Transition Events in the Dynamics of Poverty. Decomposing the Annual Poverty Rate

09/01/2002

How has the poverty rate changed over time and what dynamics lie behind those changes? In periods where poverty rates remained high, was it because the number of entries and exits were high or low? With its many years of data, the PSID can be used to analyze how the poverty rate has changed from 1975 through 1996 and the dynamics behind those changes. In the mid-to-late 1970s the annual poverty rate was relatively low, followed by relatively high poverty rates through the early-to-mid 1980s, and moderate poverty rates in the mid-to-late 1980s (Table 2). The early-to-mid 1990s saw a return to high poverty rates, with a peak of 13 percent in 1993.(34)

 

Table 2—PSID Data:  Decomposing the Annual Poverty Rate
Year Sample Size Number Poor Number Enter Poverty Number Exit Poverty Net Change in Number Poor Poverty Rate
1975 18,521 22,424        
1976 18,672 20,303 7,417 9,133 -1,716 7.8
1977 18,811 18,977 6,739 7,567 -828 7.4
1978 18,954 17,997 6,625 7,317 -693 7.0
1979 19,254 19,908 7,117 7,344 -227 6.2
1980 19,548 21,736 8,674 6,938 1,737 7.6
1981 19,614 23,793 9,538 7,059 2,479 8.6
1982 19,875 23,893 8,328 8,159 169 8.5
1983 20,119 23,261 7,493 7,940 -447 8.4
1984 20,202 24,001 8,187 10,231 -2,044 7.0
1985 20,446 24,428 9,329 8,510 820 8.2
1986 20,192 22,609 6,968 8,630 -1,662 7.7
1987 20,235 22,322 6,937 6,904 33 7.7
1988 20,272 22,674 7,860 7,631 229 7.7
1989 20,223 25,355 7,727 9,197 -1,470 6.5
1990 20,498 25,508 9,309 9,136 174 7.8
1991 20,532 26,030 9,074 8,435 639 8.1
1992 21,933 28,584 10,951 8,339 2,612 8.8
1993 22,942 41,749 22,019 8,811 13,208 12.6
1994 25,044 37,603 12,324 18,087 -5,763 10.7
1995 24,340 36,056 12,195 14,561 -2,366 10.1
1996 23,530 29,762 11,979 9,712 2,267 11.5
Notes:  Poverty rates in the PSID are lower than official poverty rates produced by the U.S. Census Bureau from the March Current Population Survey (CPS). Evidence suggests that the lower poverty rates are due to the more complete income reporting at the lower end of the income distribution in the PSID than in the CPS (Citro and Michael 1995, p. 403). The 1993-96 income data are from the early release PSID files and thus, are preliminary. Population numbers in thousands. Numbers do not sum precisely due to minor changes in the PSID sample over time.

The poverty rate measures the number of poor persons (numerator) as a fraction of the total population (denominator). As described in the Conceptual Model (Section III.2), the poverty rate can be decomposed to highlight the variables responsible for its changes: the number of people who enter and exit poverty, and the number of people who enter and exit the total population. We focus on the number of people who enter and exit poverty because our main objective is to explain poverty dynamics, not population dynamics, and the PSID is not a strong data source for explaining population dynamics.(35)

Our examination of the dynamics behind changes in the poverty rate over time illustrates that, not surprisingly, the number of people entering poverty is greater than the number of people exiting poverty when the poverty rate is increasing. Conversely, the number of people entering poverty is smaller than the number exiting poverty when the poverty rate is decreasing (Table 2).

While there were year-to-year changes in the number entering and exiting poverty, these numbers fluctuated within a band between roughly 7 and 10 million per year from 1975 until the early 1990s. Then, both entries and exits jumped dramatically. The number of entries hit a peak in 1993, doubling between 1992 and 1993, and the number of exits hit a peak in 1994, more than doubling from its 1993 level.(36)

The high levels of poverty entries and exits in the mid 1990s suggest that poverty rates remained high over this period because entries and exits were both high, not because they were both low. Many people were cycling in and out of poverty rather than a few people staying in poverty. A look at the early-to-mid 1980s, another period where poverty rates remained high, reveals that this was not always the case. The number of people entering and exiting poverty in this period was comparatively low. The early-to-mid 1980s were characterized by fewer people staying in poverty rather than many people cycling through.

In summary, our examination of changes in the poverty rate and the dynamics behind it over the 22 years from 1975 through 1996, using PSID data, suggests that the early-to-mid 1990s look different from earlier time periods. The early-to-mid 1990s were characterized by relatively high poverty rates and high numbers of people cycling in and out of poverty. These differences are also reflected in the likelihood of entering and exiting poverty over time.

View full report

Preview
Download

"full-report.pdf" (pdf, 308.4Kb)

Note: Documents in PDF format require the Adobe Acrobat Reader®. If you experience problems with PDF documents, please download the latest version of the Reader®