Stevens (2012) - Poverty Transitions - Oxford Handbooks

Poverty Transitions
Oxford Handbooks Online

Poverty Transitions
Ann Huff Stevens
The Oxford Handbook of the Economics of Poverty
Edited by Philip N. Jefferson
Print Publication Date: Nov 2012

Subject: Economics and Finance, Health, Education, and Welfare, International Economics
Online Publication Date: Dec 2012 DOI: 10.1093/oxfordhb/9780195393781.013.0016
Abstract and Keywords
This article examines factors that determine transitions into and out of poverty using
household data from the Panel Study of Income Dynamics. Two key factors drive poverty
transitions: changes in household structure and changes in labor market attachment at
the individual or household level. For children, women, and men, a change in the
household head is the single biggest factor in initiating or ending poverty spells. On
average, poverty spells are longer for blacks, for those who are less educated, and for
those who live in female-headed households. Poverty re-entry rates for these groups are
also higher. The number of weeks worked annually by the household head is an important
determinant of poverty exit, entry, and re-entry probabilities.
Keywords: poor, household structure, labor market, employment, household head
1. Introduction
Studies of transitions into and out of poverty provide a link from individual behaviors and
constraints to aggregate poverty rates. Understanding the causes and timing of
transitions into and out of poverty are crucial in refining distinctions between short-term
poverty, which may reflect transitional life-cycle stages or short-term employment shocks,
and longer-term poverty, which may be associated with more permanent limitations on
earnings potential, human capital, and family structure. This chapter discusses common
issues that arise in estimating poverty transition models, and it uses data from the United
States to estimate such a model, focusing on the role of aggregate and individual-level
labor market factors.
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Poverty Transitions
As a country’s poverty rate rises, it must be the result either of more individuals falling
below the poverty line or of fewer individuals finding ways to move above the poverty
line. To think about causes of poverty, it is essential to bring in longitudinal data on
poverty transitions. By documenting the changes that occur around the time an individual
moves from nonpoor to poor (or the reverse) we can understand, at a minimum, the
proximate cause of that individual’s poverty status. Although changes in observable
characteristics and circumstances coincident with poverty entry may not identify the
deep causes of poverty, they provide clues to the processes that alter the overall poverty
level in a population. If, for example, most poverty spells begin with no change in family
structure but with a change in hours of work, this would suggest a major role for labor
market constraints and choices as an underlying cause of poverty.
Poverty transitions also provide an appealing framework for measuring the

(p. 495)
persistence of poverty from an individual perspective. Motivated both by a desire to more

fully describe the individual experience of poverty (how long do individuals remain poor?)
and by a desire to understand the underlying causes of poverty (is poverty due to short-
term disruptions in employment or to longer-term detachment from the labor market?),
models of poverty transition can provide a rich description of poverty persistence.
Alternative ways of measuring poverty duration, including direct observation of poverty
status in longitudinal data or income-components models that isolate the permanent
components of low-income individuals, have certain drawbacks. Multivariate transition
models allow for a clear way to relate individual, family, and environmental
characteristics not just to the level of poverty, but to its persistence.
The chapter is organized as follows. An overview of the poverty transitions literature is

presented in Section 2. In Section 3, econometric and empirical issues that arise in
poverty transition models are discussed. Poverty transition models are estimated in
Section 4. Section 5 concludes and contains suggestions for future research.
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2. Previous Studies of Poverty Transitions

The focus on poverty transitions as a window into the duration and causes of poverty goes
back to work by Bane and Ellwood (1986) in the United States. Bane and Ellwood pointed
out the advantages of estimating transitions out of poverty for measuring the duration of
spells. Specifically, they point out that this method easily accommodates the right-
censoring of spells in progress and that it allows for clear delineation of stock versus flow
measures of poverty. A key insight of their work was that, while most individuals who
begin a poverty spell will end that spell relatively quickly, most individuals observed to be
poor at a point in time will be in the midst of a very long poverty spell. A drawback of
focusing on single spells of poverty is that, if multiple spells of poverty are common for
individuals, focusing on a single spell does not give an accurate impression of total time
spent in poverty. In previous work (Stevens 1999) I show that, while it is true that more
than half of all spells of poverty end after only a single year, most of these endings are far
from permanent. In the United States, from 1969 to 1988, more than half of individuals
ending a spell of poverty had returned to poverty within four years (Stevens 1999). In
Britain between 1991 and 1996, Jenkins (2000) notes that around 20 percent of those
ending poverty spells return to poverty within four years. These studies emphasize the
importance of going beyond single-spell measures of poverty duration. This is done by
estimating probabilities for entry (or at least re-entry) into poverty along with exits from
poverty. While the estimation of re-entry rates into poverty is now fairly common, there
remain many examples of a focus on single-spell (p. 496) measures of poverty duration.
Cellini and colleagues (2008), in their review of the findings on poverty persistence in the
United States, note that
a more optimistic picture emerges from our second research question: how
persistent is poverty? The literature in this area suggests that most people who
begin a poverty spell end it quickly, with around 50 percent experiencing poverty
spells of just one year and around 75 percent experiencing spells less than four
years.
This “optimism” remains, however, only if the re-entry rates, which are substantial in the
United States, are ignored.
The literature on poverty transitions is now fairly extensive, and several good summaries
of both empirical findings and methodological issues are worth noting. Jenkins (2000)
reviews a broad range of methodological issues that arise in models of income (and
poverty) dynamics, focusing on transition models but also discussing alternative models
of income processes over time. He includes empirical estimates of poverty transition
rates for Britain from 1991 to 1996. Similarly, for the United States, Cellini and
colleagues (2008) review the methodological choices and key empirical findings of
poverty transition models based on US data.
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Models of poverty transitions have been estimated for many other countries as well.
Bradbury, Jenkins, and Micklewright (2001) review poverty dynamics in several
industrialized countries, with a focus on poverty dynamics experienced by children.
Duncan and colleagues (1993) present broadly comparable poverty transition rates for
eight countries in Europe and North America.
While a detailed review of the empirical findings on the determinants of poverty

transitions is beyond the scope of this chapter, some key themes have emerged from
studies of transitions in the United States and Britain. These themes suggest which
methodological issues and empirical investigations may be most important in the future.
The findings of empirical poverty transition models in the United States and elsewhere
have focused on the impact of demographic events or changes in household structure
among those at risk of poverty transitions and changes in labor market conditions,
constraints, and choices. Both Cellini et al. (2008), reviewing the literature based on US
data, and Jenkins (2000), looking at estimates for Britain, point to demographic events, in
particular marriage and divorce, as central factors leading to transitions into and out of
poverty. Jenkins (2000) notes that demographic events seem particularly important for
poverty entry in Britain. This focus on events that begin or end spells also raises issues
concerning what controls should be included in multivariate hazard models. If events—
such as marriage—are included in the model used to predict poverty entry, then it may
not be possible (or desirable) to simultaneously estimate the effects of time-varying
indicators for demographic characteristics. At a minimum, the interpretation of
demographic variables in a model that also conditions on demographic events requires
caution. Jenkins (2000) has a useful discussion of these issues relating to model
specification, given the importance of demographic events. In addition to discrete events,
in the United States a small set of demographic characteristics—race, (p. 497) family
structure, and education—has very large effects on poverty transitions and persistence.
Labor market variables are also important and have been included in transition models in
various ways. Several papers note that changes in the earnings of the household head are
one of the primary factors associated with the beginning and ending of poverty spells. In
the analysis of US data below, I update and extend our knowledge of labor market factors
in driving transitions in and out of poverty in the United States.
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3. Econometric and Empirical Issues in Poverty

