Persistence of Poverty Perplexing

Education and Training Offer Possible Solutions

Despite a half century of strong economic growth and a variety of programs designed to reduce poverty, nearly 37 million Americans - more than 12 percent of the U.S. population - live below the poverty line. Why is poverty so entrenched, and what can be done to address it? According to Understanding the Persistence of Poverty, the feature essay in the Federal Reserve Bank of Cleveland's 2006 Annual Report, programs that encourage the production of human capital through education and training may be the most fruitful approach to fighting the battle against poverty.

The causes of income inequality are complex and not entirely understood. One theory is that during periods of rapid technological change, like the Industrial Revolution or perhaps today's Information Age, workers who acquire the appropriate skills can take advantage of new technologies and increase their wages, while unskilled workers cannot. Increasing inequality is thus a natural outcome of fundamental changes in the supply of, and demand for, labor. A logical way for workers to combat these labor-market forces and increase their incomes is to acquire additional education and skills.

The report notes that poverty rates for counties located within the Fourth Federal Reserve District are strongly related to the education level of the residents: Places where people lack a high school diploma have much higher poverty rates. (The Fourth District includes Ohio, eastern Kentucky, western Pennsylvania, and the northern panhandle of West Virginia.)

Boosting education levels will likely require a broad range of policies and consideration of new strategies, says the report, which highlights some recent research related to education. One study, for example, shows that early childcare and education programs appear to provide substantial benefits for disadvantaged children.

Additional findings from Understanding the Persistence of Poverty:

The feature essay in the Federal Reserve Bank of Cleveland's annual report reviews the persistence of poverty in the U.S. and suggests some reasons why the economy's rising tide has failed to lift all boats. The report also explains how a variety of antipoverty programs impact the official poverty rate and discusses how the composition of poverty has changed. For example, the report notes that:

• Welfare payments are not large enough to move family incomes above the poverty line.
• Noncash benefits - such as food stamps, Medicaid, or housing assistance - are not counted in the official poverty definition. Adjusting for noncash benefits and taxes paid reduces the poverty rate by about 2 to 3 percentage points.
• Social Security, while not structured to be an antipoverty program, is associated with a precipitous decline in poverty rates among the elderly.
• Rising poverty among children has offset the decline in poverty among the elderly. In 2005, 17.6 percent of children in the U.S. belonged to poor families.
• Poverty rates have declined substantially in rural areas.
• Poverty rates are highest in central cities, where they have changed little since 1959.

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell, doug.campbell@clev.frb.org, 513.455.4479