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A tightening labor market and Obamacare delivered income growth and health coverage to working families in 2015

(Luke Sharrett/Bloomberg News)

Poverty fell sharply, middle-class incomes rose steeply, and more people had health coverage last year, according to Tuesday’s report on household economic conditions from the Census Bureau — the best evidence to date that the growing economy is finally reaching households that had been left behind.

Middle class incomes had their fastest growth on record last year

Poverty rate drops

The official poverty rate fell from 14.8 percent in 2014 to 13.5 percent last year, a decline of 3.5 million people in households whose incomes put them below the poverty threshold for their family type. (The poverty threshold for a single parent with two children was around $19,000 in 2015). This is the largest one-year decline in poverty since 1968.

In 2007, before the Great Recession drove many more families into poverty, the rate was 12.5 percent. Below, I discuss the Census Bureau’s Supplemental Poverty Measure (SPM), a more inclusive measure that’s more appropriate for historical comparisons. It, too, fell significantly last year, from 15.3 percent to 14.3 percent. As shown below, the decline in poverty was greater for minority populations.

Household income rises

Median household income rose 5.2 percent in real terms, from $53,700 in 2014 to $56,500 in 2015, a gain of $2,800, the first real gain since 2007, and the largest gain on record back to 1967, when these data begin.

This brings the real median household income just slightly below its 2007 peak (the difference is statistically insignificant). For black and Hispanic households, real median income rose 4.1 percent and 6.1 percent, respectively (figure below). Income gains were significantly larger at the middle and bottom of the income scale relative to the top, meaning lower income inequality.

Heath insurance expands

Health coverage continued to increase, as the Affordable Care Act’s coverage measures — the Medicaid expansion and state exchanges — diffuse across the land. Today’s data show that the share without coverage fell last year to 9.1 percent, down from the 2014 uninsured rate of 10.4 percent, meaning 4 million more people got health coverage. Comparisons to earlier years cannot be made due to changes in the survey questions, but other data sources show that since the ACA was enacted, the number of the uninsured is down by 20 million and the rate is down from 16 percent to 9 percent.

Such a trifecta — lower poverty, higher middle-class incomes and more people covered by health insurance — is rare in this annual report. In fact, since 1988 (the first year for which census data on health insurance are available), the only other year that brought simultaneous official progress on poverty, median income and health insurance was 1999.

These very positive results were largely driven by two factors: a stronger labor market that finally began to lift the living standards of low- and middle-income working families and the diffusion of health coverage because of the Affordable Care Act. In other words, both the economy and public policy were finally pulling for the middle class and the poor. Given the powerful forces of inequality pushing the other way, the results show the extent to which this one-two punch — full employment and progressive policies — can lift the living standards of working families.

Putting the gains in historical context

The first figure below shows real median household income for all households and by race (the break in the series at the end is because of recent changes in Census Bureau survey methodology). Real middle incomes for households grew in the long recoveries of the 1980s and considerably more so in the full employment 1990s. But since then, they’ve been largely stagnant, falling in the Great Recession and the initially weak expansion that followed. The sharp trend reversals in middle-class incomes are clear in the figure.

The next figure shows official poverty rates, pre-recession and 2014-2015. As noted, while minorities have higher poverty levels than whites, their declines in poverty last year were larger. This is a characteristic outcome of tight labor markets, which disproportionately benefit minorities. (Of course, the opposite is true as well, as downturns are particularly damaging to those with fewer resources to fall back on). Note, for example, that the poverty rates of blacks and Hispanics are back to their pre-recession levels.

A big shortcoming of the official poverty measure is that it fails to include the effect of certain anti-poverty policy measures, such as the cash value of nutritional support and refundable tax credits like the Earned Income Tax Credit. These policies have been increasingly effective at lifting working families out of poverty (or nearer to the poverty threshold). Fortunately, the Census Bureau publishes a Supplemental Poverty Measure (SPM) that accounts for these policies. (The SPM also updates the poverty thresholds to be more consistent with basic needs faced by contemporary families).

While the official poverty rate, which, again, fails to reflect many advances in anti-poverty policy, shows little historical progress over time, the more accurate SPM shows that poverty rates are down by almost half since the 1960s (from about 26 percent to about 14 percent), a fact that belies that oft-heard conservative mantra that “we fought a War on Poverty and poverty won.” Neither did poverty “lose;” i.e., it is still much too high, especially considering the long-term damage that economic deprivation wreaks on children. But we will never effectively benchmark the effectiveness of interventions if we depend on metrics that ignore them.