Transition Models
Before moving to the details of estimating poverty transition models, an initial choice to
be made in this literature involves the definition of poverty itself. While many papers on
poverty rates have explored the effects of altering the nature and level of the poverty
thresholds, using absolute versus relative thresholds, and altering the income definition
(such as pre- versus post-tax income or inclusion of in-kind benefits as income), these
issues have often been ignored in studies of poverty transitions. In the United States,
there has been much discussion of problems with the official poverty measure, much of it
triggered by a 1995 report by the National Research Council (Citro and Michael 1995).
These problems include its exclusion of in-kind benefits, focus on pretax income, and
invariance to local cost-of-living differences. Hoynes and colleagues (2006) briefly review
these issues and note that these issues largely affect the level of poverty, but they do not
appear to have major effects on trends in poverty rates. For poverty transitions, a similar
question is raised—does adjustment of the poverty threshold, income definition, or needs
measure affect the probability that an individual moves from below to above the poverty
line in a given year? Relatively little attention has been paid to these alternative
definitions of poverty in the poverty transitions literature in comparison to the literature
on poverty rates.
Much of the expansion of research on poverty dynamics around the world can be traced
to the availability of longitudinal data with a reasonably long panel dimension. Certainly,
poverty transitions can be estimated with only a few years of data. To allow for the
richness possible with multivariate hazard techniques, however, panel data covering
something close to a decade or longer are required. The need for fairly long panels is
largely related to the central role that spell duration plays in predicting transitions across
the poverty line. A typical poverty transition model aims to estimate
One of the main terms of interest in X is the duration of the current spell in (or
(p. 498)
out of) poverty, largely because duration predicts transition rates. In Britain during the
1990s, for example, Jenkins (2000) estimates that the probability of exiting a poverty spell
after one year poor is 0.47, but this falls to 0.22 after three years. This setting generally
leads researchers to estimate multivariate discrete time-hazard functions, including a
flexible baseline hazard to allow for duration dependence in the transition rates. For
example, a typical approach in this literature estimates the hazard for ending a poverty
spell after d years poor, conditional on having remained poor for d years.
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An alternative to the hazard framework with duration dependence is a Markov model for
transitions, as in Cappellari and Jenkins (2002). In the Markov model, in contrast to other
hazard models, spell duration is not included as a predictor of transitions. The Markov
model focuses instead on poverty status conditional on the previous year’s poverty status.
Differences in the probability of poverty by poverty status in the previous year (and
conditional on observable covariates) are interpreted in this framework as state
dependence. In practice, the separate identification of state dependence and duration
dependence is difficult, and so the Markov and other hazard approaches may not differ
dramatically in their implications for poverty duration. If the goal is to accurately predict
the degree of persistence of poverty in a population or subpopulation, there is likely to be
predictive information in the duration of the spell, and so the hazard approach may be
preferred. There does not appear to be a direct comparison in the poverty dynamics
literature of whether a Markov or hazard-rate model can better capture actual patterns of
poverty persistence. Markov models may be especially useful when only short data panels
are available so that many spells will not be observed from their beginning.
Given the typical use of duration as a predictor of poverty transitions, a common

econometric challenge is the need to incorporate left-censored spells of poverty (or
nonpoverty) in the estimation. If individuals are poor in the first year in which they are
observed in the data, it seems natural to include them in the “at-risk” pool for exits from
poverty. Unfortunately, the fact that this is the first year of data means that these spells
are left-censored and we will typically not know their current duration. As originally
noted by Heckman and Singer (1984), failure to include left-censored spells, in the
presence of any unobserved heterogeneity that is correlated with spell duration, will
result in biased estimates of transition rates. Because researchers often wish to condition
on duration, it is tempting to use only those spells of poverty for which the initial year is
observed (sometimes referred to as “fresh spells”). This approach will lead to bias
because it will disproportionately eliminate relatively long spells (longer spells are more
likely to be sampled at any single point in time).
As a practical matter, the difficulty with including left-censored spells in a model of

transitions is that we do not observe their true duration. A simple solution to this is to
include such spells but to count their duration as unknown. Other features of the left-
censored spells (such as “events” associated with the spells’ (p. 499) beginning) may also
be unobserved. This means that the left-censored spells can contribute to the estimation
of the effects of other characteristics on poverty transitions, but any predictions based on
duration of the spell will face the problem of how to use the spells of unknown duration
(or unknown beginning events). A related approach is suggested by Iceland (1997), who
includes left-censored spells but redefines the duration as “observed duration.” This
means that the duration of the left-censored spells is mismeasured and will always
understate the true duration (because true duration is duration since the observed start
of the sample plus the duration as of the sample start time). This does include the left-
censored spells in the estimation and so should avoid the full bias from sampling only
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Poverty Transitions
fresh spells, but observed duration of completed spells will still be understated, leading to
a shorter expected duration than the true duration.
More formal methods for dealing with left-censoring also exist but have not been used in
the literature on poverty dynamics. Moffit and Rendall (1995) present an analysis of
spells of female headship in which they account for left-censoring by specifying
econometric models for an initial entry into headship, exit from female headship, and
then re-entry into headship. These models can be used to predict, based on observable
characteristics, the likelihood of observing a spell of headship of any given duration in
progress in the initial year of the sample. The predicted probabilities of each possible
sequence of headship state that would lead to a spell in progress in the initial year can
similarly be derived and incorporated into a likelihood function. A related approach is
used by Capellari and Jenkins (2002) in their Markov model of poverty transitions. Here,
the left-censoring issue is not that duration is unobserved but rather that the sample of
individuals poor in the initial sample year is a nonrandom combination of those poor and
nonpoor in the previous years. Capellari and Jenkins (2002) address this issue by
specifying a model for the initial conditions—the probability of being poor or not in the
initial year. The separate identification of the initial state and the transition probabilities
requires that some observable characteristics affect the initial condition (the chance an
individual is poor in the first year) but do not affect the probability of a transition out of
poverty in the next year.
Finally, in Stevens (1999), I take a less formal approach and include left-censored spells
of poverty by imposing a restriction on the shape of the hazard function with respect to
duration and dropping a number of early years of data. For example, if the effect of
duration on poverty exits is constant beyond some number of years, then imposing this
restriction permits the inclusion of left-censored spells. In Stevens (1999), the estimation
with left-censored spells is based on the years 1973 through 1988, despite having data
from 1968 through 1988. By 1973, all left-censored spells still in progress last for at least
six years, and duration is specified as constant for all spells of six years or longer. I use
this approach in my estimates below, and I present some evidence on the sensitivity of
duration estimates to inclusion of left-censored spells.
Most researchers model the hazard as a standard discrete-time hazard, using either a
proportional hazard specification or an approximation, such as a logit (p. 500) functional
form, for the hazard.1 Devicienti (2002) estimates poverty transitions for Britain by using
the proportional hazard model of Prentice and Gloeckler (1978), in which the hazard for
transitions occurring in discrete intervals is derived from the underlying continuous time
hazard. These two approaches are unlikely to differ significantly. Because poverty is
defined over a discrete interval (usually a year or a month), discrete time hazards seem
natural in this application. Another approach for the form of the hazards is to estimate
Kaplan-Meier empirical hazards in which the probability of an exit at any duration is
simply computed as the ratio of spells of duration d that end to the total number of spells
in progress (and so at risk of ending) at time d. It is common to start with this approach
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Poverty Transitions
and then move to a specification that allows for time-varying covariates that shift the
baseline hazard.
Another modeling issue that has not been very thoroughly studied with respect to poverty
durations is the issue of how multiple spells for a given individual are linked together.
One of the key findings in the poverty transitions literature is that poverty spells are
likely to recur. Transition models that aim to draw conclusions about the persistence of
poverty may need to consider allowing for linkages across spells (in and out of poverty for
a given individual or family). Relatively few papers have directly linked spells of poverty
with subsequent spells out of poverty (or with subsequent spells back in). One way in
which this has been done is to model unobserved heterogeneity in poverty transitions as
an individual random effect. The importance of modeling unobserved heterogeneity in
hazard models was largely developed in the literature on unemployment spells. (See, for
example, Meyer 1990.) Empirical estimation of transitions into and out of poverty may
similarly include a term representing unobserved time-invariant differences across
individuals. Because these heterogeneity terms are typically modeled as correlated
random effects, they are likely to have little impact on the coefficient estimates for the
observable factors that affect transition rates. The exceptions to this statement, however,
are the duration terms. As Meyer (1990) shows for unemployment spells, the primary
effect of controlling for unobserved heterogeneity in this way is to alter the shape of the
estimated baseline hazard. The combination of unobserved heterogeneity and the
resulting duration terms will capture changes in transition rates over the course of a spell
that would be captured by duration terms alone in the model without heterogeneity. If the
purpose of the model is to describe or predict poverty persistence, and not to distinguish
structural from apparent duration dependence, the inclusion of the random effects will
have little practical consequence. In most poverty applications, the baseline hazard is
quite flexible with respect to duration (and often given the data available and time
interval over which poverty is defined, duration can take only a limited number of values)
and this flexibility is likely to be more important than inclusion of correlated random
effects.
It is possible that unobserved heterogeneity could play a role in predicting the total time
in poverty across multiple spells in and out of poverty. If, for example, those with very
long spells of poverty are more likely to return quickly to poverty, (p. 501) allowing for
correlation across spells via an unobserved “type” might change our predictions about
the fraction of a population who spend many years poor. In practice, however, there is
little evidence that modeling unobserved heterogeneity in poverty transition rates plays a
substantial role in predicting the distribution of years poor. In Stevens (1999), for
example, I show that estimates of total time spent in poverty do not differ substantially
based on three approaches to modeling correlation across spells: assuming independence
across an individual’s spells, including a discrete distribution of unobserved
heterogeneity that introduces a fixed “type” across spells, and including terms for the
duration of the previous spell in poverty in the hazard for returning to poverty (and the
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Poverty Transitions
reverse). A more systematic investigation of whether and when systematically linking

