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"Growing Poverty in a Growing Economy,"

by Jared Bernstein November/December 1996 issue of Poverty & Race

When it comes to poverty, two important facts characterize our economy. The first is that the overall economic picture is pretty positive, with steady GDP and job growth in a climate of low inflation. The second is the persistent disconnection between these overall trends and the well-being of society's worse-off families.

For example, in the current recovery, poverty rates actually rose in 1992 and 1993, before reversing course over the last two years. Even with the recent declines, however, the 1995 poverty rate of 13.8% is still above the 13.1% rate that prevailed at the time of the most recent economic peak in 1989. And this pattern is not endemic to only the current recovery. Given the historical relationship between overall growth and poverty rates, poverty should have averaged 11.9% since 1983; instead, the average has been 14.0%. I will try to account for this disconnection, using the most recent data available. The conventional wisdom typically defines the problem in terms of the counterproductive behavior ~f poor people themselves, implying that, with more effort, the poor could lift themselves up by their bootstraps. The implication is that the poor have failed to be lifted by the rising economic tide because of bad choices about family structure and lack of work effort.

Recent trends in family structure and low-wage labor markets, however, contradict this analysis. Whether it's the perceived problem of female-headed family formation, the question of whether welfare programs have created incentives that increase poverty, or the issue of whether the poor choose not to work, the data do not support such explanations for the high and intractable poverty rates throughout the economic expansions of the 1980s and 1990s.

Some critics take another tack, arguing that poverty is mismeasured and that the economic condition of the poor has improved more than the official statistics show. However, both the government's official measurement and a series of more conceptually satisfying ways to measure poverty reveal that the general finding of the disconnection between economic growth and poverty is valid no matter how poverty is measured.

Instead, heightened inequality of the nation's income distribution and, in particular, falling wages conspired to keep poverty rates historically high throughout the 1980s and into the 1990s. Moreover, the ‘safety net" (the social provision of assistance to those in poverty) has grown less effective at providing relief to the poor. And recent legislative efforts to further gut safety nets can only continue to erode their anti-poverty effectiveness.

It's Neither Demographics Nor Measurement

Family structure has historically been an important determinant of po'.'erty status, as certain family types (e.g., female-headed families) are more vulnerable to poverty than others. However, the important question regarding family structure and poverty is: to what extent are poverty rates and family structure changes causally related? To what degree are the high and intractable poverty rates noted above driven by individuals' choices to form vulnerable family types?

A look at the relevant trends challenges a simple demographic story. When female-headed families were forming most rapidly, in the 1970s, their poverty rates were actually falling. Over the 1980s, their growth as a share of the population moderated, and their poverty rates grew quickly. Since 1989, their growth rate has accelerated slightly, but their poverty rates havent budged. This type of pattern means that the main factors driving the secular increase in poverty since the early 1980s are not family structure choices.

Race deserves special mention in the current debate over the demographics of poverty. Conventional arguments target African-Americans as responsible for the failure of poverty rates to respond to growth. Again, the opposite is true. Between 1979 and 1995, poverty rates grew for both whites and Hispanics but have fallen for blacks (note that poverty rates of minorities are two to three times that of whites). In fact, among female-headed families, increases in poverty since 1979 have been generated by whites and Hispanics, not blacks.

Of course, a disproportionate share of minority families are struggling under the yoke of poverty and declining living standards. Long-term poverty is particularly problematic for non-whites. But arguments that try to ascribe demographic or racial explanations for the increase in poverty since the late 1970s are fundamentally flawed.

Nor is the poverty problem an artifact of measurement error. Adding the value of food stamps and housing benefits (which are not counted in the official measure) only lowers the level of poverty in a given year; the trend toward higher poverty rates persists, and was even steeper over the 1980s (the same is true for the appropriate portion of Medicaid). The National Research Council's recent panel of non-partisan experts charged with recommending an improved measure of poverty [see S. M. Miller's lead article, "Remeasuring Poverty," in the September/October P&RJ focused on the year 1992, when the official U.S. poverty rate was 14.5%. Under their updated measure, the poverty rate was 18.1 %, with many more working persons reclassified as poor (due to the subtraction from income of work-related expenses such as child care).

So What Is It?

