Who are the Truly Poor? Patterns of Official and Net Earnings Capacity Poverty, 1973-1988

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Abstract
In this paper we study changes in the prevalence and composition of poverty in the United States over the 1973-1988 period, focusing on the first and last years. Over this period, official poverty rose from 23.6 million people (11.4 percent of the population) to 31.9 million (13.1 percent), passing over a peak in the recession of 1981-1983 of over 15 percent of the population.' The official definition of poverty in the United States compares the total income of families to an officially designated "poverty line" that varies with the size and composition of the family. If the income of a family falls below its poverty line, it is said to be poor. Total poverty in the nation is the sum of the individuals living in families whose income falls below their poverty line. One of the most persistent and fundamental criticisms of the official definition is its reliance on a single year of cash income of a family. For many families, annual income is a fluctuating figure. Unemployment, layoffs, income flows from self-employment, the decision to undertake mid-career training or to change jobs, or health considerations may all cause the money income of a household to change substantially from one year to the next. A second fundamental problem with the official definition is its heavy dependence on tastes--in particular, the tastes of the members of the household unit for income versus leisure. Both theoretical and empirical work in economics have recognized these limitations of money income as a measure of economic well-being. Many studies have relied on the average of a number of years of a household's income in order to gain a better estimate of "normal" income--income purged of its transitory elements. Others have taken observed, annual consumption to be a better estimate of real economic well-being than annual income (e.g. Mayer and Jencks, 1991). Consistent with the multiyear perspective, early work by Ando and Modigliani (1963) emphasized a life-cycle p
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