November 15,1994 eCONOMIC GOMMeNTORY Federal Reserve Bank of Cleveland Understanding Differences in Regional Poverty Rates by Elizabeth T. Powers and Max Dupuy Ahe U.S. poverty rate is among the Poverty is the product of a multitude of most widely used indicators of the factors, including market conditions, The official U.S. poverty rate, often nation's economic success—and of how demographic characteristics, and fiscal cited as a measure of our nation's that success is shared. However, the policy. Its accurate measurement is com- economic strength, hides a huge varia- national rate masks tremendous variation plicated by interregional differences in tion across regions. Here, the authors in the regional numbers. In 1992, for the cost of living and the quality of life, examine the reasons for this disparity, example, the official poverty rate ranged among other factors. focusing on differences in demographic, from a low of 8.3 percent in New Eng- economic, policy, and cost-of-living land to a high of almost 16 percent in the A common feature of all these determi- factors across the nine U.S. census East South Central states. nants is their great variation across divisions. Results show that although regions. The burdens of recession are all of these elements have some influ- If we accept the poverty rate as a legiti- generally distributed unevenly over the ence on the poverty gap, economic mate yardstick of national achievement, country, as illustrated by the disparate factors are key. then policymakers have several reasons experiences of the West and Midwest to be concerned about this disparity. during the last downturn. Demographic First, interregional equity is a legitimate types that are overrepresented among the In this Economic Commentary, we policy concern in and of itself, analogous poor, such as female-headed households, employ a simple method (see box) to to concerns about how income is distrib- are more prominent in some areas than attribute poverty differences across the uted among individuals. In fact, inter- in others. State fiscal policies, which are nine standard census regions to demo- regional poverty differentials may be presumably uncoordinated, are an obvi- graphic, economic, policy, and cost-of- another dimension along which the well- ous source of interregional poverty vari- living factors.1 Our results show that being of the nation is judged—a premise ation. Federal fiscal policy also plays a economic factors are the primary source that casts doubt on the desirability of role through both intended and unin- of the disparity, with weak economies having means-tested cash transfers (com- tended interregional transfers. Finally, accounting for a large share of the above- monly termed "welfare") determined by the official poverty level is not adjusted average poverty rates seen across the the states. Second, even if equalization for regional cost-of-living differences, United States. Surprisingly, government of poverty across regions is not a policy which may contribute to large and per- fiscal policy, although poverty-reducing goal, understanding the marked and per- sistent disparities in measured rates. on an absolute basis in every region, is sistent differences in the regional statistics Recent legislative interest has made it less effective in areas with weak econ- can shed light on the factors contributing particularly important to understand how omies. Our findings also show that to poverty. And finally, it is important to such adjustments might change percep- demographic patterns play an important determine whether interregional dispari- tions of the poverty picture, since the role. Interestingly, a crude cost-of-living ties truly reflect meaningful differences flow of federal dollars to the states would correction would result in a very different in well-being. be affected by changes in the measured poverty picture, implying a major change distribution of poverty. in the flow of funds from the federal government to state coffers. DECOMPOSING REGIONAL POVERTY DIFFERENCES account for a significant portion of the Our method for decomposing differences in regional poverty rates can best be illus- total value of transfers, particularly for 4 trated by working through a comparison of the East North Central (ENC) region and low-income families. Consequently, we the United States. First, families are sorted into three classifications: female-headed count as income the value of some nor- 5 households with children, two-parent families with children, and other family units. mally excluded in-kind benefits. Data from the March Current Population Survey are used to compute the fraction of each type of household in poverty in both the ENC states and the United States as a This more complete measure does not whole. To compare the difference in poverty rates attributable to demographic charac- change