The Relationship Between Macroeconomic Performance and Poverty – Is This Time Different?

Abstract

Macroeconomic performance has long been seen as an indicator of the well being of a country’s poorer citizens, as GDP growth leads to higher incomes, and thus fewer people in poverty. However, after the lengthy economic expansion of the 1960s and early 70’s, the relationship between macroeconomic performance and poverty became greatly weakened during the 1980’s due to adverse labor market conditions and rising wage inequality. While macroeconomic performance and reduced unemployment regained their antipoverty effectiveness after the recession in the early 1990’s, the most recent “Great Recession” has brought the question of macroeconomic performance as an antipoverty measure back to the forefront of the current economic debate. The question “Is this time different?” has often been asked of the Great Recession, and this paper seeks to answer whether the underlying structural changes in the economy have indeed created a different or changed relationship between the macro economy and poverty. By looking at consumption based poverty as our dependent variable, and various economic indicators (unemployment, inflation, fiscal policy) this paper proposes to model the effects of macroeconomic performance on poverty rates in the United States using vector auto regressions to examine the interaction between these dependent variables and their overall effects on poverty. These results, compared with the response of poverty to economic conditions in previous recessions, will shed light on the question of whether or not this time truly is different.