DAVID M. CUTLER
Harvard
University
LAWRENCE F.
KATZ
Harvard University
Macroeconomic
Performance
and
the
Disadvantaged
A
LONG-STANDING,
positive
relationship between
the economic well-
being of the poor
and the growth of
the economy has
changed. In the
1960s rapid
economic growth and a
relatively stable
macroeconomy
were associated
with a 10 percentage
point reduction
in the proportion
of
people living
below the official
poverty
line.
Unstable macroeco-
nomic conditions in
the 1970s were
associated with no
progress against
poverty, and
the
recession of
the
early 1980s
brought substantial in-
creases
in
poverty.
Despite a sustained
macroeconomic expansion from
1983 to 1989,
however, poverty
reduction was only
moderate. The pov-
erty
rate in
1989, for
example, was
more than
1
percentage point higher
in 1989 than in
1979.
Thus, although
the
experience of the
1960s had sug-
gested
that
a
"rising
tide raises all
boats," persistent
poverty in the 1980s
indicates a
weakening in the
trickle-down mechanism.
In this
paper,
we
explore
how
disadvantaged
individuals
and
families
(those
in the lower
part
of
the income
distribution)
fared
from the
eco-
nomic growth
of the 1980s.
We start
by documenting
the
seeming
inef-
fectiveness of macroeconomic
growth
to
help
the
disadvantaged during
this period.
Movements
in
both
the
poverty
rate and
family
income
in-
equality
indicate
a break
in the
relationship
between
macroeconomic
We
are grateful
to
David
Ellwood,
Rachel
Friedberg,
Claudia
Goldin,
Christopher
Jencks,
Dale
Jorgenson,
and Daniel
Slesnick
for
helpful
discussions and
comments,
and
to
David
Lee
for
outstanding
research
assistance.
This
research
was
supported
by
the
National
Science
Foundation
(Katz)
and the
Alfred P.
Sloan
Foundation
(Cutler).
The
data
used
in
this
paper
are
available
from
the
authors
on
request.
1
2
Brookings
Papers
on Economic
Activity,
2:1991
performance
and
inequality
beginning
about
1983.
Forecasts
of
poverty
rates
and
family
income
shares
based
on equations
estimated
with
data
through 1983
underpredict
poverty
in 1989
by 2.1
to
3.4 percentage
points
and substantially
overpredict
the
share of
income
accruing
to
the
lowest
quintile.
Next we
assess
some
alternative
explanations
for the
changing
rela-
tionship
between
macroeconomic
activity
and the
income
of the
poor.
We find
that increased
family
income
inequality
is largely
associated
with
increased
wage inequality,
particularly
for
primary
earners.
By
contrast,
shifts
in
labor's
share
of
national income
do not play
an
im-
portant
role
in
increased
inequality.
Thus, explanations
for why
the
problems
of
the
disadvantaged
appear
to
have worsened
in a
period
of
apparent
prosperity
must focus on
the factors
that have
shifted relative
labor
demand
away
from
less skilled workers
and generated
tremendous
increases
in
wage
inequality.
To
examine the
determinants
of
economic
well-being
requires
a reli-
able
measure of
material
welfare.
Although government
statistics
on
family
incomes clearly
suggest
a deterioration
in the standard of living
for
a
large
share of
American
families over
the
past
two
decades,
some
researchers
have started
to
question
whether such
income
statistics
ac-
curately
capture
changes
in the level and distribution
of
economic
well-
being.
Christopher
Jencks,
for
example,
has found
that more "direct"
measures of well-being
(like
life
expectancy
and
housing
conditions)
in-
dicate
that
living
standards
continued
to
improve
rapidly
during
the
1970s.
1
And
Susan
Mayer
and
Jencks
have
argued
that alternative meas-
ures to
income
indicate
little
increase
in the
inequality
of
economic
well-
being
over
the
past
two decades.2
To
address these concerns,
we move
beyond
comparisons
of current
money
income
in
our
assessment of
the
changes
in
the distribution
of
economic
welfare.
To
do
this,
we
look
at the distribution
of
consumption
in the
1960s,
1970s,
and
1980s
using
household
survey
data
from
the
Consumer
Expenditure
Survey (CES).
Although
consumption
data
have many problems
of
their
own,
the
permanent-income
hypothesis
suggests
that
changes
in the distribution
of
consumption
may
measure
1.
Jencks (1984).
2.
Mayer
and Jencks
(1991).
David M.
Cutler and
Lawrence
F.
Katz
3
changes
in the distribution
of
economic
status
more
accurately
than
do
changes
in the distribution of current
money
income.
From our
examination of household
consumption
data,
we find
first
that the
distribution
of
consumption
is
substantially
more
equal
than the
distribution of income.
This
finding
is consistent
with
evidence from
ear-
lier
household
budget studies
presented
by
Milton
Friedman in
his
work
on
the
permanent-income
hypothesis.3
Our data show that
the
lowest
quintile of
the
consumption
distribution receives about 15
percent
more
resources than
does
the
lowest
quintile
of
the income
distribution.
Second,
however,
we find that
recent trends
in the
distribution of
consumption
closely mirror those
in
the distribution of
income. Con-
sumption
inequality increased
along
with
income
inequality
in
the
1980s,
particularly
for the
nonelderly.
We also
find that
the relation
between
income and
consumption
appears
to deteriorate over the
past
thirty
years,
though
this
deterioration is
not
serious
enough
to detract
greatly
from the
usefulness
of income
comparisons for
the
nonelderly.
