on average. 

Given the resources and effort dedicated to reducing poverty, why has the official rate not fallen? Part of the answer today is the economy remains fairly weak, unemployment high, and wage growth anemic.  Part of the answer is some aspects are not easily addressed by public policy. Another part of the answer is the official measure is itself deeply flawed.

Quality education is especially relevant to breaking the cycle of poverty, specifically graduating from high school with the tools necessary to succeed in a global economy. While school reform is ongoing, most recently with a push toward “common core” standards, public education appears to be doing little to help disadvantaged kids catch up. A recent study by Sean Reardon of Stanford University found that disadvantaged children enter and leave public schools well behind their more advantaged peers.

Another issue is family structure. Raising a family well is hard work; therefore, it should not surprise us that Census Bureau data show that a male-headed household is roughly three times more likely than a married couple to be in poverty, while a female-headed household is roughly five times more likely to be in poverty. Consequences for parents mean consequences for kids. 

As Ron Haskins of the Brookings Institute observes, “ … children in single-parent families are four times as likely to be poor as children in married-couple families.” Haskins goes on to note that “disadvantaged parents, usually single mothers, spend less time with their children, talk with them less, and are more likely to use child-rearing techniques that are associated with poor developmental outcomes.”

What about the poverty data itself? Well, imagine that the government launched an expensive new program providing substantial additional support, yet the official poverty rate showed no change. One would reasonably doubt the poverty calculation. This indeed happened, and so the Census Bureau developed a Supplemental Poverty Measure (SPM) accounting for a wide range of transfer programs. According to the SPM, the poverty rate remains high, but government benefits (excluding health programs) reduced the poverty rate by about half; and if the health programs such as Medicare for seniors and Medicaid for low-income citizens were included, then the true poverty rate would be cut further.  

Income Mobility and Income Inequality

Perhaps as important as ameliorating poverty is whether families can with hard work and determination improve their and their children’s economic circumstances. A recent, widely cited Harvard study appears to affirm America remains the land of opportunity, concluding that “measures of intergenerational mobility have remained extremely stable.” Further reinforcing the role of family structure in reducing poverty, the study found “the strongest predictors of upward (income) mobility are measures of family structure such as the fraction of single parents in the area.”

Intergenerational mobility remains, but what of income inequality? First, as with measures of poverty, it makes little sense to ignore policy’s effects. According to the Congressional Budget Office (CBO), the federal tax system is highly progressive (the top 1% pays a 29.4% average total federal tax rate, while the bottom 20% pays 1.5%). Meanwhile, federal benefits go overwhelmingly to low-income citizens.  

In its recent assessment, CBO found after-tax incomes adjusted for inflation rose substantially for all groups from 1979 to 2007. Adjusted for the effects of policy, incomes rose substantially and by comparable percentages for most of the population, with the notable exception of those in the bottom 20%. For the 20% of the population with the lowest incomes, average incomes rose about 18%, while incomes rose about 60% for those in the middle and 65% for the top 20%. Income inequality has increased over recent decades despite substantial government efforts, not because the rich have done notably well, but because those on the first rungs of the economic ladder continue to struggle.

Minimum Wage Hike

These facts underscore why raising the federal minimum wage is a poorly targeted, largely ineffectual, and unfair approach to improving the lives of low-income American families. It is poorly targeted because only about 3.5 million Americans earn the federal minimum wage. Of these, about half are teenagers or young adults, suggesting that fewer than 1 million minimum wage workers were adults working full time. With more than 46 million Americans living in poverty, raising the minimum wage is a poor policy tool.

It is also a largely counterproductive policy. With high unemployment, especially among low-wage and poorly educated workers, the job destruction normally accompanying a minimum wage hike would likely be more severe than usual. Destroying low-income jobs is no way to help low-income Americans.

Raising the minimum wage is also an unfair policy as predominantly small businesses would be forced to act as agents of the federal government to achieve a desired federal policy outcome. The severity of the recession and the meager recovery have left millions unemployed and wages flat, making the hill to climb out of poverty much steeper. If the nation believes more needs to be done to ensure better outcomes for low-income Americans, the solutions should address causes, should encourage—not discourage—jobs and hiring, and the costs should be shared broadly.  

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About the Author

About the Author

Former Senior Vice President, Economic Policy Division, and Former Chief Economist

Dr. J.D. Foster is the former senior vice president, Economic Policy Division, and former chief economist at the U.S. Chamber of Commerce. He explores and explains developments in the U.S. and global economies.