Why don't we care about the poor?

Source: US Census Bureau, 2014.

Last week saw the release of the annual US poverty and income statistics.  On the face of it, they make for pretty terrible reading. The top fifth of the income distribution held nearly 50 per cent of all income, the bottom fifth just over 3 per cent (Figure 1b). If income was equally shared out across the population, the top fifth would only hold 20 per cent. A longer sweep of history shows how everyone except the top has lost out over the past 40 years, with only the income share of the top growing (Figure 1a).

It's a pretty lonely place down there at the bottom. 15 per cent of Americans are in poverty*. Many more are in near-poverty, struggling on the edge of hardship. Single mums and children fare the worst. Young children are five times as likely to be in poverty if they live in a family headed by a single mother compared to married parents. And despite a small tick down in poverty rates for children and those of Hispanic descent, poverty remains stubbornly high.

You'd be forgiven for blinking and missing this publication. The data are only published once a year and are already a year out of date. They don't move markets or grab headlines.  In fact, those that get most impassioned about the data are people already working at the coal face of poverty alleviation, who are able to demonstrate through statistics what they already know through experience.

Why don't these facts and figures about the harsh reality of life in America grab more attention?

Is it because the average person is also under pressure?  In 2013, the median household was 8% poorer than it was in 2007, just before the financial crisis began. That means that even though we might have made up for all the jobs that we shed in the Great Recession, we haven't made up for all the money we lost.  If the average family is worse-off, and are themselves struggling to stay afloat, they probably don't have the time, or money, to worry about the very poor.

Or is it because poverty's very existence goes against the ideal of the American dream? That if we really believe what they show, then we have to accept that opportunity is not equal for all. That hard work and determination alone are not enough to move out of hardship. By accepting poverty, we accept that there are barriers in-built into our institutional architecture that mean non-Whites are more likely to be born into poverty, live in a deprived area, eat poor-quality food, attend poor-quality schools, drop out of college (if indeed they apply), hold a minimum wage job, not have access to childcare, suffer from poor health outcomes and die early.

Perhaps these reasons are two sides of the same policy coin. If ordinary people are struggling to stay afloat, and those at the very bottom are sinking, then only active government policy can generate a tide that will lift all boats. An increase in the minimum wage, for example, would benefit the majority of people living in poverty but it would also create a corresponding increase in pay further up to maintain pay differentials. A concerted effort to improve the quality of K-12 education would benefit those who in poverty who are most likely to fall behind, as well as creating positive spillovers to all students within that learning environment. Those in poverty may be in the minority but solutions to their problems would definitely benefit the majority.

*According to a more comprehensive measure, the supplementary poverty measure, poverty rates are higher still. The 2013 estimate will be published later this year.

An economy that works together, stays together

Source: Steve Breen / Creators Syndicate

The US economy is experiencing its slowest recovery in 70 years. We just can’t seem to give the economy the kick-start it needs. Why? Because we are held back by inequality. Only by tackling inequality head-on can we secure the sustained economic recovery that we are looking for.

Inequality sends a signal about the economy’s potential to grow today. Income among the poorest can be stagnant if people have given up looking for a job because opportunities are so scarce. The recent fall in US unemployment masks record falls in the participation rate, the number of people actually looking for a job. Fewer people in the labour force leads to lower per head growth rates and lower social cohesion. We are wasting our best resource – people. 

Source: Chan Lowe / Tribute Content Agency

Inequality also matters for the economy’s growth potential tomorrow. Richer families can afford to spend more time with their children, investing in their learning and development. Poorer families, who are more likely to work longer hours in minimum wage jobs, simply don’t have the time. But if you think that talent is randomly distributed, then this means that many children's potential will be left untapped. These young people are also more likely to drop out of high school or college, either because of cost or because they simply don't believe that people like them can succeed. This impacts on their ability to secure a job and makes it more likely that they will also fall on hard times.  

What can be done? If inequality is defined as a gap, then let’s build bridges that enable people to close this divide. Raising the minimum wage would enable everyone to earn a basic income. On-the-job training would improve career progression and lifetime income for those in work, and back-to-work training would improve job prospects for those out of work. A more progressive tax and social security system would provide much-needed resources to low-income families to invest in themselves. 

