13.2 Poverty
Okay, so far we’ve been analyzing inequality. But inequality reflects two phenomena—the abundance of the rich and the poverty of the poor. Many people argue that poverty is the more important phenomenon, and so let’s now apply our recipe to understanding the key facts about poverty.
Defining Poverty
If we are going to measure poverty, we have to start by defining it. But defining poverty is not a simple task—in fact, it can be surprisingly controversial. Every country defines poverty somewhat differently, and even within the United States there is more than one definition. But the U.S. government has one official measure of poverty, so that’s a good place to start.
Officially, in the United States you are in poverty if your family income is below the poverty line. The poverty line is a somewhat arbitrary threshold. It was originally set in 1963, using data on food purchases in 1955. Back then families spent about a third of their incomes on food, so the poverty line was set at three times the cost of a low-cost food plan. The poverty line has been updated for inflation ever since. In 2018, the federal poverty line for a family of four was a family income of $25,700, and it was $16,300 for a family of two. The line varies to reflect the costs of supporting different sized families.
How many people are in poverty?
The official poverty rate is the share of people whose family income falls below the poverty line. The poverty rate in 2017 was 12.3% of the population, meaning that roughly one-in-eight people were in poverty.
The official poverty rate has not changed much over time.
Figure 8 shows that the share of people whose income is less than the official poverty line has been largely stable at around one in seven over the past four decades, even though the average income of the population as a whole has doubled. This suggests that those at the bottom of the income distribution have not shared in the rising prosperity of the past four decades.
Figure 8 | Official Poverty Rate
Data from: U.S. Census Bureau.
The official poverty rate is calculated using a measure of income that is mainly market earnings. This means that the official poverty rate fails to account for the tax credits and many benefits provided by government programs designed to help the poor. As a result, the official poverty rate doesn’t adequately capture the resources available to the poor. However, the official poverty rate provides a useful indication of what might happen without government intervention.
Absolute versus Relative Poverty
The official U.S. poverty rate compares people today with living standards from the 1950s. To understand what this means for making comparisons across time, let’s take a look at two different ways of measuring poverty. Absolute poverty judges the adequacy of resources relative to an absolute or unchanging standard. By this view, the poverty line measures whether your basic needs are met, assuming a universal, time-invariant standard for basic needs. By this view, the poverty line should be the same in the United States as in Zambia, and the same today as in prehistoric times.
The alternative view is relative poverty, which judges poverty relative to the material living standards of your contemporary society. By this view, poverty is not just about physical measures of need, but whether you have the resources necessary to participate in your society. What’s considered essential depends on what everyone else in the community has.
In reality, most people consider something between absolute and relative as a reasonable way to measure poverty, but where to draw the line between the two is the subject of heated debates.
Is the U.S. poverty line an absolute or relative standard?
The official U.S. poverty line has features of both a relative and an absolute standard. It’s relative, in that it is set at a level that reflects the fact that the United States is a rich country. But technically it’s an absolute poverty line, because—as Figure 9 shows—it was set at an absolute level more than fifty years ago. Since it was set in 1963, it has only been adjusted for inflation—which means that it can buy the same bundle of goods it could buy in 1963. The advantage of this approach is that it tracks through time how many people are below an unchanging standard. The disadvantage is that living standards have risen over time, and so it has become decreasingly relevant as our society has become increasingly prosperous. For instance, in the 1960s, some who weren’t in poverty might not have had access to a phone or even running water in their home. These modern conveniences are much more commonplace today.
Figure 9 | Alternative Poverty Lines for a Family of Four
Data from: Census Bureau; Gallup.
Relative poverty measures say that more people are in poverty.
How then might we set a relative poverty line that will keep up with our rising prosperity? One common measure of relative poverty says that you are poor if your family income is below half the median family income. Indeed, as Figure 9 shows, at the time the official poverty line for a family of four was established, it was roughly equal to half of median family earnings. The rise in median family income over time means that half of median family income has risen to $38,000. The fact that the U.S. official poverty rate was equal to half the median income of a family in the mid-1960s is what makes it a relative measure. The fact that it is stuck at that level while U.S. incomes have grown is what makes it an absolute measure.
Another approach to measuring relative poverty involves surveying the public about what they think is an adequate income to “get by.” Figure 9 shows that the average responses have risen as our society has gotten richer. This suggests that most people think about minimal income needs as being relative to the contemporary standards of their society.
Which of these alternative poverty lines do you think makes most sense?
Absolute poverty in a global perspective.
Think about what it means to get by on this.
The United Nations and the World Bank focus on an absolute poverty line of $1.90 per day. They calculate that this is the minimum needed for human survival in modern times. Globally, 896 million people—including 15% of people in the developing world—are below this poverty line. Under an alternative poverty line of $3.10 per day, the global ranks of the poor rise to 2.1 billion people, or about one-third of all people.
Interpreting the DATA
The lives of the poor
She works hard, but has little.
