The COVID-19 inflation episode: Lessons from emerging markets


The COVID-19 inflation episode: Lessons from emerging markets


Simulating the Effect of the “Great Recession” on Poverty

September 10, 2009

The number of people living in poverty in the richest country in the world remains stubbornly high, higher than it was back in the 1970s. The 1960s and 1970s brought considerable progress for the poor but were followed by the lost decade of the 1980s, during which little additional progress occurred. Then in the 1990s the combination of a strong economy, welfare reform, and expanded assistance for low-income working families helped to gradually move more poor families into at least the lower-middle class. Welfare reform in 1996 pushed more low-income mothers into jobs and provided new supports, such as several refundable tax credits, that directly augmented the incomes of the working poor and contributed to this progress. But by the beginning of the current decade, rates began drifting upwards again, and now with a recession in progress – and unemployment rates forecasted to exceed 10 percent – they are likely to go much higher. But how much higher and for how long? Although forecasting the future is always dicey business, this paper presents several scenarios, all based on simulations of what poverty rates for various groups are likely to be over the next decade based on data showing how poverty has responded to changing unemployment rates in the past.

Using data from the Congressional Budget Office (CBO) and others about the likely trajectory of the recession, we find that, absent other changes, the poverty rate will increase rapidly through 2011 or 2012, at which point about 14.4 percent of the country will be in poverty, up from 12.5 percent in 2007. As the recession ends and employment levels increase, the poverty rate will begin to steadily decrease though it will not, at least over the next decade or so, reach its 2007 level. In short, our results show that recessions can have long-term scarring effects for all workers but especially for the most disadvantaged, whose skills and attachment to the work force are already somewhat marginal. A prolonged lack of jobs reduces the amount of on-the-job training or experience that people receive, discourages them from making the effort needed to climb out of poverty, and can even lead to a deterioration in their health or family life that adversely affects opportunity.

There were 37 million people in poverty in 2007, so our results indicate that the recession would increase the number of people in poverty by about 8 million, or 22 percent. Our estimates for the increase in poverty amongst children are even more dramatic. There were about 13 million children living in poverty in 2007, and we estimate that the number of poor children could increase by at least 5 million, or 38 percent.

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