None of these policies constitute a hand-out. Raising the wage, for example, would actually increase tax receipts and reduce welfare expenditure as fewer people require income support. All of these policies can help children as much as adults. For example, women who joined the workforce following welfare reform in the UK spent the extra income earned on books and activities for their children. And each one would increase the productive potential of the economy. An economy that can produce more is likely to grow.  

I think, therefore I learn

Source: US Census Bureau

Minorities in the US have a much higher chance of living in poverty than Whites. This has not changed materially for 40 years (Figure 1). In other words, poverty persists.

To tackle the inequality debate head on, we need to address this racial divide, starting by shifting the mindset of minority children themselves. Children show a strong understanding of racial stereotypes from an early age. By 3, they are aware of ethnicity and gender. By 6, they begin to infer beliefs held by an individual. By 10, they are able to relate these beliefs to a more broadly-held stereotype (McKown and Weinstein, 2003). 

These stereotypes become self-fulfilling.

"Stereotype threat", as this is known, is a belief that an outcome is pre-determined by the student's background. Experiments have shown that reminding children that they are black before they sit a test reduces their subsequent score. The same is true for females and other minorities. It is no wonder then that Black and Hispanic students are more likely to drop out of high school, despite the overall improvement to completion rates (Figure 2). They think they are going to perform badly. Therefore, they do. 

Source: US Department of Commerce, Census Bureau,
Current Population Survey (CPS)

But children can be persuaded to change perceptions about themselves. This comes from a realisation that intrinsic ability is not fixed or pre-determined by their ethnic background. For example, middle-school minority students who were encouraged to believe that knowledge and intelligence are malleable - that they can be grown over time - showed an improvement in test scores (Good, Aronson and Inzlicht, 2003). First-year college students who received letters from older students about their initial struggles and the way in which they overcame them, in turn were less likely to fall behind. 

These interventions are not costly. They can be carried out within the school or college gates, by teachers or older students (as David Yeager at the University of Texas has shown). But they are exceptionally powerful. By breaking the perceived link between background and intelligence, it is more likely that minority groups will do better at school and develop the emotional and psychological tools they need to succeed in the workplace. In time, this could go a long way in breaking the inter-generational persistence of poverty. 

The Forgot-Teen Generation

There is widespread evidence that poor children in the US do not have a fair start in life. By age 2, there is a 6 month gap between children of low and high socioeconomic status in processing skills that are important for language development. By age 4, children in very poor families will have heard 30 million fewer words than their better-off peers. These differences persist. Variations in high school test scores between low and high-income children can be predicted from elementary school performance. As a result, many campaigns have focused on the importance of early years intervention in improving a child's life chances.

In addition, academic research into the high returns to investing in young children has influenced a policy shift.  James Heckman, a Nobel-prize winning economist, has argued that if the foundations of cognitive and non-cognitive development are not set early on, there will be nothing to build upon in teenage years.  He points to the seminal Perry pre-school project, an early intervention program designed to improve the outcomes of disadvantaged African-American youth in the 1960s.  The return to intervening at such a young age is estimated to be between 7 and 10 per cent, calculated as the sum of private gains (e.g. staying on in education and earning a higher wage) and social gains (e.g. costs saved from reduced crime rates).  President Obama has therefore emphasised the importance of early intervention in reducing inequality.

But there is a danger that such rhetoric leads to older children being forgotten. This blog does not dispute the evidence that early years intervention is important. But the US is not at the point at which all children start school equal. Furthermore, some schools are failing to help them catch up. An emphasis on mainstream standardised testing is detrimental to those who are not used to such discipline. Disadvantaged students are more likely to be disengaged, and have less drive, motivation and self-belief, leading to higher drop-out rates.
   
In addition, things are getting worse for older children, who neither appear as cute as babies nor as vulnerable as the elderly in advocacy campaigns. As mentioned in last week's blog, if you are a high-school drop out, your chance of being employed is at its lowest level since records began (in 1970). The likelihood that you are out of the workforce altogether is at its highest level for over a decade. Worse, the US schooling system is not even equipping its average student with the skills necessary to succeed in today's information economy. In a wider test of attributes of 15 year olds - the Programme for International Student Assessment - the US ranked 27th out of 34 countries. US students are, it would appear, unable to "think outside the box".
    
