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18.2: The Economics of Poverty

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  • Learning Objectives

    1. Distinguish between relative and absolute measures of poverty and discuss the uses and merits of each.
    2. Describe the demographics of poverty in the United States.
    3. Describe the forms of welfare programs in the United States and the reform of welfare in the mid-1990s.
    4. Discuss the factors that have been looked at to explain the persistence of poverty in the United States.

    Poverty in the United States is something of a paradox. Per capita incomes in this country are among the highest on earth. Yet, the United States has a greater percentage of its population below the official poverty line than in the other industrialized nations. How can a nation that is so rich have so many people who are poor?

    There is no single answer to the question of why so many people are poor. But we shall see that there are economic factors at work that help to explain poverty. We shall also examine the nature of the government’s response to poverty and the impact that response has. First, however, we shall examine the definition of poverty and look at some characteristics of the poor in the United States.

    Defining Poverty

    Suppose you were asked to determine whether a particular family was poor or not poor. How would you do it?

    You might begin by listing the goods and services that would be needed to provide a minimum standard of living and then finding out if the family’s income was enough to purchase those items. If it were not, you might conclude that the family was poor. Alternatively, you might examine the family’s income relative to the incomes of other families in the community or in the nation. If the family was on the low end of the income scale, you might classify it as poor.

    These two approaches represent two bases on which poverty is defined. The first is an absolute income test, which sets a specific income level and defines a person as poor if his or her income falls below that level. The second is a relative income test, in which people whose incomes fall at the bottom of the income distribution are considered poor. For example, we could rank households according to income as we did in the previous section on income inequality and define the lowest one-fifth of households as poor. In 2010, any U.S. household with an annual income below $20,000 fell in this category.

    In contrast, to determine who is poor according to the absolute income test, we define a specific level of income, independent of how many households fall above or below it. The federal government defines a household as poor if the household’s annual income falls below a dollar figure called the poverty line. In 2010 the poverty line for a family of four was an income of $22,314. Figure 18.2 “Weighted Average Poverty Thresholds in 2010, by Size of Family” shows the poverty line for various family sizes.

    Figure 18.2 Weighted Average Poverty Thresholds in 2010, by Size of Family


    The Census Bureau uses a set of 48 money income thresholds that vary by family size and composition to determine who is in poverty. The “Weighted Average Poverty Thresholds” in the accompanying table is a summary of the 48 thresholds used by the census bureau. It provides a general sense of the “poverty line” based on the relative number of families by size and composition.

    Source: DeNavas-Walt, Carmen, Bernadette D. Proctor, and Jessica Smith, U.S. Census Bureau, Current Population Reports, P60-239, Income, Poverty, and Health Insurance Coverage in the United States: 2010, U.S. Government Printing Office, Washington, D.C., 2011; p. 61.

    The concept of a poverty line grew out of a Department of Agriculture study in 1955 that found families spending one-third of their incomes on food. With the one-third figure as a guide, the Department then selected food plans that met the minimum daily nutritional requirements established by the federal government. The cost of the least expensive plan for each household size was multiplied by three to determine the income below which a household would be considered poor. The government used this method to count the number of poor people from 1959 to 1969. The poverty line was adjusted each year as food prices changed. Beginning in 1969, the poverty line was adjusted annually by the average percentage price change for all consumer goods, not just changes in the price of food.

    There is little to be said for this methodology for defining poverty. No attempt is made to establish an income at which a household could purchase basic necessities. Indeed, no attempt is made in the definition to establish what such necessities might be. The day has long passed when the average household devoted one-third of its income to food purchases; today such purchases account for less than one-seventh of household income. Still, it is useful to have some threshold that is consistent from one year to the next so that progress—or the lack thereof—in the fight against poverty can be assessed. In addition, the U.S. Census Bureau and the Bureau of Labor Statistics have begun working on more broad-based alternative measures of poverty. The new Supplemental Poverty Measure is based on expenses for food, clothing, shelter, and utilities; adjusts for geographic differences; adds in various in-kind benefits such as school lunches, housing subsidies, and energy assistance; includes tax credits; and then subtracts out taxes, work expenses, and out-of-pocket medical expenses (Short, U.S. Census Bureau, & Current Population Reports, 2011).

    The percentage of the population that falls below the poverty line is called the poverty rate. Figure 18.3 “The Poverty Rate in the United States, 1959–2010” shows both the number of people and the percentage of the population that fell below the poverty line each year since 1959.

    Figure 18.3 The Poverty Rate in the United States, 1959–2010


    The curve shows the percentage of people who lived in households that fell below the poverty line in each year from 1959 to 2010. The poverty rate fell through the 1960s and since has been hovering between about 12% and 15%. It tends to rise during recessions.

    Source: DeNavas-Walt, Carmen, Bernadette D. Proctor, and Jessica Smith, U.S. Census Bureau, Current Population Reports P60-239, Income, Poverty, and Health Insurance Coverage in the United States: 2010, U.S. Government Printing Office, Washington DC, 2011; Figure 4, p. 14.

