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August 27, 2007
WHAT TO WATCH FOR IN THE CENSUS INCOME AND POVERTY NUMBERS
by Arloc Sherman and Robert Greenstein
Tomorrow, the Census Bureau will release findings on household income and poverty for 2006. These figures are likely to show that median income increased in 2006 and poverty declined, which is the typical pattern for years well into an economic recovery. If this is the case, Administration officials may portray the figures as good news and as evidence of the success of recent policies.
But such an assessment would be much too simplistic. 2006 marked the fifth full year of an economic recovery. To assess the new income and poverty figures, one needs to look not only at the changes that occurred between 2005 and 2006, but also at the degree of progress (or lack thereof) in income and poverty over the recovery as a whole.
Key guideposts in the data will include:
- Will the poverty rate drop to 11.7 percent or lower? That was the poverty rate in 2001, the year the last recession hit bottom.
- Will median income rise to more than $56,062 among working-age households (those headed by someone younger than 65)? That was the median income level for non-elderly households in 2001, when the last recession hit bottom, adjusted to 2006 dollars.
If poverty remains higher, or the income of working-age households remains lower, than during the last recession, it will hardly be a sign of the recovery's success.
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Is the Annual Poverty Measure Meaningful?
In the early 1990s, the National Academy of Sciences (NAS) convened an expert panel to study how poverty is measured. Those experts concluded that three sets of changes should be made to how the country measures poverty: the value of cash-like benefits such as food stamps, as well as the net effect of the tax system (including income and payroll taxes paid and refundable tax credits), should be included when measuring a family's income; certain work expenses such as child care and transportation costs, as well as out-of-pocket health care costs, should be subtracted before determining whether the a family's disposable income is above or below the poverty line; and some modifications should be made to the poverty line itself to reflect the costs of basic necessities. The Census Bureau has estimated a range of alternative poverty rates drawing on the NAS recommendations. Overall, these alternative poverty rates are similar to or slightly higher than the official poverty measure. (The NAS methodology increases poverty rates among working families and the elderly, while lowering it among jobless non-elderly families, as compared to the official poverty measure.)
The fact that many analysts believe the poverty measure could be strengthened through these or other changes does not mean, however, that the current poverty measure is not meaningful. Overall poverty rates under the official measure are generally similar to (or slightly lower than) those computed using the NAS methodologies. Of particular importance, the official measure and the alternative measures tend to rise and fall at roughly the same time (except in periods when tax and non-cash benefit policies are being changed dramatically). This is because, over the course of a business cycle, the most important determinant of whether poverty is rising or falling is the economy, including the low-wage labor market. |
This could occur. The poverty rate increased each year from 2002 through 2004 even though those were recovery years. Similarly, real median income of working-age households fell each year from 2002 through 2005. Simply to return to the levels attained during the last recession — that is, to the level in 2001 — the poverty rate will need to drop from 12.6 percent in 2005 to 11.7 percent. This would require an unusually large one-year decline. Median income of working-age households, which stood at $54,001 in 2005 (measured in 2006 dollars), will need to rise by 3.8 percent, to $56,062.
If poverty remains higher than when the economy hit bottom in 2001 or median income for working-age households remains lower, it will be the latest evidence that the current economic recovery has been strikingly uneven, with an unusually small share of the gains from the recovery reaching low- and middle-income families. Data recently issued by the Commerce and Labor Departments tell such a story; they show a smaller share of the gains from the current recovery going to workers’ wages and salaries, and a larger share going to corporate profits, than in any other recovery since World War II.[1]
Even if poverty drops slightly below its 2001 level, or if median income for working-age households rises slightly above the 2001 level, that would not mean that income or poverty levels have made long-term improvement. It would merely signify that the recovery has finally undone the damage sustained during the recovery's early years from 2002 through 2005. To demonstrate long-term progress, poverty will need to drop below the 11.3 level attained in 2000, the year before the recession began. Similarly, median income for working-age households will need to rise above $57,101, the level it reached in 2000.
To be sure, an increase in poverty during the early years of a recovery is not that unusual. In recent economic cycles, poverty often has risen, and median income continued to fall, in the first year or two after a recession ends. But the current recovery has already taken longer than previous recoveries to start showing improvements in poverty and income. If the Census data released tomorrow show that either poverty or working-age incomes have not returned to pre-recession levels after five full years, this will hardly be reason to celebrate the “success” of current policies.
End Notes:
[1] Aviva Aron-Dine and Isaac Shapiro, “Share of National Income Going to Wages and Salaries at Record Low in 2006: Share of Income Going to Corporate Profits at Record High,” Center on Budget and Policy Priorities, revised March 29, 2007. At http://www.cbpp.org/8-31-06inc.htm. |
