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News from EPI Raising Wages is the Missing Ingredient in the Fight against Poverty

Broad-based wage growth could make a significant dent in the poverty rate, according to Broad-Based Wage Growth is a Key Tool in the Fight against Poverty, a new EPI study from senior economist Elise Gould and research assistants Alyssa Davis and Will Kimball. Despite the fact that wages and work-related income represent more than two-thirds of the total income of the bottom fifth of non-elderly American households, wage growth is often overlooked as a tool to fight poverty. Gould, Davis, and Kimball demonstrate how significant reductions in poverty could have occurred if wages for all workers had grown alongside either average wages or productivity since 1979.

“The period of economic growth between 1959 and 1973 saw significant reductions in poverty. The poverty rate would be essentially zero by today had poverty reduction and growth remained as tightly correlated as they were then,” said Gould. “Unfortunately, growing income inequality, which is rooted in growing wage inequality, has severed the link between poverty reduction and overall economic growth.”

The report uses various simulations to determine the effect of broad-based wage growth on poverty rates. If all workers’ wages had grown at the same rate as average wages since 1979, 4.5 million fewer people would be poor, including 1.7 million children. If all wages had grown at the same rate as productivity since 1979, these reductions would be even larger—7.1 million fewer people would be poor, including 2.7 million children. The largest impact broad-based wage growth would have on the poverty rate would occur if the economy were closer to full employment—combined with wages increasing alongside productivity growth, full employment would bring 11.2 million people out of poverty, including 4.4 million children.

“Contrary to what some policymakers think, poor people do work and would benefit from higher wages,” said Gould. “Without wage gains, the tax-and-transfer system needs to work harder every year simply to keep poverty rates from increasing. To fight poverty, we need a policy agenda that includes raising wages.”

The authors suggest a number of policy solutions to boost wage-growth and reduce poverty rates, including provisions to raise the minimum wage, strengthen overtime protections, eliminate wage theft, and strengthen workers’ collective bargaining rights.

This paper is part of EPI’s Raising America’s Pay project, a multiyear research and public education initiative to make wage growth an urgent national policy priority. Raising America’s Pay seeks to explain wage and benefit patterns—and the role of labor market policies and practices in suppressing pay—and identify policies that will generate broad-based wage growth.