What we need to do is borrow the early years philosophy - which focuses on cognitive development - and apply it to young people, disadvantaged or otherwise.  The standardised testing approach leaves little room for the development of critical thinking and challenge. Finland, by contrast has all but eradicated standardised tests, opting for a more equitable and relaxed school experience. If we made school more enjoyable and inclusive then, in theory, students from every background could flourish, not just those who benefited from early years intervention. By doing so, we can increase the likelihood that all students finish high school more equally than they started.

Machine Age II: Dawn of the unemployed

US retailers donate excess clothing (made cheaply in Asia and shipped back) to homeless charities to help down-and-out Americans. There is no denying the generosity of such an act. But what is this chain of events telling us? That emerging economies have "taken our jobs"? Or that the US has failed to adapt to a changing world economy and create new job opportunities?

Over the past 20 years, some middle-skilled jobs did migrate to countries that were able to provide labour at a lower cost than at home. At the last count, China accounted for 40 per cent of all clothing imports into the US. Such a shift was unsurprising. Making clothes required some skill but relied on repetition across dozens of lines. A Chinese middle-skilled labourer was in all ways identical to a US labourer except one - cost. Wages paid to Chinese workers were lower than their US counterparts.* In order to increase profits, firms chose to locate production in an area with the cheapest operating costs. Thanks to globalisation, which reduced geographical barriers between countries, it no longer mattered where in the world that was.

But other middle-skilled jobs have disappeared because of technological progress - particularly in IT - that automates tasks and renders the job obsolete. Sales assistants at grocery stores have been replaced by self-checkout kiosks. Secretarial pools have been replaced by computers. The speed of such change feels rapid. The US Bureau of Labor Statistics predicts that it will continue to be so - some of the fastest falls in occupations between now and 2020 will be in middle-skilled occupations.

Source: Tuzemen and Willis (2013)

The gap left behind in the US labour market has not been filled by equivalent jobs. Instead, there has been a rise in the share of high-skilled jobs - professional and managerial roles - that computers cannot yet perform because of the cognitive and non-cognitive skills they require. This is known as skills-bias technical change** because securing these jobs requires advanced qualifications and so favours those who have - or can obtain - such skills. Between 1983 and 2012, the share of high-skilled jobs in the US labour market increased from 26 per cent to 37 per cent (Figure 1). These skills earn a premium in the form of higher wages.

There has also been an increase in the share of low-skilled jobs (Figure 1). These tasks are manual and service orientated (think cleaners, waiters, security staff) and today cannot be automated or relocated offshore. But because these jobs require fewer skills, they are open to more people, including those who would have previously taken on middle-skilled jobs. Competition has increased, reducing the wage premium (see last week's blog for a discussion of trends in low wages). Inevitably, this will lead to some people being out of work. Worse, it might lead to people dropping out of the workforce altogether. Indeed, the participation rate - the fraction of people aged 16 and over actively looking for work - fell to 63 per cent in May from a high of 66 per cent prior to the last recession.  

Looking ahead, some think that the speed with which the US economy could be upended by technological change might be even faster than in previous years. The dawning of the so-called "second machine age" would eliminate the need for many more occupations, perhaps even some low-skilled ones. The idea that everyday tasks will be completed by a robot may be a bit far-fetched today. But 20 years ago, it would have seemed strange to think that we wouldn't talk to a cashier while they scanned our groceries or dictated a letter to a secretary to print, sign and send by post.

To keep pace with such change, and to prepare our future workforce, we must adapt our learning environment today. This includes investing in K-12 and higher education. But it also means embracing new forms of online learning, like mass open online courses, that open up high-quality education to the whole population. This will enable the future generation to have the right skills to participate in the "second machine age". Not doing so risks leaving an increasing share of the population behind. Who knows where their clothes will be made.

* Though given a rising middle class in China, labour costs are creeping up, which is leading to shifts in production to other parts of Asia.
** Link to earlier publicly-available version.