transition rates across spells would be a valuable addition to the poverty transitions
literature.
4. Poverty Transitions in the United States:

1968–2003
4.1. Description of the PSID Data
I next turn to estimates of poverty transitions, implications for poverty durations in the
United States, and factors affecting these transition rates, with a particular focus on
labor market conditions. To do this, I use data from the Panel Study of Income Dynamics
(PSID). The PSID has often been used to estimate poverty transition rates for the United
States, along with the Survey of Income and Program Participation (SIPP). The PSID is, in
many ways, well suited to an analysis of poverty durations. First, it has now been ongoing
for more than 35 years, since 1968. Second, it provides a source for studying poverty
transitions over the life course and even across generations because it follows an initial
cohort of sample families and their children into their own families. Third, the PSID
collects a rich set of data on income and its components as well as detailed information
on demographic events affecting the households.
While the length and extensive coverage of the PSID survey makes it useful for research
on poverty dynamics, it also suffers from some serious disadvantages. First, there have
been important changes in the later years of the PSID that make it difficult to use the
entire span for a study of poverty dynamics. In particular, beginning in 1997, the PSID
moved from having interviews every year to having interviews every other year. Given
this, it may be difficult to utilize the later years (1997 through 2005) in a broader study of
poverty transitions. The PSID has attempted to collect family income information during
the “off-years”—the period of two years prior to the current survey, starting in 1997. The
difficulty is that these off-year income measures from the PSID are not strictly
comparable with other (p. 502) year income measures. Both the method for collecting the
data and the recall period for respondents differ. Andreski and colleagues (2008) note
that “the t-2 income from the 1997–2007 data waves is to be used with caution and is not
to be combined naively with income reports from t-1.” In work below, I make use of these
data to extend my poverty measures through 2003, but I interpret any year-specific
estimates or terms beyond 1997 with caution.
A second important disadvantage of the PSID for poverty-related research questions is its
failure to include immigrants since 1968 in the sampling frame for most of the survey. In
particular, this makes it impossible to use the PSID to say anything about poverty
transitions among the US Hispanic population, or about the overall population, including
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recent immigrants (and not-so-recent immigrants in the later years). An “immigrant