    Despite its shortcomings, measuring poverty using an absolute measure allows for the possibility of progress in reducing it; using a relative measure of poverty does not, since there will always be a lowest 1/5, or 1/10 of the population. But relative measures do make an important point: Poverty is in large measure a relative concept. In the United States, people defined as poor have much higher incomes than most of the world’s people or even than average Americans did as recently as the early 1970s. By international and historical standards, the average poor person in the United States is rich! The material possessions of America’s poor would be considered lavish in another time and in another place. For example, based on data from 2005 to 2009, 42% of poor households in the United States owned their own homes, nearly 75% owned a car, and 64% have cable or satellite TV. Over 80% of poor households had air conditioning. Forty years ago, only 36% of the entire population in the United States had air conditioning. The average poor person in the United States has more living space than the average person in London, Paris, Vienna, or Athens (Rector & Sheffield, 2011).

    We often think of poverty as meaning that poor people are unable to purchase adequate food. Yet, according to Department of Agriculture surveys, 83% of poor people report that they have adequate food and 96% of poor parents report that their children are never hungry because they cannot afford food. In short, poor people in the United States enjoy a standard of living that would be considered quite comfortable in many parts of the developed world—and lavish in the less developed world (Ibid).

    But people judge their incomes relative to incomes of people around them, not relative to people everywhere on the planet or to people in years past. You may feel poor when you compare yourself to some of your classmates who may have fancier cars or better clothes. And a family of four in a Los Angeles slum with an annual income of $13,000 surely does not feel rich because its income is many times higher than the average family income in Ethiopia or of Americans of several decades ago. While the material possessions of poor Americans are vast by Ethiopian standards, they are low in comparison to how the average American lives. What we think of as poverty clearly depends more on what people around us are earning than on some absolute measure of income.

    Both the absolute and relative income approaches are used in discussions of the poverty problem. When we speak of the number of poor people, we are typically using an absolute income test of poverty. When we speak of the problems of those at the bottom of the income distribution, we are speaking in terms of a relative income test. In the European Union, for example, the poverty line is set at 60% of the median income of each member nation in a particular year. That is an example of a relative measure of poverty. In the rest of this section, we focus on the absolute income test of poverty used in the United States.

    The Demographics of Poverty

    There is no iron law of poverty that dictates that a household with certain characteristics will be poor. Nonetheless, poverty is much more highly concentrated among some groups than among others. The six characteristics of families that are important for describing who in the United States constitute the poor are whether or not the family is headed by a female, age, the level of education, whether or not the head of the family is working, the race of the household, and geography.

    Figure 18.4 “The Demographics of Poverty in the United States, 2010” shows poverty rates for various groups and for the population as a whole in 2010. What does it tell us?

    1. A family headed by a female is more than five times as likely to live in poverty as compared to a family with a husband present. This fact contributes to child poverty.
    2. Children under 18 are about two times more likely to be poor than “middle-aged” (45–64) persons.
    3. The less education the adults in the family have, the more likely the family is to be poor. A college education is an almost sure ticket out of poverty; the poverty rate for college graduates is just 4.7%.
    4. The poverty rate is higher among those who do not work than among those who do. The poverty rate for people who did not work was about nine times the poverty rate of those who worked full time.
    5. The prevalence of poverty varies by race and ethnicity. Specifically, the poverty rate in 2010 for whites (non-Hispanic origin) was less than half that for Hispanics or of blacks.
    6. The poverty rate in cities is higher than in other areas of residence.

    The incidence of poverty soars when several of these demographic factors associated with poverty are combined. For example, the poverty rate for families with children that are headed by women who lack a high school education is higher than 50%.

    The new, more broad-based Supplemental Poverty Measure shows an increase of only 0.1 compared to the official poverty rate measure, but bigger differences for different segments of the population. For example, a smaller percentage of people under the age of 18 are poor according to the supplemental poverty measure (18.2% versus 22.5%), while a larger percentage of those over 64 years of age are considered poor (15.9% versus 9.0%). The new measure also shows lower poverty rates among blacks, renters, people living outside metropolitan areas, and those covered by only public health insurance. Other groups show the same or higher poverty rates (Short, U.S. Census Bureau, & Current Population Reports, 2011).

    Figure 18.4 The Demographics of Poverty in the United States, 2010


    Poverty rates in the United States vary significantly according to a variety of demographic factors. Panels (a) through (f) compare poverty rates among different groups of the U.S. population. The data are for 2010.

    Source: DeNavas-Walt, Carmen, Bernadette D. Proctor, and Jessica C. Smith, U.S. Census Bureau, Current Population Reports, P60-239, Income, Poverty, and Health Insurance Coverage: 2010, U.S. Government Printing Office, Washington DC, 2011. Data for educational attainment, employment status, and residence from the Annual Social and Economic Supplement 2010, poverty tables at