The economic factor that has had the largest impact on poverty rates in the 1980s and 1990s is wage decline. While hourly rates of pay have fallen for the majority of the workforce since the late 1970s, by far the largest losses have been for the lowest paid workers. Between 1979 and 1989, the male worker at the 10th percentile (meaning 90% of the male workforce earns more) saw his hourly wage decline 13%, and since 1989 he lost another 6%. For women workers at the 10th percentile, the decline over the 1980s was 18%. The low-wage female worker gained slightly since 1989 (1.6%), but by 1995 her hourly wage rate was $4.84, down from $5.82 in 1979 (all dollars are in 1995 inflation-adjusted terms).

These trends correspond to the negative wage trends among the non-college educated, who represent 75% of our workforce. In 1979, a young man entering the workforce with a high-school degree earned $10.43 per hour. By 1995, that wage rate had dwindled to $7.58, a 27% decline. For women, the comparable values are $7.92 and $6.42, an 11% loss. Meanwhile, the earnings of more highly educated workers have either fallen more slowly, or, in the case of highly educated women, consistently grown. When you add the fact that returns to wealth holdings and profit rates have soared (witness the stock market in the 1990s), the nature of the poverty problem, at least in a descriptive sense, is clear.

The condition of the low-wage labor market is perhaps even worse than these negative wage trends reveal. There have also been secular increases in unemployment rates among low-wage workers and decreases in the shares of certain population groups with jobs (a sign of weak labor demand). For example, the employment to population ratios of young black men (ages 25-34) with high-school degrees fell from 85.4% in 1979 to 77.5% in 1993. Not only are wages low and falling for these groups of workers, but they have a harder time than most finding stable employment.

The Future?

What are the factors driving these wage trends, and thus maintaining the disconnect between poverty and growth? First and foremost is the sharply diminished bargaining power of the non-college educated worker. It is very difficult to imagine a maid in the service sector or a clerk in a retail chain insisting on a pay raise, or even a wage that keeps pace with inflation. In such a labor market climate, why should we expect poverty to respond to overall economic growth?

In order to correct this imbalanced system, we must recognize what has led us here. Over the last two decades, economic policy has moved decisively towards creating a more laissez-faire economy. Industries such as airlines, trucking, intercity buses, railroads and telecommunications
have been deregulated. A flood of imported manufacturing goods has swamped our manufacturing base. The holes in the government safety net for the poor and the unemployed have grown larger. Health, safety and environmental regulations have been slashed. Congress has also allowed the after-inflation value of the minimum wage to erode (even the recent federal increase only returns us to the mid- 1980s level). Meanwhile, business has actively attacked unions right to organize and bargain collectively. Taxes on businesses and the well-off have been reduced. And the Federal Reserve Board, catering to Wall Street, has battled inflation, regardless of the cost in terms of higher unemployment and slower growth.

In sum, for the past two decades, we have suffered a conscious, decided shift in national policy designed to unleash market forces and empower corporate managers and shareholders. Those who have supported and implemented these changes argue that they point the way to a new, dynamic and more efficient economy. Yes, there are transitional costs, they argue, but the process will yield benefits that outweigh those costs.

But where is the payoff? Productivity — output per hour of work — grew no faster in the 1980s or 1990s than in the 1970s (in fact, it has grown slightly slower). The rate of investment was no higher in the 1980s than in earlier periods and actually decelerated in the 1990s.

What has happened, instead, is a large-scale redistribution of income, wealth and, ultimately, power, from those at the bottom to those at the top. Income and wealth holdings are currently more concentrated than they've ever been, and profit rates are at a 30-year high. [See "Race, Wealth & Inequality in America," by Melvin Oliver & Thomas Shapiro, the lead article in the November/December 199S P&R, for a discussion of Black-white wealth disparities, which are far more pronounced, and more important, than income disparities.] But greater inequality and higher profits have not led to improvements in efficiency, investment or competitiveness. For most of the poor, the "transition to a better economy" has been all pain, no gain.

Since deregulation, expanded trade and the gutting of labor market institutions have not improved productivity growth or investment, a return to an economy that tempers the worst excesses of the market and safeguards the living standards of the majority of workers would not generate efficiency losses. Moreover, redistributing resources back to working families will undeniably restore some long-missing equity and fairness to the economy. Only through the tempering of market excesses can we expect to reconnect economic growth and the well-being of the poor.

Jared Bernstein a senior economist at the Economic Policy Institute, is co-author of The State of Working America. In 1995-96, he was deputy chief economist at the U.S. Dept. of Labor.

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