refresher sample” was added to the PSID in 1997, but it is difficult to use these data for a
study that was based on the earlier years also. Both of these changes suggest that future
research might best view the PSID as two samples—one running from 1968 to 1997, and
another, biennial longitudinal sample going from 1997 forward.
My sample for this analysis includes all PSID families and respondents who are
associated with an original 1968 family. This includes both original sample members as
well as members of those households who subsequently “split off” from the original
family and formed their own households. Not included in the analysis are individuals who
later married into PSID households (“nonsample” individuals in the PSID’s terms) and the
immigrant sample added in 1997. Another important change to the PSID is that the low-
income oversample portion of the study was dramatically reduced in size in 1997. While
weights in those years reflect this change in the nonrandom sampling design, this means
that many spells of poverty are right-censored in 1997 when the individuals affected are
dropped from the survey.
My measure of poverty based on the PSID family income measures follows the
suggestions of the PSID staff for a poverty threshold that allows the PSID data to most
closely track the trend in the official Census Bureau poverty rates. Specifically, the
poverty thresholds are set at the same level as the official Census Bureau thresholds; this
will lead to lower rates of poverty in the PSID data because the PSID tends to produce
higher income estimates than do Census data collections. (See Lane and Morgan 1975;
Grieger et al. 2008.) The threshold used here differs slightly from the official Census
Bureau poverty thresholds by its lack of adjustment for the age and gender of family
members in calculating the needs component of the poverty threshold.2 The poverty
threshold for a family of four in 2003, in current dollars, was $19,307. Poverty thresholds
vary by calendar year and family size. Grieger and colleagues (2008) show that poverty
rates in the PSID based on their recommended measure are always below official poverty
rate statistics (due to higher income levels in the PSID), but that the trend in the PSID
series tracks the official Census Bureau series well. I have similarly calculated poverty
rates for each year based on my sample by using their definitions, and I come up with a
pattern very similar to that shown in Grieger’s research (Grieger et al. 2008).
(p. 503) 4.2. Spells
Before turning to estimates of the transition probabilities in and out of poverty, I look at
completed spells of poverty and the distribution of duration of these completed spells.
This also allows for an example of the importance of including left-censored spells in the
estimates, as discussed above. The duration of spells in and out of poverty in the PSID
data from the United States is summarized in Table 15.1. The top panel shows, for two
sample periods (1968–2003 and 1975–2003) and two samples of spells (fresh spells, or
those not left-censored, and all spells, including those left-censored), the distribution of
years and duration of completed spells in and out of poverty. The first column in the top
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Poverty Transitions
portion of the table gives the distribution of the duration of completed poverty spells (the
duration at the time of transition out of poverty) when I use only fresh spells, based on
the full panel data available from 1968 to 2003. In the (p. 504) third column, I include all
left-censored spells and I re-define duration to be “time in poverty since first observed.”
In this specification, true duration will always be at least as large as measured duration
because we know these individuals have been poor for at least d years when they exit.
Despite this systematic understatement of duration, including the left-censored spells in
this way shifts the distribution of completed spell lengths slightly to the right. This is an
indication of the potential bias (or selection on spell length) that occurs if left-censored
spells are ignored.
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Table 15.1 Distribution of Completed Duration In and Out of Poverty: Alternative Samples and Handling of Left-Censored Spells
Completed Spells of Poverty
(1) (2) (3) (4)
Fresh Spells (Not Left-censored) All Spells
1968–2003 1975–2003 1968–2003 1975–2003
Completed duration (years)
1 62.8 60.8 60.8 60.2
2 17.0 17.3 17.2 17.1
3 7.4 7.8 7.9 7.6
4 4.0 4.2 4.4 4.2
5 2.5 2.8 2.7 2.7
6 1.6 1.8 1.8 1.8
7 or more 4.7 5.4 5.2 6.4
Completed Spells Out of Poverty
Page 12 of 34
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Poverty Transitions
Fresh Spells (Not Left-censored) All Spells
1968–2003 1975–2003 1968–2003 1975–2003
Completed duration (years)
1 39.2 36.5 29.0 26.5
2 15.7 15.3 13.5 11.9
3 10.3 10.3 9.1 8.0
4 7.2 7.4 6.6 6.0
5 5.9 6.1 5.2 4.7
6 3.3 3.7 3.7 3.1
7 or more 18.5 20.6 32.9 39.8
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Note that the extent of bias from omitting left-censored spells will, in practice, be related
to the length of the panel data that are being used. For very long panels, with many years
over which to observe entry into new spells, the fraction of all spells that are left-
censored will be relatively small, and so the bias from omitting them will be smaller as
well. If, for example, I artificially stop my samples in 1984, the difference in average
duration between fresh- and left-censored spells grows substantially. Thus, the length of
the panel data to be used for estimation may have important implications in practice for
the severity of the bias from omitting left-censored spells in or out of poverty.3
My approach to the issue of left-censoring here is to use only data from 1975 on in my
estimation of poverty exit and entry rates. The reason for this is that, by 1975, I know, for
all spells in and out of poverty, whether they have been in progress for at least seven
years, or their exact duration if the duration is less than seven. This means that I can
include all spells in the analysis from 1975 on, as long as I restrict the effect of duration
to be constant beyond seven years. Thus, columns 2 and 4 of Table 15.1 show completed
spell lengths using data from 1975 through 2003. The earlier years of the panel (1968–
1974) are used only to learn something about the duration of spells in progress as of
1975. The hazard for exiting poverty based on all spells is approximately half a
percentage point lower at a duration of one year compared to the sample without left-
censored spells, and approximately a percentage point higher at seven or more years’
duration. In what follows, I used the 1975–2003 sample and include all spells—left-
censored and not—but restrict the exit and entry rates to be constant at spell durations
greater than seven years.
The bottom half of Table 15.1 repeats this exercise for spells out of poverty. Given that
most households in the initial year (or any year) are not poor, the potential bias from
omitting left-censored spells out of poverty is far more severe. Focusing on the fraction of
all spells out of poverty lasting seven or more years, the first two columns, which omit
left-censored spells out of poverty, suggest that 18 to 21 percent of spells out of poverty
last more than six years. In contrast, when all spells, including left-censored ones, are
counted (columns 3 and 4), the comparable figures are 33 (an underestimate due to
consistently understating duration in these counts) to 40 percent.
4.3. Transitions
Another type of analysis of poverty transitions involves the examination of well-defined

events associated with transitions into and out of poverty. An advantage of thinking about
poverty spells or transitions is that we can focus on the observable (p. 505) events
associated with these transitions across the poverty line. Bane and Ellwood initially
emphasized the importance of events in their analysis of poverty entry and exit. They
showed that, for the United States, from 1969 to 1983, most poverty spells began and
ended around the time of demographic or family structure changes. Tabulation of the
frequency of discrete events that occur around the time of poverty transitions may be
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informative as to the types of factors that will predict transition in a multivariate

