Lane Kenworthy, The Good Society
October 2021

One of the principal goals of a good society should be to improve the living standards of the least well-off.¹ How poor are the least well-off in the United States and other affluent nations? How much has their standard of living risen in recent decades? Why have some countries done better than others?

Skip to:

• How poor are the poor?
• Are the poor better off in America than in other affluent countries?
• How do rich countries lift up the poor?
• Why so little progress for America’s poor?
• Summary

HOW POOR ARE THE POOR?

Think of the income distribution in the United States as a ladder with five rungs, each of which holds 20% of the population. Among the 25 million households on the bottom rung, the average income as of 2016 was just $22,000.²

Income data are never perfect. However, these data, compiled by the Luxembourg Income Study, are quite good. They include earnings, government cash and near-cash transfers, and other sources of income. Tax payments are subtracted. These data give us a pretty reliable picture of the incomes of American households.

Few of these low-income Americans are destitute. Most have clothing, food, and shelter. Many have a car, a television, heat and air conditioning, and access to medical care.³ But making ends meet on an income of $22,000 is a challenge. That comes out to $1,833 a month. If you spend $700 on rent and utilities, $350 on food, and $250 on transportation, you’re left with just $533 each month for all other expenses — health care, child care, educational expenses, clothing, toiletries, hair care, cleaning supplies, furniture, appliances, cell phone, internet, cable or streaming tv, home or car repair, parking tickets, interest on credit card debt, gifts, and more. It’s doable. Tens of millions of Americans offer proof of that. But this is a life best described as “scraping by.”⁴

There are important caveats. First, since $22,000 is the average among these 25 million households, about half have an income above this amount, and for them making ends meet will be a little easier. But it still won’t be easy. And the other half have incomes below the $22,000 average. Some solo adults make do with an income of $10,000 or $5,000. Some families with one or more kids get by on $15,000 or even less. About 1% of families with children and 4% of those without children have, for at least three months during a year, an income of less than $2 a day — an astonishingly low amount. (That includes food stamps, EITC payments, and housing support.⁵) As Kathryn Edin, Luke Shaefer, Matthew Desmond, and others have documented, some of these Americans live in abysmal conditions and engage in demeaning or dangerous activities in order to subsist.⁶

Second, some of these households have assets that reduce their expenses or provide a cushion in case expenses exceed income in a particular month or year. Some, for example, own a home outright and therefore have no rent or mortgage payments. But many Americans aren’t saved by assets. Approximately 26% are “asset poor,” meaning they don’t have enough assets to replace their income for at least three months.⁷

Third, these data very likely underestimate the true incomes of some households at the bottom. The data come from a survey in which people are asked what their income was in the prior year. People in low-income households tend to underreport their income, perhaps out of fear that accurate disclosure will result in loss of a government benefit they receive.⁸

A fourth caveat is that some of these 25 million households have a low income for only a short time. Their income may be low one year because the wage earner leaves her job temporarily to have a child, is sick, or gets laid off. By the following year, the earner may be back in paid employment. Some low earners are just beginning their work career. Five or ten years later, their earnings will be higher, or perhaps they will have a partner whose earnings add to household income. On the other hand, some who move up the economic ladder will later move back down. Shuffling in and out of poverty is common. Using a data set known as the Panel Study of Income Dynamics (PSID), which tracks the same set of households over time, Mark Rank, Thomas Hirschl, and Kirk Foster calculate that 10% of Americans spend ten or more years with an income below 1.5 times the US government’s official poverty line (about $18,000 for a single adult and $37,500 for a household of four as of 2017) between the ages of 25 and 60.⁹

Fifth, some of these households are made up of immigrants from much poorer nations. They are better off than they would have been if they had stayed in their native country, though that doesn’t change the fact that they are scraping by.

How much should these qualifiers alter our impression of low-end living standards in the United States? It’s difficult to say. Suppose the truly insecure constitute only half of the bottom fifth. That’s still 10% of American households, quite a large share for a nation as rich as ours.