The figure below shows how effective anti-poverty measures were in offsetting the Great Recession, as both automatic stabilizers, such as Unemployment Insurance and the Supplemental Nutrition Assistance Program, and discretionary spending (as in the Recovery Act) ramped up to meet the need of households hit by the deep downturn (note that such assistance is left out of the official measure). Compared with the increase you see in the official rate (above figure), the SPM went up very little and fell significantly last year.

What changed in 2015 to reverse the negative trends in income and poverty? One factor is the tightening of the job market, which led to growth in jobs and wages, and not just for those at the top of the scale but also for middle- and lower-income households, as well.

Unemployment fell about a point in 2015, to 5.3 percent on average for the year. That’s not yet full employment, but, in tandem with very low inflation — because of falling energy prices, inflation was close to zero last year — it was enough to boost the bargaining clout of working households such that they finally started to see some growth show up in their paychecks.

Labor-market data from other sources show that real hourly pay, for example, of blue-collar manufacturing workers and non-managers in services rose 2 percent in real terms last year, compared with less than 1 percent the year before. Minimum wage increases also helped to boost low wages (and continue to do so; see Table 1 here). Employers added 2.9 million jobs to their payrolls last year, the strongest year for job growth since 1999. This combination of added jobs and rising real wages helped fuel the results in the data released today.

The figure below, using data from Tuesday’s report, shows the real annual median earnings of men and women who work full-time, full-year jobs, i.e., workers who are solidly connected to the labor market. Their pay rose 1.5 percent for men and 2.7 percent for women last year, as the number with jobs grew by 2.4 million. Typically, when we observe labor markets that are both adding jobs and raising pay, it signals an increase in labor demand. Moreover, this increase in reaching lower down into the wage scale suggests that tight labor markets are giving middle-wage workers more of the bargaining clout they need to claim more of the growth they’re helping to produce.

But the other trend that’s clear in this figure is the long-term stagnation of men’s earnings (and remember, these guys work full time, full year). Yes, the median worker got a nice bump last year, but the median man’s earnings haven’t budged much since the 1970s, even though productivity has doubled since then.

Finally, the improvement in health coverage is unquestionably a function of the Affordable Care Act, reflecting both the expansion of Medicaid into 32 states (including the District) and subsidized premiums for the majority in state health care exchanges. The Census Bureau data showed that the share of Americans without coverage fell more than a percentage point last year, from 10.4 percent to 9.1 percent. These data also show improvements in health coverage in every state (and the District) since 2013.

However, because of changes in their survey methods, longer term comparisons are not valid in Census Bureau coverage. But an alternative survey run by the Centers for Disease Control and Prevention shows that since the enactment of health reform in 2010, “the number of uninsured Americans has fallen by 20 million, according to this survey, with the uninsured rate declining from 16 percent to 9.1 percent.”

It takes the one-two punch of tight labor markets and public policies to push back on inequality.

In the age of economic inequality, gross domestic product growth alone can’t be counted on to lift the living standards of the poor or the middle class. The latest results show that it took until year six of the current expansion, which began in mid-2009, for growth to reach low- and middle-income families who, according to this annual Census Bureau survey of households, made little progress in recent years. Still, while the indicators in Tuesday’s report are strongly positive along many important lines, poverty remains higher, and middle-class incomes have only recovered to where they were before the bursting housing bubble threw the U.S. economy into deep recession in late 2007.

Climbing out of a hole is unquestionably progress, but we must do better. Ideally, the living standards of families across the income scale should grow with the overall economy, making steady progress along with the expansion, not stagnation, followed by a great year. Also, as I stressed above, unusually low inflation was a very favorable factor in these data. Price growth is already higher than it was last year, and while I expect that positive trends shown above have continued in 2016, I also suspect they’re somewhat dampened.

That said, a great year is a great year, and it has been a long time coming for many of these households.

In 2015, the combination of a strengthening labor market and public policies targeted at poor and middle-class families proved to be a powerful one-two punch. These two forces helped to offset the wedge of inequality that has long channeled much of the growth in market-based wages and incomes to those at the top of the income scale.

But one year does not a new trend make; neither does it make up for years of stagnation of real median incomes of many working families. If we are to make a lasting difference in the living standards of poor and middle-class families, policymakers must build on the successes seen in this latest report. That means getting to and staying at full employment, expanding health coverage through the Affordable Care Act, and making sure the safety net continues to catch and lift those who lack the resources and opportunities they need to realize their economic potential.