framework.
For the sample described above, based on all spells from 1975 through 2003, Table 15.2
tabulates the events associated with poverty entry. While there are many sensible, and
not mutually exclusive, ways in which such events could be defined, this analysis
considers major changes in family structure first, and then considers the change in
income components among those transitions observed without an accompanying family
structure change. Among all spells for which I observe the initial year (excluding left-
censored spells) I first calculate the fraction associated with a change in the head of the
household (generally associated with marriage or divorce) within two years of the
beginning of the spell. For example, many women and children begin a spell in poverty
when parents divorce and this is classified as a change in the head of household.
Similarly, there is a change in the head of household when a child leaves his parents’
home and becomes his own head of household. In Table 15.2, I show the fraction of spells
with any change in the head as well as the subset of these that involve changes in the
head generated by marriages and divorces. Next, among those spells with no change in
the household (p. 506) head, I consider whether a child has been born into poverty.
Finally, among those spells beginning with no change in the household head or birth, I
look at whether husbands’ and wives’ earnings have changed in the required direction to
drive the transition across the poverty line (earnings drops for poverty entry; earnings
increases for poverty exit). The remaining spells begin with other changes in the size of
the household (and the associated change in the needs component of the income-to-needs
ratio) or with changes in components of income other than heads’ and wives’ earnings.
Table 15.2 Events Beginning and Ending Poverty Spells
Children Women Men
Fraction of Poverty Spells Beginning with
New Head of Household 0.26 0.27 0.21
Male Head Left* 0.19 0.22 0.02
Born into Poor Household 0.18 0 0
Head’s Earnings Fall 0.19 0.19 0.24
Wife’s Earnings Fall 0.05 0.04 0.07
Other Income Falls/Needs Rise 0.32 0.5 0.48
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Fraction of Poverty Spells Ending with
New Head of Household 0.22 0.24 0.17
Male Head Joins Household* 0.14 0.13 0.04
Head’s Earnings Rise 0.21 0.13 0.15
Wife’s Earnings Rise 0.08 0.04 0.08
Other Income Rises/Needs Fall 0.49 0.59 0.60
(*) Male heads leaving/joining are a subset of all changes in household head
The top panel of Table 15.2 shows that family structure changes continue to be strongly
associated with poverty transitions. The fraction of spells starting within two years of a
change of the household head is between 21 and 27 percent, looking across men, women,
and children in the PSID sample. More than a quarter of spells of poverty experienced by
children coincide with a change in the household head. For women and children, these
usually involve the departure of the male household head. Of the 26 percent of children’s
poverty spells starting with a change in the head of household, most of these (19 percent
of all spells) begin with the departure of a male head. An additional 18 percent of poverty
spells experienced by children come about because they are born into poor families. The
importance of these demographic events does not imply, however, that fluctuations in
earnings are not important predictors of poverty transitions. Among male and female
adults, 19 to 24 percent of poverty transitions involve no change in the head of
household, but they do involve a reduction in the head’s earnings, and 4 to 7 percent
involve a change in the wife’s earnings. The remaining spells of poverty (one-third of
spells among children and half of spells among adults) do not begin with changes in the
head of household or a decline in earnings of the head or wife, but involve either
decreases in other income or an increase in household needs. Between 9 and 14 percent
of adult poverty transitions (not shown separately in Table 15.2) involve no reduction in
income (including earnings) but instead are precipitated by an increase in the needs
standard, generally reflecting an increase in the size of the family unit.
A similar analysis for exits from poverty is shown in the lower half of Table 15.2.
Demographic events are also important for escaping poverty, with 17 to 24 percent of
spells of poverty ending around the time of a change in the household head. An increase
in the head’s earnings accounts for 13 to 21 percent of exits from poverty.
I next present estimates of exit and entry probabilities at each potential spell duration.
For these, I move to a logit discrete time hazard and a framework that can incorporate a
variety of controls for time, geography, demographics, and labor market conditions.
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Specifically, the probability that a spell of poverty experienced by person i in year t ends
at duration d is given by the following hazard function:
where Yidt = αd+βXit and α is a vector of dummies for duration of the spell,
(p. 507)
running from 1 to 7 or more. I estimate the probability of entering poverty in the same
way, conditional on years out of poverty and other observables. In the basic specifications
of both transition rates, I also include dummy variables for the calendar year and for the
Census division (nine sets of states) in which the individual resides (to facilitate later use
of labor market indicators measured at the division and year levels).
The first column of Table 15.3 shows the overall sample average, where only duration
terms are included in the logit. The probability of ending a spell of poverty is more than
0.5 in the initial year of poverty, but falls to 0.2 or less after being observed poor for five
consecutive years. After seven or more years, the probability of a transition out of poverty
is 0.13. This confirms previous work noting that most individuals who become poor will
remain poor for only a few years. Nearly three-quarters of individuals end a poverty spell
within two years. I also show the average length of a completed spell in poverty,
calculated from the given exit rates. Measured over the entire sample, an average spell of
poverty will last 2.77 years.
As noted previously, however, most exits from poverty are not long-lasting. To understand
the persistence of poverty, the probability of returning to poverty must be considered.
The lower half of Table 15.3 shows the probability of entering poverty, also conditioned on
duration out of poverty. After one year out of poverty, 18 percent of individuals return to
poverty, and another 10 percent return after two years. These re-entry probabilities can
be summarized with measures of the cumulative probability of returning to poverty.
Based on these measures, the row below the distribution of spell lengths out of poverty
shows the fraction of individuals ending poverty spells who have returned within four
years. For the overall sample, more than one-third of those ending a single spell will
return to poverty over the next few years.
The remaining columns of Table 15.3 show how transitions out of and into poverty vary
according to the race, educational level, and sex of the household head. As a baseline,
column 2 reports predicted transition probabilities and duration summary measures for
an individual living in a household headed by a white male with a high school education.
The subsequent columns vary one characteristic at a time and show the resulting
probabilities. Race plays a significant role; having a black household head increases the
expected duration of a stay in poverty by more than 50 percent from 1.7 to 2.7 years.
Once a spell of poverty has ended, those living in a household headed by a black male
face higher rates of re-entry. Almost half of these individuals will return to poverty within
four years of ending a stay in poverty. Education of the household head also has very
large effects. Moving from a head with a high school education to one without lengthens
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time spent in poverty to a similar extent as changing the race of the head of household.
Finally, the greater poverty persistence for individuals in households headed by a single
female is shown in the final column. Those living with a single female head of household
(p. 508) have a completed spell length in poverty of 3.1 years, and half of these
individuals will return to poverty within four years of an exit.
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Table 15.3 Entry and Exit Hazard Rates by Duration and Demographic Characteristics
Poverty Exit Hazard Rates
Duration in Sample Average Baseline Case* Black Head Less Than Female Head
Poverty (Years) High School
1 0.56 0.65 0.56 0.55 0.52
2 0.39 0.51 0.41 0.41 0.37
3 0.29 0.41 0.32 0.31 0.29
4 0.23 0.35 0.26 0.26 0.23
5 0.20 0.32 0.24 0.24 0.21
6 0.18 0.29 0.21 0.21 0.19
7 or more 0.13 0.25 0.18 0.18 0.16
Mean completed 2.77 1.72 2.68 2.57 3.14

spell length
Poverty Entry Hazard Rates
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Duration Not in Sample Average Baseline Case* Black Head Less Than Female Head
Poverty (Years) High School
1 0.18 0.13 0.22 0.21 0.24
2 0.10 0.07 0.13 0.13 0.14
3 0.08 0.06 0.11 0.10 0.11
4 0.06 0.05 0.09 0.09 0.10
5 0.05 0.04 0.08 0.08 0.09
6 0.04 0.03 0.06 0.06 0.07
7 or more 0.02 0.02 0.03 0.03 0.04
% Returning 36% 28% 46% 44% 50%

within 4 years**
(*) Baseline case is white male household head, with high school education.
(**) Calculated as one minus the survival rate out of poverty after four years; survival rates calculated from duration-specific hazard
rates shown in the table.
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Poverty Transitions
4.4. Labor Market Factors
Moving beyond the effects of individual characteristics on transitions in and out of

poverty, I next consider labor market conditions at the aggregate level along with labor
market characteristics and outcomes at the individual level. The relationship between
overall poverty rates and the general economic environment has frequently been studied.
(See, for example, Blank and Card, 1993.) More recently, Hoynes and colleagues (2006)
explore the relationship between poverty rates and (p. 509) the macroeconomic
conditions within Census divisions in the United States. Work on poverty transitions has
sometimes considered the role of the broader economic environment as well. Stevens
(1994) considers both cycle and trend patterns in the year-specific effects on poverty
entry and exit. More focus in the poverty transitions literature has been on relating
individual-specific measures of labor market activity and/or success on transition
probabilities. McKernan and Ratcliffe (2005) consider individual employment indicators
and show some changes in the role of individual employment indicators in generating
poverty transitions between the early and later 1990s.
While work on poverty transitions has often focused on individual and family
characteristics, labor market conditions are also likely to affect mobility across the
poverty line. To summarize the role of labor market conditions on the probabilities of
exiting and entering poverty, I follow earlier work by Hoynes and colleagues and use the
variation over time and across areas of the United States. In particular, I use data on
unemployment and the wage distribution, calculated from the Current Population Surveys
from 1975 through 2003 at the level of the Census divisions (which divide the United
States into nine geographic areas) as a measure of local economic conditions. As in the
earlier work, I make use of the data at the division level, rather than the state level,
because consistent unemployment rates are not available for all states prior to 1977. The
hazard models for poverty exit and entry include year and division fixed effects so that
the coefficient of interest on the unemployment and wage measures reflect variation
driven by the health of the overall labor market, but the labor market indicators are more
closely linked to an individual’s current geographic labor market than similar variables
measured at the national level. I focus on two specific measures: the unemployment rate,
and the 20th percentile of the male, full-time weekly wage distribution. The
unemployment rate is a standard measure and is meant to capture the employment
opportunities within an area in a given year. The wage measure is slightly less standard.
Given the large changes in the distribution of real wages in the United States during the
period studied, it seems important to make use of the variation in the price of labor over
time to see how important wage levels are in facilitating transitions out of poverty.
Because real wages changed differentially at the bottom of the distribution, and this is
likely to be the part of the distribution most relevant to poverty movements, I use the
20th percentile of the wage distribution as the relevant summary measure. Finally, the
use of a full-time male wage measure is meant to provide a relatively pure price effect
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Poverty Transitions
(abstracting from part-time work that may reflect a combination of hours and labor
market prices for less-skilled labor). Using the male wage distribution is also intended to
avoid mixing price changes with changes in selection into the labor force that would be
part of the time-series movement in women’s wages over this period.
The top half of Table 15.4 reports coefficients, standard errors, and marginal effects of
the division-wide unemployment rate (defined to be between 0 and 1) and the 20th
percentile of the weekly wage distribution on the probability of exiting poverty. The
marginal effects reported in square brackets are calculated at the (p. 510) sample
averages and the average exit rate for the sample is 0.36.4 The first column shows the
expected effects on poverty exits of both the unemployment rate and the wage level, and
both are statistically significant. A one percentage point increase in the unemployment
rate lowers the probability of ending a poverty spell by 0.8 percentage points, or
approximately 2 percent. This is a relatively small effect in a single year, particularly
relative to the effects of education and race shown in Table 15.3. The real value of wages
near the bottom of the distribution also affects the likelihood of escaping poverty. A $100
increase in the real weekly wage increases the annual probability of escaping poverty by
approximately five percentage points, or around 15 percent.
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Table 15.4 Labor Market Effects on Poverty Exit and Entry Hazards
Exit Probabilities Entry Probabilities Re-entry Probabilities
(1) (2) (3) (4) (5) (6) (7)
Aggregate Labor Market Indicators (Division Level)
Unemployme –3.79 –3.16 –0.605 2.48 2.64 3.85 4.17