Since the early 1990s the Survey of Income and Program Participation (SIPP) has asked a representative sample of Americans about their living conditions. Here’s what the most recent survey, in 2011, found for households in the bottom fifth of incomes¹⁰:

• 54% don’t have a dishwasher.
• 47% don’t have a computer.
• 31% don’t have a clothes washer.
• 22% report two or more of the following: unmet essential expenses, unpaid rent or mortgage, unpaid utilities, disconnected utilities, disconnected phone, insufficient amount of food to eat, didn’t see a doctor when needed, didn’t see a dentist when needed.
• 11% say their neighborhood is unsafe.

Americans with incomes in the lowest income quintile are much more likely than those with higher incomes to experience stress, worry, and sadness, as figure 1 shows.

Perhaps we should measure low income in another way. We could, for example, identify the minimum income needed for a decent standard of living and then see how many households fall below this amount.¹¹ A team of researchers at the Economic Policy Institute did this, estimating “basic family budgets” for metropolitan and rural areas around the country and calculating the share of families with incomes below these amounts in 1997-99.¹² They concluded that approximately 29% of US families could not make ends meet. More recently, researchers for United Way have calculated household “survival budgets” in six states — California, Connecticut, Florida, Indiana, Michigan, and New Jersey — as of 2012. Their estimates for a family of four range from $46,000 in Indiana to $65,000 in Connecticut, and they find that 35% or more of the households in each of the six states had an income below the needed amount.¹³ Researchers with Wider Opportunities for Women and the Center for Social Development at Washington University have calculated basic-needs budgets for various household types as of 2013. They estimate that to meet basic expenses, a single adult needed, on average, about $30,000, and a household with two adults and two children needed about $71,000. According to their calculations, 45% of American households fell below the threshold.¹⁴

This helps us understand a striking finding in a study the Federal Reserve has conducted every year since 2013. Asked how they would pay for a hypothetical emergency expense totaling $400, 40% to 50% of American adults say they would be unable to pay for it with cash, money in their bank account, or a credit card paid off at the next statement.¹⁵

ARE THE POOR BETTER OFF IN AMERICA THAN IN OTHER AFFLUENT COUNTRIES?

The United States is one of the world’s richest nations. Yet as figure 2 shows, household income at the tenth percentile of the income ladder is lower in the US than in quite a few other wealthy nations. (The appendix has a separate graph for each country.) It’s only a little below some of the other countries, but about $5,000 below the leaders. That’s a sizable difference.

What if we look at a more direct measure of living standards, such as material hardship? Two OECD researchers, Romina Boarini and Marco Mira d’Ercole, have compiled material deprivation data from surveys in various nations.¹⁶ Each survey asked identical or very similar questions about seven indicators of material hardship: inability to adequately heat one’s home, constrained food choices, overcrowding, poor environmental conditions (noise, pollution), arrears in payment of utility bills, arrears m mortgage or rent payments, and difficulty making ends meet. Boarini and Mira d’Ercole create a summary measure of deprivation by averaging, for each country, the shares of the population reporting deprivation in each of these seven areas. As figure 3 indicates, the United States fares just as badly on this measure.¹⁷

HOW DO RICH COUNTRIES LIFT UP THE POOR?

As a nation grows richer, the living standards of its least well-off ought to rise. Historically, economic growth has tended to benefit all households, and that continues to be the case in many of the world’s developing nations.¹⁸ But the fruits of economic growth don’t automatically trickle down to everyone. In many affluent countries, a host of developments over the past generation — economic globalization, the proliferation of computers and robots, shareholder obsession with short-term profits, union decline, and more — have reduced the likelihood that economic growth will boost the incomes of the least well-off.

Figure 4 shows that the United States has been particularly ineffective at lifting up the poor since the late 1970s. Many other countries achieved larger increases in the incomes of low-end households (vertical axis) despite smaller increases in GDP per capita (horizontal axis).¹⁹ (The appendix has a separate graph for each country.)