What does it mean to be this poor? Let’s investigate the economic lives of Anuperna and Raja, a couple who are roughly representative of the poor in Udaipur in India. Both Anuperna and Raja work cultivating their land. Raja also works as a laborer; when there’s no work nearby he will migrate for a few months and send his meager wages home. Anuperna is also an entrepreneur, making and selling saris. Neither of them are literate. They live with their three kids and Raja’s mother in a small two-room house with no electricity, toilets, or tap water. Food accounts for two-thirds of their household spending, leaving little for anything else. They own a bed, but no chairs or tables. While their better-off neighbors have a radio or a bicycle, they do without. Hunger is a key concern, and when income is scarce, they will do without food for an entire day. More often, they make do by eating less in a day than they need to stave off hunger. Of all the deprivations of poverty, this is the hardest, and Anuperna says that she finds it hard to stay in good spirits when she’s hungry. Like most of her neighbors, Anuperna is underweight and also anemic. She, Raja, and the kids are also frequently sick, or weak, but they rarely seek treatment because it is expensive. Instead of complaining, Anuperna is grateful for the health of her children as around one-eighth of all children in her village die before the age of five.
The U.S. poor are not members of the global poor.
The global poverty line of $1.90 per day is a measure of extreme poverty. This measure is also a useful benchmark for the United States. Researchers have shown that such extreme poverty in the United States has risen in recent decades. Yet, most American families in extreme poverty will receive some kind of assistance or only spend a few months in such extreme poverty.
For the most part, people struggling with poverty in the United States and other developed countries are better off than those struggling in the developing world. In fact, more than 95% of people in the developing world get by on less than the U.S. official poverty line. Moreover, throughout most of human history, nearly everyone—even those in rich countries—lived on less than the official U.S. poverty line. When considered in either a global or historical context, even those at the bottom of American income distribution have a lot. This suggests that in the United States, it makes more sense to focus on relative poverty.
Do the Economics
If you believed that the poverty line should be based on public opinion about what is required to “get by,” would this lead you to think that there are more or fewer people in poverty than is measured by the official statistics?
The Incidence of Poverty in the United States
While there is disagreement about how to measure poverty in the United States, there are a few facts about poverty that turn out to be true regardless of whether one measures poverty using the official U.S. poverty rate or alternative measures. First, most people who are in poverty will spend much of their lives in poverty—but most people will spend some time in poverty in their lifetime. Second, children and single moms are the most likely to be in poverty. Third, people of color are more likely to experience poverty. Let’s take a closer look at each of these facts.
Most poverty spells are short, but most poor people are in long-term poverty.
Millions of people both enter and escape poverty each year. Some people spend much of their lives in poverty, while others fall on hard times briefly or even choose to make sacrifices in the short-term, for instance, forgoing income to pursue more education. (College students living in dorms are automatically excluded from the official poverty rate, but roughly half of college students living on their own have incomes below the U.S. official poverty line.)
There are big differences between experiencing a spell of poverty and a lifetime of poverty. Most spells of poverty are temporary, and around half last less than a year. However, at any point in time, long-term poverty is an important problem, and more than half of all whose incomes are currently below the U.S. official poverty rate are in the midst of a spell of poverty that will last eight years or more. That is, people in long-term poverty are both a small proportion of those who enter poverty, and a large share of the poor at any point in time. The distinction between temporary and long-term poverty is further complicated by the fact that poverty is often recurrent, and over half of all people who escape poverty will return to poverty within five years.
Who is in poverty?
Figure 10 shows that while poverty afflicts some more than others, no group is immune to it. The top cluster of bars shows that having an income below the U.S. official poverty rate is more common among those who are black or Hispanic. They are about twice as likely to be in poverty compared to those who are white or Asian. Even so, you shouldn’t believe the stereotype that those in poverty are mostly minorities. Around three-fifths of all people in poverty are non-Hispanic whites.
Figure 10 | Who Is in Poverty?
Data from: U.S. Census Bureau.
The next cluster of bars in Figure 10 shows that poverty varies by age. Seniors aged 65 years and older have low poverty rates, largely because Social Security income is included in measuring income and it provides most retirees with an income above the poverty line. By contrast, child poverty is quite common, and one in six kids are in poor families. That means that you or some of your childhood friends likely grew up in poverty. Even though many people keep it hidden, the fact that a large number of children are in poverty is a reality in most communities.
The third cluster of bars illustrates one source of child poverty: Single parents—particularly single mothers—experience extremely high poverty rates. It’s not just a matter of having only one income; single parents also face logistical difficulties juggling work with their child-care responsibilities, and income-based government assistance for single-parent families isn’t generous enough to lift them out of poverty. The concentration of poverty among the racial, ethnic, age, and family structures shown in Figure 10 is a long-standing pattern. Moreover, these disadvantages cumulate, so that nearly half of the children of black or Hispanic single parents live in poverty.
The deeper cause of poverty is a lack of full-time employment. The bottom cluster of bars in Figure 10 shows that only 2% of adults with full-time year-round jobs are in poverty. Those who aren’t employed, or could only find part-time or part-year work, are much more likely to be in poverty.
When does poverty strike?
What precipitates a spell of poverty? The biggest risk is losing a job. Another significant trigger is divorce or separation, which leads family income to be spread across two households. Other changes in the household can also be trigger points for poverty, such as the birth of a child, the death of a breadwinner, or a young adult trying to set up on their own.
All of this reveals a sobering insight: All of us are susceptible to the risks that lead to poverty, including joblessness and changes in family structure. These risks can strike without much warning. In fact, more than half of all Americans will experience poverty at some point in their lives. Social insurance is designed to help reduce some of the hardship associated with a spell of very little income. Let’s turn to exploring what social insurance is and how it works.