nt Rate
(1.57) (1.61) (1.91) (2.64) (2.69) (2.25) (2.25)
[–0.75] [–0.63] [–0.10] [0.09] [0.09] [0.30] [0.31]
20th 0.27 0.31 0.38 0.06 0.03 0.024 –0.09

Percentile
Weekly Wage
($100s)
(.12) (.13) (.10) (.11) (.13) (0.16) (0.17)
[0.054] [0.062] [0.064] [0.002] [0.001] [0.002] [–0.006]
UE –0.022
Rate*20th
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Poverty Transitions
Percentile
Wage
(0.015)
Individual Labor Market Characteristics and Interactions
Heads 0.03 –0.04 –0.03

Annual
Weeks
Worked
(0.002) (0.002) (0.002)
[0.006] [–0.001] [–0.003]
Change in 0.286 1.31 0.67

Household
Head
(0.096) (0.065) (0.038)
[.050] [.044] [.049]
Note: Standard errors, clustered at the division level in parentheses, marginal effects in square brackets.
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The second column of Table 15.4 tests the possibility that there is an interaction effect
between the unemployment rate and the level of wages on exits from poverty. This
possibility is suggested by earlier work on poverty rates that finds a reduction in the role
of the unemployment (or employment) rate on poverty rates after 1980. (See Blank and
Card 1993; Hoynes et al. 2006.) One explanation that (p. 511) has been suggested for this
is that employment or business-cycle measures have differential effects depending on the
level of wages for the affected population. Because real wages at the bottom of the
distribution were falling after 1980, this may explain some of the change in the role of
unemployment rates after 1980. In column 2, I show the results of combining the division-
level unemployment rate with the division-level measure of the 20th percentile of the real
wage distribution. The interaction term is not statistically significant (p-value of 0.13), but
the negative sign is consistent with the idea that higher unemployment decreases the exit
rate from poverty by less when the low-skilled wage is lower. At values of the weekly
wage measure above the sample mean ($413), this combination of the main
unemployment rate term and the interaction implies a negative and statistically
significant marginal effect of the unemployment rate, while at wage values below the
mean there is no statistically significant effect of unemployment on the rate of exit from
poverty.
The likely reason that division-level unemployment rates matter for poverty transitions is
that many of these transitions across the poverty line are associated with changes in the
employment status of the adults in the household. An alternative is to control for
individual employment measures directly. In general, including both individual and
aggregate measures of labor market variables raises concerns about interpretation of
these variables, similar to the discussion of events versus individual demographic
characteristics raised above. In this case, I include both to better understand the direct
mechanisms through which aggregate conditions lead to transitions out of poverty. When
I include the individual labor market variables to the hazard specifications shown in Table
15.4, I also include an indicator for changes in the household head. This is because, first,
if I do not control for changes in the household head, variables summarizing the head’s
annual hours of work would also capture changes in the head. If, for example, a working
male head joins a household previously headed by a nonworking single mother, this
should not be counted as an increase in weeks worked. Second, Hellerstein and Morrill
(2012) and Schaller (2012) show that both marriage and divorce probabilities fall when
unemployment rates are high. Given this correlation between labor markets and family
structure changes, and the fact that a substantial number of poverty spells end when a
female head marries, it is interesting to see whether the labor market controls are robust
to controlling for changes in the household head.
Column 3 of Table 15.4 adds to the exit hazard a control for the number of weeks of work
by the head of household and a dummy variable indicating a change in the head. As
expected, weeks of work has a positive and statistically significant effect on the
probability of leaving poverty. Ten additional weeks of work by the household head
increases the probability of exiting poverty by six percentage points. Further, the
inclusion of just this single indicator for weeks worked by the household head
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Poverty Transitions
dramatically reduces the magnitude of the division unemployment rate coefficient and
moves it out of statistical significance. Thus, while changes in earnings of the wives and
other adults are also correlated with poverty exits, the household head’s weeks of work
alone capture the effect of broader economic conditions. (p. 512) As expected, a change
in the household head significantly raises the probability of exiting poverty. Higher wages
at the bottom of the distribution should increase transitions out of poverty by raising the
return to work but could also increase labor supply and facilitate transitions out of
poverty in that way. When I add controls for the weeks worked by the head of household,
however, the coefficient on the low-skilled wage barely changes, suggesting that very
little of the response of poverty transitions to this wage measure comes from labor supply
adjustment (by the household head). Instead the story is simply that higher wages,
holding constant the weeks of work, increase the probability of an escape from poverty.
The importance of both aggregate wage levels and individual employment may shed light
on changes over time in the role of individual employment on poverty transitions reported
in earlier work (McKernan and Ratcliffe 2005). McKernan and Ratcliffe find that
employment was less important in moving individuals out of poverty during the early
1990s relative to a later period, and this may be explained by the level of real wages
during those years. Nationally, the 20th percentile of the weekly wage distribution
increased from $389 to $424 from 1994 to 2000. This low level of wages for less-skilled
individuals in the United States during the 1990s may partially explain why employment
was less effective in moving individuals out of poverty during the early 1990s.
I have estimated models to explore interactions between the aggregate unemployment

