Figure 2 presents the trends in poverty, unemployment rates and real median wages from 1967–2003.3 The figure documents a strong cyclical component in the poverty rate—with relatively higher poverty rates in high unemployment periods such as 1971, 1975, 1983 and 1993.
However, the rise in poverty that is associated with increasing unemployment rates is lower during the early 1970s than in the 1980s and 1990s.
Periods of falling poverty rates also correspond to periods during which median wages are increasing (like 1967–1973, 1983–1986, 1996–1999).
Figure 3 presents trends in the poverty rate and inequality.
Our measure of inequality is the ratio of the median wage to the wage at the 20th percentile.4 This measurerecognizesthatinequalityatthelowendofthedistributioniswhatmattersfor poverty, while acknowledging that increases in inequality are not exclusively driven by wage declines at the bottom.
The patterns here are less striking, but it appears that periods of falling inequality (like 1987–1990, 1991–1996) are also periods of falling poverty.
We will argue that the virtually continuous increase in wage inequality below the median is an important explanation for the upward drift in poverty rates, which