Why is that? We often think of the trickle down process as one in which economic growth produces rising earnings via more work hours and higher wages. But in many of these countries, the earnings of low-end households have increased little, if at all, since the late 1970s. Instead, as figure 5 suggests, it is increases in government transfers that have tended to drive increases in incomes when they occurred.²⁰

Sometimes increasing government transfers requires no explicit policy change, as benefit levels tend to rise automatically as the economy grows. This happens when, for instance, pensions, unemployment compensation, and related benefits are indexed to average wages. Increases in other transfers, such as social assistance, typically require periodic policy updates. That’s true also of tax reductions for low-income households.

In the United States, only one of the main government transfer programs, Social Security, is structured in such a way that benefit levels automatically increase when the economy grows. Social Security retirement benefits are indexed to average wages, so they have tended to rise more or less in concert with GDP.

Unemployment benefit levels are determined by state governments. In many instances, the benefit level is a “replacement rate,” which means the payment is a certain fraction of the unemployed person’s former wage or salary. Because real wages in the bottom half of the distribution have not increased in the past several decades, unemployment benefits for Americans in low-wage jobs have failed to keep up with growth in the economy. Other programs, such as the Earned Income Tax Credit (EITC), the Supplemental Nutritional Assistance Program (SNAP, formerly called Food Stamps), Social Security Disability Insurance (SSDI), and Supplemental Security Income (SSI), are indexed to prices. This means they keep up with inflation, but not with economic growth. Temporary Assistance for Needy Families (TANF, formerly AFDC) payments are determined by state policymakers; there is no automatic increase, not even for prices. AFDC-TANF benefit levels have fallen steadily in inflation-adjusted terms for nearly half a century.

If most of the poorest Americans were Social Security recipients, the US position on the vertical axis in figure 4 probably would be a good bit higher. But in the US, as in many other countries, most of the least well-off aren’t retirees. The fact that most of our other government transfers have only kept up with inflation rather than with the economy, coupled with the decline in AFDC-TANF benefits, is a key cause of slow income growth at the bottom in the United States.

Should we bemoan the fact that employment and earnings haven’t been the key trickle-down mechanism in recent decades? Not necessarily. At higher points in the income distribution, they do play more of a role.²¹ But for those at the low end there are limits to what employment can accomplish. Some people have psychological, cognitive, or physical conditions that limit their earnings capability. Some are constrained by family circumstances. At any given point in time, some will be out of work due to structural or cyclical unemployment. And some are retirees. We surely can do better at helping able adults get into (or back into) employment, but we shouldn’t pretend that paid work is a realistic route to guaranteeing rising incomes for everyone.

WHY SO LITTLE PROGRESS FOR AMERICA’S POOR?

Let’s look more closely at over-time developments in the United States. Figure 6 shows average income among the bottom fifth of US households between 1979 and 2016. It increased by $3,500. That’s a small improvement for a period of nearly four decades, especially given that for much of this time the American economy was growing at a healthy clip.²²

Other indicators tell a similar story of limited improvement in living standards for America’s poor since the 1970s. Figure 7 shows two measures of the poverty rate.²³ One is the official government measure, which includes cash government transfers but leaves out near-cash transfers such as the EITC and SNAP (“food stamps”) and doesn’t subtract taxes. The other is the “supplemental poverty measure,” which takes into account all transfers and taxes and also adjusts for homeownership and for medical, childcare, and work expenses.²⁴ Both suggest that the country made significant progress through the mid-to-late 1970s. The official poverty measure suggests no progress at all since then, while the supplemental measure suggests real but limited progress.²⁵

Why has this happened? There are two main sources of income for low-end households: earnings and government transfers. And there are two main ways for households to increase earnings: more employment (increasing work hours or adding a second earner) and higher wages. So progress for the poor depends on increases in wages and/or employment and/or government transfers.

Low-end wages rose steadily from the mid-1940s through the end of the 1960s. We don’t have reliable data for this period on wages at the tenth percentile, but a decent substitute is the statutory minimum wage. As figure 8 shows, the minimum wage (adjusted for inflation) increased sharply in the 1940s, 1950s, and 1960s and then decreased a bit in the 1970s. Since then it has increased only a little, as has the tenth-percentile wage level.