and wage measures with indicators for the sex and race of the household head. The main
difference in the effects of the division-level labor market variables on poverty exits for
female-headed households involves the role of the real wage level. Among those with
single female heads, there is a larger marginal effect of the wage measure on the
probability of exiting a poverty spell. By definition, those living in households with single
female heads do not have a spouse who is a potential second earner. The chances of those
in households with only a single potential earner5 to escape poverty are more closely tied
to wage levels because there is one fewer margin (an additional worker) by which to
increase income.
The second section of Table 15.4 repeats this analysis for the probability of entering
poverty. In contrast to the results for exits, column 4 shows no statistically significant
effect from either the unemployment rate or the wage measure on the probability of
beginning a poverty spell. In column 5, I add individual-specific labor market and family
structure variables, and these have sizeable effects on the probability of entering poverty.
A 10-week increase in the number of weeks worked by the household head reduces the
probability of entering poverty by around one percentage point, or roughly 25 percent.
The departure (or other change) in the head of household also increases the likelihood of
entering poverty dramatically. A change in the household head increases the probability
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Poverty Transitions
of entering poverty in a given year by four percentage points, approximately doubling the
average entry rate of 0.04.
The lack of statistical significance of the aggregate labor market variables on poverty
entry may reflect limited power of using only time-series variation across nine Census
divisions for identification (though the same is true in the exit-rate (p. 513) exercise), and
the standard errors suggest that we cannot rule out reasonably large effects of the
unemployment rate on the probability of entering poverty. Another explanation is that
these entry probabilities reflect the likelihood of entry into poverty for the entire nonpoor
population, many of whom are unlikely to become poor regardless of the state of the
economy. The effects of macroeconomic conditions may be more important when re-entry
rates are estimated, so that the at-risk group includes individuals who have previously
been poor.
Estimates of the probability of re-entering poverty, conditional on having been poor in a

previous year, are shown in the final section of Table 15.4. Beginning with column 6, the
unemployment rate does have a larger, and marginally statistically significant, effect on
entry into poverty among those previously poor than on the unconditional entry
probability. A one percentage point increase in the unemployment rate increases the
probability of returning to poverty by 0.003, or approximately 3 percent, calculated from
the average re-entry rate of 0.09. In contrast, movements in the lower tail of the wage
distribution do not have a statistically significant effect on the rate of re-entry into
poverty.
The final column of Table 15.4 shows results controlling for the individual labor market
and family structure variables in the re-entry hazard. Changes in the head of household
increase the entry rate by 0.05, or more than 50 percent. The number of weeks worked
by the head also has a large effect on the probability of re-entry. An increase of 10 in the
number of weeks worked during the year reduces the probability of returning to poverty
by approximately one-third. In contrast to the exit hazard, the effect of the unemployment
rate on the re-entry hazard remains statistically significant, and it increases slightly in
magnitude when the weeks worked variable is added. When I control more fully for
individual employment (including weeks worked by the spouse and hours per week
worked by both the head and spouse), the unemployment rate coefficient declines slightly
but remains close to statistical significance at a 10 percent level.
The results above point to an important role for movements in the lower tail of the wage
distribution over time in determining individual’s chances of escaping poverty. Given the
dramatic changes in the real wage distribution in the United States over the past 40
years, it is natural to ask how these movements affected transitions out of poverty. To
illustrate the effects of the types of wage changes that occurred in the United States over
the past several decades, Table 15.5 presents the average probability of exiting poverty,
along with predicted probabilities based on counterfactual assumptions about the
patterns of low-skilled wages and individual weeks of work. In the first column, I show
the average exit probabilities calculated for years 1975, 1985, and 1995, calculated from
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Poverty Transitions
the coefficients of a logit model for exits that includes controls for the aggregate and
individual labor market characteristics and for changes in the household head. In column
2 of Table 15.5, I calculate the implied exit rates if the low end of the real wage
distribution had not declined after 1975; column 2 holds constant the real value of the
20th percentile of the weekly wage distribution at its 1975 value but uses actual values of
all other regression controls. Nationally, the measure of the 20th percentile of (p. 514) the
real weekly wage went from $473 in 1975 to $410 in 1985 and to $386 in 1995.6 If the
weekly wage measure had remained at its 1975 values, exit rates from poverty would
have declined in the 1980s but then returned to their 1975 level by 1995, rather than
declining by four percentage points (as shown in column 1). A similar story is obtained if I
hold the wage level constant at its 1995 value.
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Table 15.5 Effects of Wage and Hours Changes on Poverty Transitions
Average Exit Probabilities—All Households
Actual Exit 20th Percentile 20th Percentile 20th Percentile 20th Percentile
Probability Real Wage at Real Wage at Real Wage at Real Wage at
1975 Value 1995 Value 1995 Value and 1995 Value and
Weeks Worked at Weeks Worked at
20 40
(1) (2) (3) (4) (5)
1975 0.38 0.39 0.33 0.32 0.44
1985 0.29 0.33 0.27 0.24 0.35
1995 0.34 0.39 0.34 0.35 0.47
Note: Simulated exit probabilities are based on logit models that result from column 3 of Table 15.4.
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In addition to aggregate wage levels, individual labor supply, proxied above by weeks of
work by the household head, is also an important determinant of transitions out of
poverty. The fourth column of Table 15.5 illustrates the role of individual labor supply by
holding constant both the wage level (at its 1995 value) and the hours worked by the
household head (at 20 weeks per year). Twenty weeks of work is close to the sample
average of weeks worked by the head in 1975 by those at risk for poverty exits. This
exercise shows that, with constant weeks of work and constant wages, poverty exit rates
would have initially declined more sharply to 0.24 in 1985, but then would have risen
slightly to 0.35 in 1995. This suggests that part of the decline in exit rates from 1975 to
1995 shown in the initial column is due to a decline in weeks worked by those currently
poor. Two major labor market and demographic trends in the United States are behind
this pattern. First, weeks worked by male heads of household have declined over time, so
that holding weeks of work constant tends to increase exit rates in the later years.
Second, overall weeks worked by those in poverty has declined slightly over time,
because of the increase in female-headed households among those in poverty from the
1970s to the 1990s. While all of these trends are well documented, this exercise
emphasizes that patterns of poverty transitions may often reflect fairly complex
interactions—in this case a three-way interaction over time between aggregate labor
market conditions, individual labor force attachment (weeks worked in the year), and
changes in family structure. While changes in the PSID after the mid-1990s prevent
similar exit-rate simulations after 1995, additional changes associated with US welfare
reform may further complicate this story in the last decade.
5. Conclusions and Directions for Future