We
con-
clude that
changes
in
the
distribution of income
continue
to
provide
fairly accurate
guides to changes
in the
distribution of
economic
welfare.
But, of
course,
consumption
data and alternative
measures of material
deprivation
and
living
conditions,
such as
those
proposed
by Mayer
and
Jencks as well as
by
Jencks
and Barbara
Torrey,
can
provide
a
useful
supplement
to income
comparisons
by
pinpointing
the
prevalence
of
specific
material
hardships.4
Finally,
we
explore which
groups
were left
behind in
the
expansion
of the
1980s
and
compare the
upward
mobility of
disadvantaged
young
workers in
the 1960s
and
1980s. We
find that
young
families
headed by
less
educated
workers fared
worst
during the
1980s and
that the
differ-
ence in
the
performance of
manufacturing
employment
between
the
1960s and
the 1980s
plays an
important
role in
explaining
the labor
mar-
ket
outcomes for
less
educated young
men.
We
conclude
that while the
disadvantaged
are
greatly
affected
by the
state of
the
macroeconomy,
economic
growth
is
not the
only
factor af-
fecting
the
economic
outcomes of the
disadvantaged.
Strong
macroeco-
nomic
performance
generates
more
employment
opportunities
and in-
3. Friedman (1957).
4. Mayer and
Jencks
(1989); Jencks
and
Torrey (1988).
4 Brookings Papers on Economic
Activity,
2:1991
creases the rate at which
all individuals are promoted
into higher-paying
occupations. Differences
across U.S. regions
and
metropolitan
areas in-
dicate that changes in the
earnings and occupational status
of young and
less educated workers and
changes in family income
inequality contin-
ued to be closely related
to local macroeconomic performance
during
the 1980s.5 The experience
of
the
1990-91 recession
reinforces the per-
ception
that the
poor
bear a
disproportionate
share of the losses
from
a
recession.
Yet, other factors
were not constant during
the
1980s.
Changes
in
rel-
ative
labor
demand
against
the
less
skilled offset the effects of
improved
aggregate employment
opportunities during
the
expansion
of 1983 to
1989.
In
an environment
of persistent and severe shifts
in
relative labor
demand against
the
less
skilled, a buoyant macroeconomy
alone may
not be sufficient to improve
the absolute and relative
living conditions of
those from disadvantaged
backgrounds. Policies
designed to improve
the
skills of
the
disadvantaged
and a
more
generous
safety
net
may
be
necessary to gain ground
on poverty
even with a
booming aggregate
economy.
Macroeconomic Growth
and the Disadvantaged
In
this
section,
we
document
trends
in
macroeconomic
activity,
offi-
cial
poverty rates,
and
family
income
inequality
in
the
postwar
United
States. We
find
a
strong
inverse
relationship
between
indicators of mac-
roeconomic
performance
and
income-based
meas'ires of absolute
and
relative
deprivation
through
much of
this
period.
However,
that rela-
tionship
has deteriorated
since
the
early 1980s,
leaving
a
far more
un-
equal
distribution of income
at
the end of
the
1980s
than would be
nor-
mally expected.
Macroeconomics and
Poverty
Discussion of
the
disadvantaged
in
the United
States
typically
fo-
cuses on the fraction
of the
population
with
current
money
incomes
be-
low an absolute
poverty
line.
Figure
1
shows
the share of
the
population
5.
Bartik
(1991);
Freeman
(1991a).
David M.
Cutler
and
Lawrence
F.
Katz
5
Figure
1.
Poverty
Rate
and
Poverty-Income
Ratio,
1959-89
Poverty
line/median
Poverty
rate
(percent)
income
(percent)
22
-
.4%
~ ~ ~
~
~ ~ ~~~~~~~~~-55
20
-
18 _%
-s
5
.4~~~~~~~~~~~~~~~-4
14~~~~.
50
12
t
X
.
-
0~%
%
40
10
l
L I
I l I
I I
I l
I l
l I
l
lI
I
I
I i
I I I I
I I I _
35
1960
1965
1970
1975
1980
1985
Source:
Current
Population
Surveys.
The
poverty
rate is the
official
poverty
rate,
based
on annual
income
data.
The
poverty-income
ratio is
the
average
poverty
threshold for
a
family
of four
divided
by
median
family
income.
below
the
official
U.S.
poverty
line over
the
past
thirty years.
This
pov-
erty
rate
is
produced
by
the
Census
Bureau
and
is
based
on
annual in-
come
data
from
the
March
Current
Population
Surveys,
or
CPS. The
measure
has
been
criticized in
various
ways.6
First,
since
the
family
classifications
have
changed
through
time,
the
official
poverty
rate
does
not
measure a
consistent
set
of
people. Second,
the
official
poverty
threshold is
updated
using
the
consumer
price
index
(CPI),
which
has
historically
overweighted
house
price
changes
in
measuring
living
costs.
Both
of
these
problems
tend
to
overstate
poverty
in
recent
years
relative
to earlier
years.
For
comparison
with
past research,
we use
the
official
measures of
poverty
in
this
section;
later
we
show that
these
two
factors
do
not
greatly
affect the
qualitative
nature
of our
results.
Poverty
rates are
clearly
countercyclical
and
responsive
to
the
rate
of
economic
growth.
Aggregate
poverty
fell
by
50
percent
between
1959
and
the
early
197Us,
corresponding
to the
prolonged
expansion
of
that
6.
See
Ruggles
(1990)
for a
comprehensive
discussion
of
the
problems
with
the
official
poverty
lines.