The Poor Get Richer

Wall Street Journal
May 23, 2007

It's been a rough week for John Edwards, and now comes more bad news for his "two Americas" campaign theme. A new study by the Congressional Budget Office says the poor have been getting less poor. On average, CBO found that low-wage households with children had incomes after inflation that were more than one-third higher in 2005 than in 1991.

The CBO results don't fit the prevailing media stereotype of the U.S. economy as a richer take all affair -- which may explain why you haven't read about them. Among all families with children, the poorest fifth had the fastest overall earnings growth over the 15 years measured. (See the nearby chart.) The poorest even had higher earnings growth than the richest 20%. The earnings of these poor households are about 80% higher today than in the early 1990s.


What happened? CBO says the main causes of this low-income earnings surge have been a combination of welfare reform, expansion of the earned income tax credit and wage gains from a tight labor market, especially in the late stages of the 1990s expansion. Though cash welfare fell as a share of overall income (which includes government benefits), earnings from work climbed sharply as the 1996 welfare reform pushed at least one family breadwinner into the job market.

Earnings growth tapered off as the economy slowed in the early part of this decade, but earnings for low-income families have still nearly doubled in the years since welfare reform became law. Some two million welfare mothers have left the dole for jobs since the mid-1990s. Far from being a disaster for the poor, as most on the left claimed when it was debated, welfare reform has proven to be a boon.

The report also rebuts the claim, fashionable in some precincts on CNN, that the middle class is losing ground. The median family with children saw an 18% rise in earnings from the early 1990s through 2005. That's $8,500 more purchasing power after inflation. The wealthiest fifth made a 55% gain in earnings, but the key point is that every class saw significant gains in income.

There's a lot of income mobility in America, so comparing poor families today with the poor families of 10 years ago can be misleading because they're not the same families. Every year hundreds of thousands of new immigrants and the young enter the workforce at "poor" income levels. But the CBO study found that, with the exception of chronically poor families who have no breadwinner, low-income job holders are climbing the income ladder.

When CBO examined surveys of the same poor families over a two year period, 2001-2003, it found that "the average income for those households increased by nearly 45%." That's especially impressive considering that those were two of the weakest years for economic growth across the 15 years of the larger study.

One argument was whether welfare reform would help or hurt households headed by women. Well, CBO finds that female-headed poor households saw their incomes double from 1991 to 2005, and the percentage of that income coming from a paycheck rose to more than a half from one-third. The percentage coming from traditional cash welfare fell to 7% from 42%. Poor households get more money from the earned income tax credit, but the advantage of that income-supplement program is that recipients have to work to get the benefit.

The poor took an earnings dip when the economy went into recession at the end of the Clinton era, but data from other government reports indicate that incomes are again starting to rise faster than inflation as labor markets tighten and the current economic expansion rolls forward.

It's probably asking way too much for this dose of economic reality to slow down the class envy lobby in Washington. But it's worth a try.