15.1Drawing the Poverty Line

The labor markets that determine the pay that workers receive 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 2020, the median American household income was $67,521 (the median is the level where half of all families had more than that level and half had less). For family households, the median was $86,372; for non-family households, it was $40,464. The Census Bureau also reported that in 2020, there were 37.2 million people living in poverty, representing 11.4% of the population. 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 chapter explores how the U.S. government defines poverty, the balance between assisting the poor without discouraging work, and how federal antipoverty programs work. It also discusses income inequality—how economists measure inequality, why inequality has changed in recent decades, the range of possible government policies to reduce inequality, and the danger of a tradeoff that too great a reduction in inequality may reduce incentives for producing output.

15.1 Drawing the Poverty Line

LEARNING OBJECTIVES By the end of this section, you will be able to:

• Explain economic inequality and how the poverty line is determined
• Analyze the U.S. poverty rate over time, noting its prevalence among different groups of citizens

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 one needs for a basic standard of living. Measures of inequality compare the shares of a nation's income or wealth that comparable groups receive. A common inequality measure is Income inequality. One of numerous ways to look at income inequality is to compare the share of income that the top 10% receive to the share of income that the bottom 10% receive. 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 one requires 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 2021 ranged from $12,880 for a single individual to $26,500 for a household of four people. Figure 15.2 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 six decades has the poverty rate been less than 10.5% of the U.S. population—that is, at best almost one American in nine is below the poverty line. In recent years, the poverty rate peaked at 15.1% in 2010, before dropping to 10.5% in 2019. Table 15.1 compares poverty rates for different groups in 2011. As you will see when we delve further into these numbers, poverty rates are relatively low for White people, for the elderly, for the well-educated, and for male-headed households. Poverty rates for females, Hispanic people, and African Americans are much higher than for White people. While Hispanic people 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 people. LINK IT UP Visit this website (https://openstax.org/l/povertyprogram) for more information on U.S. poverty.

FIGURE 15.2The U.S. Poverty RateBetween 2010 and 2019, the poverty rate declined to 10.5%, before rising to 11.4% in 2020 due to the onset of the COVID-19 pandemic in 2020. (Source: U.S. Census Bureau) Group Poverty Rate Females 12.6% Males 10.2% White (Non-Hispanic) 8.2% Black 19.5% Hispanic 17.0% Under age 18 16.1% Ages 18–64 10.4% Ages 65+ 9.0% TABLE 15.1Poverty Rates by Group, 2020 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 $109,113 in New Jersey and $59,701 in Mississippi in 2017, 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 non-cash assistance such as 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. The following Clear It Up feature explains the poverty lines set by the World Bank for low-income countries around the world. CLEAR IT UP How do economists measure poverty in low-income countries? The World Bank sets two poverty lines for low-income countries around the world. One poverty line is set at an income of $1.90/day per person. The other is at $3.20/day. By comparison, the U.S. 2015 poverty line of $20,090 annually for a family of three works out to $18.35 per person per day. Clearly, many people around the world are far poorer than Americans, as Table 15.2 shows. China and India both have more than a billion people; Nigeria is the most populous country in Africa; and Egypt is the most populous country in the Middle East. In all four of those countries, in the mid-2000s, a substantial share of the population subsisted on less than $2/day. About half the world lives on less than $2.50 a day, and 80 percent of the world lives on less than $10 per day. (Of course, the cost of food, clothing, and shelter in those countries can be very different from those costs in the United States, so the $2 and $2.50 figures may mean greater purchasing power than they would in the United States.) Country Year Percentage of Population with Income Less Percentage of Population with Income Less Than $1.90/Day/Person Than $3.20/Day/Person Brazil 2019 4.6% 9.1% China 2017 0.5% 5.4% Egypt 2017 3.8% 28.9% India 2011 22.5% 61.7% Mexico 2018 1.7% 6.5% Nigeria 2018 39.1% 71.0% TABLE 15.2 Poverty Lines for Low-Income Countries, mid-2000s (Source: https://datatopics.worldbank.org/world- development-indicators/themes/poverty-and-inequality.html) 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 poverty, then it would be difficult to compare rates over time. After all, would a lower poverty rate change the definition, or is it the case that people were actually better off? Government statisticians at the U.S. Census Bureau have ongoing research programs to address questions like these.

15.2 The Poverty Trap

LEARNING OBJECTIVES By the end of this section, you will be able to:

• Explain the poverty trap, noting how government programs impact it
• Identify potential issues in government programs that seek to reduce poverty
• Calculate a budget constraint line that represents the poverty trap

Can you give people too much help, or the wrong kind of help? When people are provided with food, shelter, healthcare, income, and other necessities, assistance may reduce their incentive to work, particularly if their work is likely to offer low wages and reduce government assistance. Consider a program to fight poverty that works in this reasonable-sounding manner: the government provides assistance to the those who need it, but as the recipients earn income to support themselves, the government reduces the level of assistance it provides. With such a program, every time a person earns $100, they lose $100 in government support. As a result, the person experiences no net gain for working. Economists call this problem the poverty trap. Consider the situation a single-parent family faces. Figure 15.3 illustrates a single mother (earning $8 an hour) with two children. First, consider the labor-leisure budget constraint that this family faces in a situation without government assistance. On the horizontal axis is hours of leisure (or time spent with family responsibilities) increasing in quantity from left to right. Also on the horizontal axis is the number of hours at paid work, going from zero hours on the right to the maximum of 2,500 hours on the left. On the vertical axis is the amount of income per year rising from low to higher amounts of income. The budget constraint line shows that at zero hours of leisure and 2,500 hours of work, the maximum amount of income is $20,000 ($8 × 2,500 hours). At the other extreme of the budget constraint line, an individual would work zero hours, earn zero income, but enjoy 2,500 hours of leisure. At point A on the budget constraint line, by working 40 hours a week, 50 weeks a year, the utility-maximizing choice is to work a total of 2,000 hours per year and earn $16,000. Now suppose that a government antipoverty program guarantees every family with a single mother and two children $18,000 in income. This is represented on the graph by a horizontal line at $18,000. With this program, each time the mother earns $1,000, the government will deduct $1,000 of its support. Table 15.3 shows what will happen at each combination of work and government support.

FIGURE 15.3The Poverty Trap in ActionThe original choice is 500 hours of leisure, 2,000 hours of work at point A, and income of $16,000. With a guaranteed income of $18,000, this family would receive $18,000 whether it provides zero hours of work or 2,000 hours of work. Only if the family provides, say, 2,300 hours of work does its income rise above the guaranteed level of $18,000—and even then, the marginal gain to income from working many hours is small.