(p. 515)
Research
The development of both practical methods and extensive longitudinal data for estimation
of poverty transition models offer a clear path along which to expand our understanding
of the nature and determinants of poverty. An expanded focus on these models in the
study of poverty can provide important contributions to the literature. Using transition
rates to measure and understand the persistence of poverty is a natural way to link
individual and family characteristics to measures of income or deprivation that go beyond
snapshots. While education, for example, dramatically affects the probability of being
poor in a single year, it has even more dramatic effects on the probability of remaining
poor for many years. In situations or models in which exposure to poverty affects later
outcomes, linking parental characteristics to total time in poverty gives a way to translate
observable characteristics into the extent of exposure to low incomes that are more
relevant for later outcomes than one year of poverty. Estimation of multivariate hazard
rates for entry and exit into poverty can provide this sort of link.
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A related point is that poverty transition rates can be used to generate rich descriptions
of the persistence of poverty. Estimation of transition rates into and out of poverty can be
used to build estimates of time in poverty for individuals and to show how varying
characteristics and circumstances can affect total time being poor over various horizons.
The literature to date has shown the importance of estimating not only exit rates, but also
the rate of re-entry (or entry) into poverty. What has been less uniformly recognized is
that this renders single-spell measures of poverty persistence incomplete. Future work
should incorporate the lessons of the poverty dynamics literature to date, and it should
more routinely incorporate repeated spells into estimates of persistence.
A more ambitious direction for the poverty transition literature is to develop linkages
among studies of poverty rates in a cross-section and the associated flows in and out of
poverty. Empirical work on poverty has not yet developed a formal link between the flows
in and out of poverty and the stock of poor individuals at a point in time. The reasons to
move in this direction come from two other literatures—on welfare and unemployment
spells—that have taken this approach. Study on welfare spells (see Klerman and Haider
2004) for example, shows that models connecting caseloads (stocks) and flows on and off
of welfare allow for a better understanding of the connections between aggregate
economic indicators and caseloads. Similarly, the unemployment literature uses the
decomposition of unemployment into inflows and outflows to more precisely model
movements in the unemployment rate (Elsby, Michaels, and Solon 2009; Shimer 2007).
To the extent that transition models will continue to be used to make statements about
poverty persistence, two technical modeling issues deserve more attention. First, it is
clear that left-censored spells must be included in models of poverty transitions. Given
this, additional work on how best to do this in the (p. 516) poverty transition setting
would be valuable. Second, attention to modeling connections between spells—either
through unobserved heterogeneity or more direct links—and when this can matter for
persistence estimates is important.
Finally, the sensitivity of transition estimates to alternative poverty definitions has been
understudied. Particularly in the face of policy and labor market changes, definitions of
poverty that place different weights on pretax, post-tax, and/or in-kind resources would
be valuable in many countries. In the United States, for example, dramatic expansion of
the use of the earned income-tax credit (EITC) suggests that pre- and post-tax definitions
of income could lead to very different patterns of poverty transitions over time. This is
particularly important given the role of labor market factors in empirical models of
poverty transitions. Changes in the lower part of the wage distribution in the United
States resulted in reduced exit rates from poverty using pretax measures of both earnings
and the poverty line. Weeks of work are also key determinants of both entries and exits
from poverty. Analyses of policies, such as the EITC, that can change the effective return
to working for the poor and near-poor are important directions for future study of US
poverty transitions.
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Income Data.” Panel Study of Income Dynamics Technical Paper Series #08–06.
Bane, Mary Jo, and David T. Ellwood. 1986. “Slipping Into and Out of Poverty: The
Dynamics of Spells.” Journal of Human Resources 21(1): 1–23.
Blank, Rebecca, and David Card. 1993. “Poverty, Income Distribution and Growth: Are
They Related?” Brookings Papers on Economic Activity 2: 285–339.
Bradbury, Bruce, Stephen P. Jenkins, and John Micklewright. 2001. The Dynamics of Child
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discrete-time hazard.
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Poverty Transitions
(2.) Grieger, Schoeni, and Danziger (2008) argue that the set of thresholds they
recommend is both most consistent over time and most consistent with the official
Census Bureau thresholds. The lack of adjustment for age and sex of each household
member has very minor effects on the thresholds. An additional difference between this
measure and earlier poverty thresholds published with the PSID data involves the lack of
adjusting of thresholds for part-year residence in the family unit. Because the official
Census Bureau poverty measures do not adjust for part-year residence, the PSID has now
constructed a comparable measure, which is used here.
(3.) This likely explains why Iceland (1997), also using the PSID for the period 1970 to
1985, shows larger differences than indicated here by whether left-censored spells of
poverty are included or not. In particular, he finds that 50 percent of poverty spells end
within three years if all spells are included, but 56 percent end within three years if left-
censored spells are dropped.
(4.) I do not show marginal effects for the interaction terms but discuss these in the text
where relevant. The unemployment rate, 20th percentile wage, and annual weeks are all
entered as deviations from their means in the models with interaction terms, so that the
main effects give the effect at the mean value of the variable with which it is interacted.
(5.) More specifically, female-headed households have one fewer potential earner,
because they may include other adults of either sex but do not contain a spouse of the
household head.
(6.) Real wages at the 20th percentile then rebound somewhat after 1995. Because of my
concerns about the consistency of the PSID data after 1997, I do not present these
calculations for individual years after that year.
Ann Huff Stevens
Ann Huff Stevens is a professor of economics at the University of California, Davis
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Poverty Transitions

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Print Publication Date: Nov 2012

Abstract and Keywords

Keywords: poor, household structure, labor market, employment, household head

Subscriber: Freie Universitaet Berlin; date: 18 September 2018

Poverty transitions also provide an appealing framework for measuring the

persistence of poverty from an individual perspective. Motivated both by a desire to more

The chapter is organized as follows. An overview of the poverty transitions literature is

Subscriber: Freie Universitaet Berlin; date: 18 September 2018

2. Previous Studies of Poverty Transitions

Subscriber: Freie Universitaet Berlin; date: 18 September 2018

While a detailed review of the empirical findings on the determinants of poverty

Subscriber: Freie Universitaet Berlin; date: 18 September 2018

3. Econometric and Empirical Issues in Poverty

Subscriber: Freie Universitaet Berlin; date: 18 September 2018

Given the typical use of duration as a predictor of poverty transitions, a common

As a practical matter, the difficulty with including left-censored spells in a model of

Subscriber: Freie Universitaet Berlin; date: 18 September 2018

Subscriber: Freie Universitaet Berlin; date: 18 September 2018

Subscriber: Freie Universitaet Berlin; date: 18 September 2018

reverse). A more systematic investigation of whether and when systematically linking

4. Poverty Transitions in the United States:

4.1. Description of the PSID Data

Subscriber: Freie Universitaet Berlin; date: 18 September 2018

recent immigrants (and not-so-recent immigrants in the later years). An “immigrant

(p. 503) 4.2. Spells

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Subscriber: Freie Universitaet Berlin; date: 18 September 2018

Completed Spells of Poverty

(1) (2) (3) (4)

Fresh Spells (Not Left-censored) All Spells

1968–2003 1975–2003 1968–2003 1975–2003

Completed duration (years)

1 62.8 60.8 60.8 60.2

2 17.0 17.3 17.2 17.1

3 7.4 7.8 7.9 7.6

4 4.0 4.2 4.4 4.2

5 2.5 2.8 2.7 2.7

6 1.6 1.8 1.8 1.8

7 or more 4.7 5.4 5.2 6.4

Completed Spells Out of Poverty

Subscriber: Freie Universitaet Berlin; date: 18 September 2018

Fresh Spells (Not Left-censored) All Spells

1968–2003 1975–2003 1968–2003 1975–2003

Completed duration (years)

1 39.2 36.5 29.0 26.5

2 15.7 15.3 13.5 11.9

3 10.3 10.3 9.1 8.0

4 7.2 7.4 6.6 6.0

5 5.9 6.1 5.2 4.7

6 3.3 3.7 3.7 3.1

7 or more 18.5 20.6 32.9 39.8

Subscriber: Freie Universitaet Berlin; date: 18 September 2018

Another type of analysis of poverty transitions involves the examination of well-defined

Subscriber: Freie Universitaet Berlin; date: 18 September 2018

informative as to the types of factors that will predict transition in a multivariate

Table 15.2 Events Beginning and Ending Poverty Spells

Children Women Men

Fraction of Poverty Spells Beginning with

New Head of Household 0.26 0.27 0.21

Male Head Left* 0.19 0.22 0.02

Born into Poor Household 0.18 0 0

Head’s Earnings Fall 0.19 0.19 0.24