A study by the CBO of a fifteen-year period shows that the poorest 20% of American families received the most benefit from economic growth. Earnings increased for this economic stratum by 78%, more than three times the increase of the next three quintiles (via Memeorandum):
It's been a rough week for John Edwards, and now comes more bad news for his "two Americas" campaign theme. A new study by the Congressional Budget Office says the poor have been getting less poor. On average, CBO found that low-wage households with children had incomes after inflation that were more than one-third higher in 2005 than in 1991.
The CBO results don't fit the prevailing media stereotype of the U.S. economy as a richer take all affair -- which may explain why you haven't read about them. Among all families with children, the poorest fifth had the fastest overall earnings growth over the 15 years measured. (See the nearby chart.) The poorest even had higher earnings growth than the richest 20%. The earnings of these poor households are about 80% higher today than in the early 1990s.
What happened? CBO says the main causes of this low-income earnings surge have been a combination of welfare reform, expansion of the earned income tax credit and wage gains from a tight labor market, especially in the late stages of the 1990s expansion. Though cash welfare fell as a share of overall income (which includes government benefits), earnings from work climbed sharply as the 1996 welfare reform pushed at least one family breadwinner into the job market.
Earnings growth tapered off as the economy slowed in the early part of this decade, but earnings for low-income families have still nearly doubled in the years since welfare reform became law. Some two million welfare mothers have left the dole for jobs since the mid-1990s. Far from being a disaster for the poor, as most on the left claimed when it was debated, welfare reform has proven to be a boon.
In fact, solid gains can be found among all levels of American economic strata. The worst performance over this period was an 18% gain in earnings by the middle 20%, which equates to an $8,500 increase in purchasing power -- after inflation. The top quartile showed a 54% increase, with the rich getting richer, but the rising tide lifted all boats -- and the smallest most of all.
How did this happen? Welfare reform and low unemployment returned people back to the workforce. Both acted to pressure employers to raise wages as the economy greatly expanded the number of jobs. The efficiencies of the American production model finally started delivering the better-scale jobs, and everyone moved up, especially the low-wage workers.
The findings by the CBO are rather remarkable. Female-headed households saw earnings double over this period as the number of them earning primarily through employment went up a third. The EITC helped, and it also kept pressure on qualifying households to earn through jobs rather than welfare. It demonstrates that the best welfare program is a paycheck.
This shows that a lightly managed capital market, a restriction on the crippling effects of government handouts, and a reduction in the tax burden creates more opportunities for all wage earners, including and especially those at the bottom. We have the data to show that we are on the right track, and that expansive and expensive government programs do not work.