Blog Posts, One Story Up

Don’t Fall in the Poverty Trap – You May Never Get Out

I wrote this post in Nov. 2009 and it’s one of my most viewed posts of all time. I think the concept is one that helps people think about poverty and programs that are supposed to help people get out of poverty in a new way. Take a look:

Until you earn about $40,000 a year, you’re pretty much stuck in poverty, an economist’s numbers show.

In fact, until you get past $40,000 a year, any raise or higher paying job you get might actually sink you deeper into poverty.

Take a look at this story from economist Jeff Liebman, who now works in the Obama Administration.

The poverty trap is still very much a reality in the U.S.

A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me. She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn’t make ends meet any more. I told her I didn’t know what I could do for her, but agreed to meet with her. She showed me all her pay stubs, etc. She really did come out behind by several hundred dollars a month. She lost free health insurance and instead had to pay $230 a month for her employer-provided health insurance. Her rent associated with her section 8 voucher went up by 30% of the income gain (which is the rule). She lost the ($280 a month) subsidized child care voucher she had for after-school care for her child. She lost around $1600 a year of the EITC. She paid payroll tax on the additional income. Finally, the new job was in Boston, and she lived in a suburb. So now she has $300 a month of additional gas and parking charges. She asked me if she should go back to earning $25,000.

Take a look at this chart by economist Clifford Thies, via Greg Mankiw’s blog.

The Dead ZoneFrom the green dot, you can see that earned income rises… for a while. Then there’s this screwy wavy line. That’s the mother making a little more, but earning a little less.

$40,000 a year is about $19 an hour. Over 40 percent of Chicagoans don’t earn that much.

There aren’t that many jobs out there that make $19 an hour. Bank Teller? $13.33 an hour. Office clerk? $15.60. Retail salesperson? $11.80. Security guard? $16.14. (Statistics via Chicago Rehab network).

Our tax incentives work… initially. Then they only serve to hurt people. They say the poor don’t work hard enough, but that single mother sounds like a pretty hard working person to me. The story goes on to say that she got a weekend job, to try to make ends meet. Except after childcare and gas, it didn’t help at all.

So if working harder means people might actually earn less, how is it that we expect people to work harder?

2 thoughts on “Don’t Fall in the Poverty Trap – You May Never Get Out”

  1. I couldn’t have put it better myself. Means tested benefits, if not designed properly, will often serve to keep the poor in poverty, and have the added effect of artificially depressing wages- which is not to say that they should be cut, but designed to gently taper off with rising incomes where possible.

  2. So very true! It is hard to get out. We’ve been stuck in it for a few years (my husband and I) because we stacked going to school on-top of having our children. My husband is currently working on his master’s degree…. I feel confident we will pop out of the ditch when he’s received his PhD and has a teaching position at a University. 😉

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