The pattern for employment is similar. Here a good measure is the average number of employment hours among low-income working-age households, shown in figure 9. In the 1980s and 1990s, hours rose during periods of economic growth, but they then decreased so precipitously during recessions that there was little or no net gain. In the 2001-2007 upturn, economic growth produced no rise in the country’s overall employment rate²⁶ or in average employment hours for low-end households. Hours then fall sharply in 2008-10, and they remain well below their 1979 level.

As a result of these two trends since the 1970s — flat wages and flat or declining employment — low-end households have seen little increase in inflation-adjusted earnings. Figure 10 shows that market income among households on the bottom fifth of the income ladder increased between 1979 and 2016, but only slightly.²⁷

With wages and employment failing to increase, we’re left with government transfers. As we saw in the previous section, this has been the key source of rising low-end incomes in a number of other affluent countries, but not in the United States (figure 4). Social Security benefits rose, as did the Earned Income Tax Credit. But social assistance (AFDC and TANF) coverage and benefit levels decreased. Figure 11 shows the difference between market (pretransfer-pretax) income and disposable (posttransfer-posttax) income for households on the bottom fifth of the income ladder. Government transfers have helped America’s poor, adding $7,000 to $10,000, on average, to their incomes. And they’ve played a particularly important role in propping up incomes during economic downturns. But their relatively small increase since the late 1970s, coupled with stagnant wages and stagnant employment, means that there has been little rise in the incomes of low-end households.²⁸

The United States could have done better. An instructive comparison case is the United Kingdom. Like the US, its public insurance programs are moderately generous,²⁹ and it too was governed in the 1980s and much of the 1990s by a conservative party devoted to shrinking the welfare state. But in 1997 a New Labour government was elected, headed by Tony Blair and Gordon Brown, and a year later Prime Minister Blair committed the government to ending child poverty in the UK within a generation. That led to a raft of policy initiatives which significantly boosted incomes among Britain’s least well-off between 1997 and 2010.³⁰ As figure 12 shows, the two countries have had similar increases in per capita GDP, but household income at the tenth percentile has risen much more in the UK than in the US.

What about the argument that overly-generous social policy is the cause of slow income growth for the poor? According to this argument, economic growth has failed to boost employment because government benefits reduce the incentive for Americans with limited skills to take a low-paying, not-very-satisfying job.³¹ This hypothesis is inconsistent with three key pieces of evidence. First, social assistance benefits in the United States — mainly AFDC/TANF and food stamps — have never been particularly generous, and their value has decreased steadily since the mid-1970s.³² Second, we see in figure 9 above that in the 1980s and 1990s employment hours in low-end households did rise quite sharply in years when the economy was growing. Ironically, it was in the period from 2001 to 2007, after incentives for employment were significantly enhanced by the 1996 welfare reform, that we see no rise in work hours during an economic growth phase. The demographic group that was the focus of welfare reform, poor single mothers with children, did experience a rise in employment hours and consequently in market incomes.³³ However, more employment for this group didn’t translate into more employment for America’s poor overall. Third, the cross-country evidence suggests that countries with generous social policies have done just as well on employment and economic growth as those, like the US, that have a smaller public safety net.³⁴

SUMMARY

Income isn’t a perfect measure of the material well-being of low-end households. We need to supplement it with data on actual living conditions, and governments now routinely collect such information (see figure 3). Unfortunately, those data aren’t available far enough back in time to give us a reliable picture of changes. For that, income remains our best guide.

What the income data tell us is that the United States has done less well by its poor than a number of other affluent nations. The reason is straightforward. Like their counterparts abroad, America’s least well-off have been hit hard since the 1970s by automation, globalization, and union decline, resulting in little if any rise in wages and employment. But whereas many other countries have ensured that government supports rise in sync with GDP, the US hasn’t.

APPENDIX

The appendix has additional data.