Labor Day is a time to honor America’s workers and their contributions to our economy. It is also a time to reflect upon the state of workers’ economic position, and how that position has faltered in recent decades. Except for a short period of across-the-board wage growth in the late 1990s, 2015 marks a general 36-year trend of broad-based wage stagnation and rising inequality in our country, which has had real, adverse effects on low- and middle-income households. This anemic wage growth is closely tied to the stalled progress in reducing poverty since 1979, as many poor people work and their incomes are increasingly dependent upon work. Therefore, along with strengthening the safety net, the goals of anti-poverty advocates should be one in the same with pro-worker advocates: to reverse the decades-long trend of wage stagnation and promote real wage growth for all Americans.
Despite dramatic gains in educational attainment, wages have failed to grow for those at the bottom (and middle) over the last four decades. At the same time, low income household incomes have become increasingly dependent on wages. The figure below shows the major sources of income for non-elderly households in the bottom fifth of the income distribution from 1979 to 2011, using the CBO’s measure of comprehensive income. It shows that incomes of the bottom fifth are increasingly dependent on ties to the workforce. Wages, employer-provided benefits, and tax credits that are dependent on work (such as the EITC) made up 68.3 percent of non-elderly bottom-fifth incomes in 2011, compared with only 58.2 percent in 1979. While government in-kind benefits from sources such as the Supplemental Nutrition Assistance Program (formerly food stamps) and Medicaid increased from 13.2 percent of these bottom-fifth incomes in 1979, to 19.5 percent in 2011, cash transfers such as welfare payments have declined 9.2 percentage points (from 18.6 percent to 9.4 percent).
For better or worse, the safety-net system has become increasingly tied to work through programs such as the EITC and the child tax credit, which only benefit households with labor earnings. While other transfers and tax credits are clearly important to families in the bottom fifth and should be strengthened, it is crucial to recognize that this group depends on pay from the labor market for the majority of their income.
In addition, despite what some policymakers and pundits might have us believe, a significant share of poor people work. The figure below shows the population of those in poverty segmented into various labor status categories. The top bar shows that 35.2 percent of the poor between the ages of 18 and 64 in 2013 were considered not currently eligible to work because they are retired, going to school, or disabled. The other 64.8 percent of working-age poor are currently eligible to work. The second bar shows us that among these currently-eligible workers, 62.6 percent are working and 44.3 percent are working full-time. Of the working-age poor eligible for employment, 37.4 percent are not working—a share that includes the 3.3 million unemployed poor people seeking a job.
On Labor Day this year, it’s important to recognize the integral role of wage growth in poverty reduction. Although hourly wage growth has stagnated for the vast majority since 1979, this didn’t have to happen—there was room in the economy for all people to see wage growth, as economy-wide productivity continuously reached new heights. In fact, if all wages had grown at the same rate as productivity since 1979 (in other words, had economic gains been more widely shared with low- and moderate-wage workers), 7.1 million fewer people would be poor and the market-based non-elderly poverty rate would be 2.6 percentage points lower today, or 13.5 percent. If we had also targeted full employment through Federal Reserve policy, for instance, the non-elderly market-based poverty rate would be 4.2 percentage points less and 11.2 million fewer people would be poor.
Policies that boost employment and wages are vital and underappreciated tools for reducing poverty. To gain momentum in the fight against poverty, fiscal transfers that help low-income families almost surely need to be accompanied by policies that foster widely shared wage growth. Without wage gains, the tax-and-transfer system needs to work harder every year simply to keep poverty rates from increasing. This Labor Day, let’s focus on the things we can do that will both help workers and reduce poverty, such as strengthening workers’ bargaining rights, raising the minimum wage, eliminating the tipped minimum wage, making sure the new overtime threshold quickly gets into place, enforcing wage theft rules, fighting for wider access to paid sick and family leave, and urging the Fed to target full employment.
People in poverty are working, now we need to make the economy work for them.