the basic picture of interregional teristics peculiar to the ENC, we compute the total poverty rate using U.S. family- poverty. Table 1 presents the official specific rates, but apply the ENC proportions of the three types. Comparing this rate family poverty rate for the nine census with the actual U.S. poverty rate reveals whether poverty in the ENC is above or below regions in column 1 and our measure in average due to the special demographic characteristics of the region. Dividing this column 2. Official rates range from a difference by the U.S. poverty rate yields the entry of 3.25 percent for the ENC low of 8.3 percent of families in New demographic factor in table 2. Policy effects are derived similarly. England to more than 15 percent in the South Central divisions. As has histori- cally been the case, the South has the TABLE 1 FAMILY POVERTY RATES AND highest poverty rates by far. The North- RANKINGS, 1992 east has the lowest overall rate, thanks to Official After Taxes, Transfers, Adjusted for the influence of New England. Poverty Region Rate and Some In-Kind Benefits Cost of Living rates in the West have been rising Northeast steadily and now surpass those of the New England 8.30 (9) 7.73(9) 9.16(8) Midwest. The difference between the Mid-Atlantic 10.80 (5) 10.29 (5) 11.70(3) rates in columns 1 and 2 is due entirely Midwest to tax and in-kind transfer policy. Note East North Central 10.27 (7) 9.68 (7) 9.58(6) that all of the adjusted rates are lower, West North Central 10.12(8) 9.09 (8) 7.92 (9) indicating that the effect of in-kind trans- fers dominates, but that the poverty South ranking of the divisions remains South Atlantic 12.18(3) 11.36(3) 10.08 (5) unchanged. Unless otherwise stated, the East South Central 15.81(1) 14.87(1) 12.56(2) term "poverty rate" will refer to this tax- West South Central 15.36(2) 14.20 (2) 11.43(4) and transfer-adjusted measure. West Mountain 10.36 (6) 9.85 (6) 9.31 (7) • Decomposing Poverty Pacific 11.50(4) 11.02(4) 12.85(1) Differences: An Overview United States 11.68 10.97 10.72 The first step toward understanding NOTE: Regional rankings are in parentheses. regional poverty differentials is to SOURCE: Authors' calculations based on data from the March 1993 Current Population Survey. decompose them into their demographic, policy, and economic components. We compare regional poverty to the national • Measuring Poverty rate is determined by computing the rate for income reported in 1992, the 6 In the late 1950s, the federal government fraction of all families whose pre-tax latest year for which data are available. developed poverty thresholds based on cash income falls below their family- One advantage of using 1992 data is that cash income. At that time, data revealed appropriate levels.2 it was a fairly typical year—neither a that the average American family devoted peak nor trough of the business cycle (at about one-third of its budget to food. Since the development of the original least not nationally), and free from any Thus, a subsistence food budget was poverty statistic, there have been two major fiscal policy changes that would multiplied by three to yield a subsistence important policy changes that might dramatically affect the level or distribu- income, or poverty line. The poverty line affect the measurement of poverty. First, tion of poverty rates. Table 2 compares varies by family size, composition, and the tax burden on low-income families each division's family poverty rate to the ageof householder. Larger families are has increased since the late 1950s, when national average and, implicitly, to each assigned higher poverty thresholds, while it was about zero.3 Thus, we calculate our other, based on regional characteristics. older families face lower ones. With poverty measure based on after-tax and (The divisions are listed from least to minor modifications, these guidelines cash transfer income. Second, "in-kind" greatest poverty for convenience.) The have been in use since 1961 and are transfer programs (primarily Medicare, first column is the percent deviation of updated yearly using the Commerce Medicaid, food stamps, and housing the region's rate from the nation's. A Department's Consumer Price Index for subsidies) that did not exist in 1961 now negative number indicates that the all items. The official family poverty regional rate lies below the national TABLE 2 PERCENT DEVIATION OF POVERTY RATE FROM NATIONAL AVERAGE BY FACTORS, 1992a Demographic Government Economic Region Total Conditions Policy Conditions'1 New England -29.50 -6.50 -9.76 -13.25 West North Central -17.14 -4.47 -5.86 -6.81 East North Central -11.75 3.25 -6.41 -8.59 Mountain » -10.21 -1.85 1.14 -9.50 Mid-Atlantic -6.20 -1.69 0.22 -4.74 Pacific 0.44 0.51 1.45 -1.52 South Atlantic 3.60 0.24 1.24 2.12 West South Central 29.44 0.27 6.89 22.28' East South Central 35.61 4.55 3.72 27.34 a.