Abstract

Understanding the link between poverty and economic growth is of long-standing interest, but heretofore it has not received much attention within the context of the dramatic changes in recent business-cycle conditions and social policies. In this paper we use state-level panel data from the 1981–2000 waves of the Current Population Survey to examine the impacts of the macroeconomy and welfare reform on family poverty. We estimate models of before-tax and after-tax poverty rates and squared poverty gaps for all families, by family structure, and by race. Our results indicate that a strong macroeconomy at both the state and national levels reduces not only the number of families below poverty, but also the severity of poverty. The magnitude and source of these antipoverty effects, however, are not uniform across family structures and racial groups or necessarily over time. While the gains in poverty eradication are tempered by rising wage inequality, the extent of this offset also varies across demographic groups. We find limited evidence that (after-tax) poverty is lower among female-headed families and black families after the implementation of state-specific welfare reforms, both before and after passage of the 1996 Personal Responsibility and Work Opportunity Reconciliation Act. An auxiliary time series analysis suggests that the expansions in the federal Earned Income Tax Credit of the 1990s accounts for upwards of 50 percent of the reduction in after-tax income deprivation. Simulations indicate that female-headed families and families headed by a black person made substantial gains in the ‘War on Poverty’ in the 1990s due in large part to the growth in median wages.

Document Type

Research Paper

Publication Date

1-2003

Discussion Paper Number

DP 2003-01

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