The Rise Of the Bottom Fifth: How to Build on the Gains Of Welfare Reform

May 29, 2007

Imagine a line composed of every household with children in the United States, arranged from lowest to highest income. Now, divide the line into five equal parts. Which of the groups do you think enjoyed big increases in income since 1991? If you read the papers, you probably would assume that the bottom fifth did the worst. After all, income inequality in America is increasing, right?

 Wrong. According to a Congressional Budget Office (CBO) study released this month, the bottom fifth of families with children, whose average income in 2005 was $16,800, enjoyed a larger percentage increase in income from 1991 to 2005 than all other groups except the top fifth. Despite the recession of 2001, the bottom fifth had a 35 percent increase in income (adjusted for inflation), compared with around 20 percent for the second, third and fourth fifths. (The top fifth had about a 50 percent increase.)

Even more impressive, the CBO found that households in the bottom fifth increased their incomes so much because they worked longer and earned more money in 2005 than in 1991 — not because they received higher welfare payments. In fact, their earnings increased more in percentage terms than incomes of any of the other groups: The bottom fifth increased its earnings by 80 percent, compared with around 50 percent for the highest-income group and around 20 percent for each of the other three groups.

When considering this explosion of work among those in the bottom fifth, remember that they all had children to take care of, that more of these households were headed by single mothers than households in the four better-off groups, and that they had the least money to, say, fix their cars or tide them over if they got sick. Those who do not admire this performance should live for a year on $16,800 and see if they could increase their earnings by 80 percent.

My rendition of the CBO findings to this point should make Republicans happy: Low-income families with children increased their work effort, many of them in response to the 1996 welfare reform law that was designed to produce exactly this effect. These families not only increased their earnings but also slashed their dependency on cash welfare. In 1991, more than 30 percent of their income was from cash welfare payments; by 2005, it was 4 percent. Earnings up, welfare down — that’s the definition of reducing welfare dependency in America.

But now consider that the next-biggest increase in income for the bottom group was from the earned-income tax credit (EITC), a program that, in effect, supplements the wages of parents with low incomes. In addition, most of the children in these families had Medicaid coverage and received free school lunches and other traditional social benefits. In other words, this success story is one of greater efforts to work more and earn more backed by government benefits to improve living standards and, as President Bill Clinton used to say, “make work pay.”

This increase in earnings and total income by low-income families is the biggest success in American social policy of recent decades. So why not broaden it? Two policy innovations, bipartisan in conception and implementation, should be pursued.

First, the type of work requirements that characterized the 1996 welfare reforms should become routine in all large-scale welfare programs, notably food stamps and housing. Rather than allowing able-bodied adults to receive benefits without making a reciprocal commitment to increase personal responsibility, federal and state policy should require serious effort to work. Both housing and food stamps now have only modest work requirements.

Second, Congress should continue the trend in federal policy to improve programs that help low-income workers such as child care and health care. The experience of the 1990s shows that the majority of poor and low-income workers are able to land jobs that pay only about $8 per hour. Most are high school dropouts, and very few have education beyond high school. Especially in the absence of a return to married-couple families, millions of young adults with children will probably not be able to earn enough to support themselves and their families without taxpayer help.

It is better for them, for their children and for society if these adults continue to work and have their poverty-level earnings supplemented by the EITC and other programs. Indeed, it would be better for everyone if Congress ended earmarks, agriculture subsidies and ineffective programs such as Title I of the No Child Left Behind Act and used the money saved to increase support for low-income working families by expanding the EITC (especially for poor men who work full time), as well as child care and health-care coverage. Without increasing the deficit, Congress could augment the progress being made by low-income families, help them increase their standards of living and income mobility, and further strengthen the politics of personal responsibility. This should be an agenda on which Republicans and Democrats can unite.