Transition Events in the Dynamics of Poverty. Chapter I: Introduction

09/01/2002

The poverty rate has fallen from over 15 percent in 1993—one of its highest levels in three decades, to 11.3 percent in 2000—its lowest level in two decades.(1) What events triggered entries into and exits from poverty during the last three decades? What role do events such as changes in household composition, employment status, and disability status play in individuals’ entries into and exits from poverty? Understanding why individuals enter and exit poverty may be useful for effective policy, yet little is known about the events associated with poverty.

Several researchers have examined the relationship between events and poverty transitions, where these “trigger events” include changes in household composition, employment status, and disability status. Surprisingly, most studies use only descriptive analyses. While informative, descriptive analyses provide limited information because individuals can experience more than one event at a time, thereby making it impossible to disentangle the relationship between one event and a poverty transition from that of other events or demographic characteristics. This study adds to our understanding of the role events play in individuals’ entries into and exits from poverty by using a multivariate framework, which disentangles the relationship between different events and poverty transitions.

This study sheds light on three questions that remain largely unanswered in the poverty literature:

  1. What are the dynamics behind changes in the poverty rate over time?
  2. What events increase individuals' likelihood of entering and exiting poverty? Do changes in household composition, labor supply, disability status, or economic status play a role? Have these events changed over time—from the late 1980s to the late 1990s? Do the events differ for short and long poverty spells?
  3. What is the likelihood of entering and exiting poverty given these different events?

We answer the questions posed above using two longitudinal data sets. We use yearly data from the 1975-97 panels of the Panel Study of Income Dynamics (PSID) as well as monthly data from the 1988, 1990, and 1996 panels of the Survey of Income and Program Participation (SIPP). Using both the PSID and SIPP allows us to examine: (1) poverty dynamics measured with monthly (SIPP) and yearly (PSID) reporting periods; (2) events associated with poverty spells that last only a few years and last five or more years (PSID); (3) events over two decades (PSID) and since the 1996 federal welfare reform (SIPP); and (4) the extent to which the results differ across the two data sets.

We examine poverty dynamics over time and measure transitions into and out of poverty using the official definition of poverty. Developed during the 1960s, the official definition of poverty compares families’ resources, defined as annual before-tax money income, with official poverty thresholds to determine whether or not a family is poor. Thresholds are based on expenditures for minimally acceptable amounts of food times a multiplier for all other expenses. While there are shortcomings associated with the official poverty measure, it is the most commonly used measure of poverty in transitions research and offers an easily implemented, straightforward method for measuring the economic status of individuals.(2)

In brief, we find that poverty entries and exits have changed over the past two decades, with the mid 1990s seeing an increase in both entries into poverty and exits from poverty. Descriptive analyses of poverty entries and exits show that shifts in household structure (i.e., transitions from a two-adult to a female-headed household and vice versa) are relatively rare events in the population, but individuals who experience these events are the most likely to transition into or out of poverty. While individuals who experience employment shifts are somewhat less likely to experience a poverty transition (than those with a household structure shift), shifts in employment are more common events in the population at large, and so are associated with a larger share of transitions into and out of poverty. Controlling for demographic and economic factors in the multivariate analyses, we find the likelihood of entering or exiting poverty to be highest for persons living in households with employment changes, followed by persons living in households with a shift in headship.

This report is organized as follows. In Section II we review prior poverty transitions research and discuss our contribution to the literature. In this literature review section we describe the theories and findings from studies of poverty transitions. In Section III we present a conceptual model of poverty. This model draws on the human capital and other existing theories presented in Section II and provides the basis for the specification of the empirical model. Section IV lays out the empirical methods, including both the count method and the multivariate hazard models, which are used to analyze events that trigger individuals' entries into and exits from poverty. This section also describes the specific events included in the analysis. Section V presents a discussion of the two data sets used in this study—the Panel Study of Income Dynamics (PSID) and the Survey of Income and Program Participation (SIPP). The results are discussed in Section VI. We first describe the dynamics behind changes in the poverty rate over time, and then describe the events related to poverty entries and exits. Section VII concludes.

Endnotes

1.  Individual poverty rates from the U.S. Census Bureau (2000).

2.  For a discussion of potential weaknesses of the official definition and measure see McKernan, Ratcliffe, and Riegg (2001) or Citro and Michael (1995).

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