Under Construction: The Economy’s Impact on Poverty

Under Construction is the title I’m going to use for a series of posts to highlight parts of the Interlock website that are incomplete – articles that need a deeper exploration of a complex interaction, areas where more research is needed, or the article stubs that are far too short to properly describe complex policy topics.  I will be returning to expand upon these articles in time, but the point of addressing them in their current form is to pose a question (or set of questions) for the reader.

For the inaugural post in the series, I want to examine the impact of the economy on poverty.  There’s already a fairly lengthy article on the site about the impact of poverty on the economy, but the article discussing the opposite connection is currently a stub:

Impact of the Economy on Poverty

Poverty is (obviously) heavily impacted by poor economic growth, both because people who lose jobs or take pay cuts are more likely to fall into the poverty trap, and because programs designed to help the poor escape the poverty trap are another casualty of poor economic growth’s impact on government budgets.  Simply put, less money to go around means that those at the bottom end of the economic spectrum get pushed closer to the brink, and more of them end up stuck there even after the economy recovers.  This ratcheting up of the poverty problem with each economic downturn is one that is deeply troubling to considerations of America’s long-term outlook.

That’s a pretty simple way to view it, of course, and there are a number of complexities in the relationship that I didn’t cover.  The way I see it, here are some of the mechanics within this connection:

  • With our current economic structure and mix of technologies, it’s disproportionately those at the bottom who are put out of work or whose hours or pay are cut when the economy slows down.
  • When the economy grows, most of the gains go to those with scarce skills and those who own large amounts of capital – statistics like the top 1% collecting 95% of the new wealth in the recovery are not encouraging for those in the bottom 30%.
  • Those who remain out of work for prolonged periods suffer a major hit to their personal stock of human capital – skills deteriorate, employers discriminate against them, and their chances of being hired again drop considerably over time.  Many give up hope and drop out of the workforce altogether.
  • The rate of technological change in recent decades has dramatically increased economic growth, but has made it even harder for those without an education to escape the poverty trap.
  • There are massive indirect impacts during an economic downturn via reductions in government spending on the safety net and on education/healthcare/general human capital programs.

Some of these points are in flux, and some have exceptions.  For instance, that first bullet isn’t necessarily true in all cases – there have been times, and there are still some industries, where highly paid workers are more likely to be laid off, simply because the company saves more by doing so.  But in the current environment, most companies find it necessary to protect their investment in highly skilled workers who are hard to replace when the economy recovers.

Now, my questions for the reader are:

A) What am I missing?

B) What doesn’t belong in this connection, or should be emphasized in other connections instead?

C) What have I gotten wrong?

I’d be very interested in hearing some other takes on this – post something in the comments, or send me an email.  For the points that are generally correct, if you have good examples or good source materials documenting them, please send me a link.  And, if you’re looking for a paper topic, we are accepting article submissions!

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