Poverty Traps and Income Gaps

Benny Goodman, a professor at Cornell University’s Department of Economics and a Research Affiliate at Opportunity Insights, was a recent guest lecturer at the David Eccles School of Business’s Marriner S. Eccles Institute for Economics and Quantitative Analysis, where he presented data about trends in economic mobility throughout the United States.

Goodman’s work focuses on labor and public economics, with a special emphasis on uncovering race- and class-based economic disparities.

The title of the paper he co-authored — “Changing Opportunity: Growing Class Gaps and Shrinking Race Gaps in Economic Mobility” — proved a straightforward synopsis of his presentation.

An Opportunity Insights study used tax data to analyze changes in outcomes for 57 million children born between 1978-1992. Researchers then measured those children’s incomes in adulthood at age 27.

Upon showing a map of the U.S. color-coded to denote large swaths of areas that he described as “poverty traps across generations,” the professor revealed the inspiration behind the research.

“Motivating this effort is the notion that the goal is, in some sense, to change economic opportunity,” Goodman explained. “Maybe there’s something we can do to reverse these trends.”

Indeed, even the positive findings from the data didn’t come without some concerns and some asterisks.

For example, income gaps between white people and Black people went from about $13K among the 1978 cohort to about $9.5K in the ’92 cohort — a decrease of 27%.

Great news, right?

Well, there are a few significant caveats.

“[Comparing those born in 1978 to those born in ’92], what we see is there’s actually been a really broad-based deterioration of economic mobility for white Americans born to low-income parents,” said Goodman.

In examining changes in income at age 27 between 1978 and 1992 cohorts, Goodman and his fellow researchers found that while Black children of low-income parents were seeing about $1.4K in growth, white children of low-income parents born in ’92 were making about $2K less than those born in ’78 did.

“These are fairly substantial changes relative to the typical amount folks earn at this age,” said Goodman. “We’re talking about 5 or 10% increases or decreases in household income, which is a sizable change over a relatively short period.”

Another big caveat: While seeing upward economic mobility for Black people is clearly encouraging, their household incomes still lag far behind.

In comparing household income percentile at age 27 for children with parents at 25th percentile, the data showed that Black people make about
$18.8K on the low end, $21.2K in the midrange, and $25.6K on the high end. Conversely, for white people, it’s $30.8K on the low end, $33.7K in the midrange, and $40.9K on the high end. The high end for Black people is more than $5K less than the low end for white people.

“Despite the broad improvement in outcomes for lower-income Black kids and the worsening outcomes for lower-income white kids, there’s still very large racial disparities in economic mobility in the U.S,” said Goodman. “… The parts of the U.S. that offer the very best opportunities for Black children born to lower-income parents still have lower outcomes on average than the places that have the very worst opportunities for lower-income white children.”

The professor was still generally encouraged by the overall trend of the diminishing racial gap, though: “The fact that it’s changed by [almost] 30% in [about] 15 years gives us some sense that it is possible for the landscape of opportunity to change in a relatively short period.”

While there has been progress made in the racial disparity, there has been regression in class disparity.

Goodman and his fellow researchers found that the class gap grew by 27% between the ’78 and ’92 cohorts. Black children of high-income parents were making about $1.2K more, while white children of high-income parents also saw an increase of about $770.

One positive sidenote to the overall data is that “persistence of poverty across generations has changed substantially,” Goodman said.

In looking at the percentage of children with parents in bottom fifth of household income who remain in the bottom fifth as adults, the researchers found that for those born in 1978, it was 24.9% for white people and 39.6% for Black people — a difference of 14.7%. Meanwhile, for those born in 1992, the numbers became 29.7% for white people and 33.8% for Black people, a difference of 4.1%.

Goodman concluded his presentation with a suggestion of placing more emphasis on proactive policies rather than reactive ones as a means of generating additional progress.

“It’s important to support the next generation of kids in communities that have been hit by economic shocks or economic displacement,” he said. “Traditionally there’s a focus in these communities on things like trade adjustment assistance, or job training, or unemployment insurance, and so on, and what these data show is that it might be equally important in these environments to focus on the next generation as well so that these shocks don’t wind up persisting across generations.”