Has growth helped the poor? Ways to make it more inclusive

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The concept of inclusive growth is based on the premise that economic growth is accompanied by an improvement in living standards and material wealth across all the different sectors and segments of society. Over the last two decades, growth in emerging market economies has resulted in a reduction in poverty levels in these countries as well as a reduction in income inequality across countries.[1] However, for many developed countries such as the United States, economic growth has not resulted in a significant decline in poverty rates.[2] At the same time, by most measures, income inequality has widened considerably since the early 1980s. What policies can these countries follow to make growth more inclusive?

Inclusive growth is consistent with an absolute, rather than a relative, improvement in incomes across different segments of the income distribution. In the United States, the debate often tends to get mired in class warfare. Statistical data from the Congressional Budget Office shows that the top 1 percent have experienced an income growth of 200% since 1979, while people in the middle and bottom 20 percent of the income distribution have experienced an average 40 percent increase in real after-tax incomes.[3] This is not necessarily at odds with the notion of inclusive growth since people at all levels have shared, albeit unequally, in the income growth. Also, consumption data points to a significant increase in material standards of living for people at all income levels as well. In research that I have done with Kevin Hassett, we find that people at all income levels are consuming more today and have access to many more devices and appliances that were traditionally considered the preserve of the rich, than at any time in history.[4]

The tax and transfer system has undoubtedly been responsible for redistributing incomes from the top to the bottom.[5] As a result, consumption inequality by most accounts is a lot narrower than income inequality. However, there is a limit to how much redistribution can be used to sustain consumption standards. Already, more than 68 percent of federal tax revenues are derived from the top 20 percent of earners, and close to $2 trillion are spent on transfer programs annually.[6] Yet, as per the U.S. Census

Bureau there are more than 47 million people living in poverty in America today.[7] In order to further enable the sharing of growth by low income individuals, other social and economic changes need to be adopted.

Inclusive growth requires that growth be inclusive of a large part of the country’s labor force.[8] This is the biggest challenge facing countries today, particularly in the context of the recent recession and subsequent anemic recovery. Research suggests that changes in labor market opportunities predict changes in poverty quite well.[9] In the United States, there are more than 10 million unemployed workers, of which nearly 4 million have been jobless for longer than 27 weeks.[10] In addition, there are another 10 million who are either in involuntary part-time jobs, or are too discouraged to look for work. This has added to the problem of poverty. And when these high rates of poverty exist in an economy with low economic mobility as is true of the U.S., the problem is exacerbated.

What policies can we encourage in order to improve economic mobility and the access to high-wage high-skilled jobs that are essential for economic agents to participate in and share in the process of economic growth? Access to high quality education and schools is extremely important as an investment into children’s futures. Poor quality schooling can limit an individual’s earning ability over his lifetime.[11]

The labor market has been particularly challenging for youth and teenagers who face unemployment rates higher than 15 percent. Research suggests that internship or apprenticeship programs may improve employment prospects and also boost college attendance.[12] Skill-biased technological change is one of the biggest drivers of inequality in incomes.[13] Therefore producing trained, highly-educated individuals would help with moving people out of poverty.

The next challenge is getting the long-term unemployed back to work. To this end, unemployment benefit programs should be supplemented by skills training and greater help with matching workers to jobs. Federal programs that provide work incentives are far more successful than simple cash assistance programs in helping people in poverty. An example is the Earned Income Tax Credit program. The EITC arguably is one of the federal government’s most efficient means of encouraging work and fighting poverty. As per the Census Bureau, the EITC lifted 5.4 million people above the poverty line in 2010. While the EITC has some disadvantages, such as the significant tax penalties on earners in the phase-out range, it has been shown to encourage labor force participation for single mothers, and has lifted millions of adults and children out of poverty.

 Finally, a competitive free enterprise system that creates the right incentives to invest in capital, labor and intangibles, is extremely important to address the challenges of long-term growth.

To conclude, making growth more inclusive requires addressing the problem of poverty and long -term unemployment directly through welfare programs that incentivize low income individuals to enter the labor market. It also involves investments in early childhood education, skills training and apprenticeship programs that would help youth and college-educated individuals to transition easily from school to high quality jobs. A productive and fully utilized labor force, in combination with adequate investments in capital and legal and property rights systems, would provide the right economic framework for sustained and high rates of growth that could move us towards substantial rates of poverty reduction.

[1] “Poverty and Inequality,” Globalization Trendlab 2013 report, University of Pennsylvania. http://lauder.wharton.upenn.edu/pages/pdf/other/Global_TrendLab_2013_Poverty.pdf

[2] Hoynes, Hilary W., Marianne E. Page and Ann Huff Stevens. "Poverty In America: Trends and Explanations," Journal of Economic Perspectives, 2006, v20(1,Winter), 47-68. 

[3] Congressional Budget Office, “The Distribution of Household Income and Federal Taxes, 2010.” Dec, 2013. http://www.cbo.gov/sites/default/files/cbofiles/attachments/44604-AverageTaxRates.pdf.

[4] Kevin A. Hassett and Aparna Mathur, “A New Measure of Consumption Inequality,” AEI Economic Studies, June 2012. 

[5] Ben-Shalom, Yonatan, Robert A.Moffitt and John Karl Scholz. “An Assessment of the Effectiveness of Anti-Poverty Programs in the United States, May 2011. http://www.nber.org/papers/w17042 

[6] http://www.downsizinggovernment.org/cutting-4-trillion-budget

[7] Current Population Reports, “The Research Supplemental Poverty Measure Nov, 2013. http://www.census.gov/prod/2013pubs/p60-247.pdf

[8] http://siteresources.worldbank.org/INTDEBTDEPT/Resources/468980-1218567884549/WhatIsInclusiveGrowth20081230.pdf

[9] Hoynes, Hilary W., Marianne E. Page and Ann Huff Stevens. "Poverty In America: Trends and Explanations," Journal of Economic Perspectives, 2006, v20(1,Winter), 47-68

[10] http://www.bls.gov/news.release/pdf/empsit.pdf 

[11] Martin Feldstein, “Income Inequality and Poverty.” Oct, 1998. http://www.nber.org/papers/w6770.pdf?new_window=1 

[12] David Neumark, 2009. "Alternative Labor Market Policies to Increase Economic Self-Sufficiency: Mandating Higher Wages, Subsidizing Employment, and Increasing Productivity," NBER Working Papers 14807, National Bureau of Economic Research, Inc. http://ideas.repec.org/p/nbr/nberwo/14807.html 

[13] Claudia Goldin and Lawrence Katz, “The Future of Inequality: The Other Reason Education Matters So Much.” 2008. http://ideas.repec.org/p/hrv/faseco/4341691.html

 

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About the Author

 

Aparna
Mathur
  • Aparna Mathur is an economist who writes about taxes and wages. She has been a consultant to the World Bank and has taught economics at the University of Maryland. Her work ranges from research on carbon taxes and the impact of state health insurance mandates on small firms to labor market outcomes. Her research on corporate taxation includes the widely discussed coauthored 2006 "Wages and Taxes" paper, which explored the link between corporate taxes and manufacturing wages.
  • Phone: 202-828-6026
    Email: amathur@aei.org
  • Assistant Info

    Name: Hao Fu
    Phone: 202-862-5214
    Email: hao.fu@aei.org

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