The Dynamics of Poverty Spells: Updating Bane and Ellwood
Author(s): Ann Huff Stevens
Source: The American Economic Review, Vol. 84, No. 2, Papers and Proceedings of theHundred and Sixth Annual Meeting of the American Economic Association, (May, 1994), pp.
34-37
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/2117797
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PERSISTENCEIN POVERTYANDWELFAREt

The Dynamics of PovertySpells: Updating Bane and Ellwood
By ANN HUFF STEVENS*
Policymakersinterested in poverty are
frequentlyconcernedwith the lengthof time
individualsspend below the poverty line.
Discussionsof the "underclass"and of dependency on public assistance often makedistinctions between the short- and longterm poor. Mary Jo Bane and David
Ellwood (1986) first used a spell-based
approachto study the dynamicsand duration of poverty in the United States between 1970 and 1981. This paper extends
their analysisthrough 1987. In addition, it
examines changes over time in exit rates
from povertyand exploresthe frequencyof
multiplespells of poverty.1

PSID, thought to be the result of morethorough reporting of income than in theCurrentPopulationSurvey.FollowingBaneand Ellwood, I exclude persons poor in theinitial year of the surveyfrom much of theanalysis, since the length of poverty spells
alreadyin progressat the startof the survey
is unknown.
Povertyspells begin duringthe first year
total household money income falls below
the poverty cutoff, and end when income
rises above the povertyline. Because somemovementsacross the povertyline may be
due to small, random changes in income,Bane and Ellwood eliminated one-year
spells into and out of povertythat resulted
from income changes of less than half theneeds standard.I have not made this adjustment since selection of a cutoff point forsmall income changesis somewhatarbitrary
and because I separatelyexamine repeatedspells of poverty.Exit probabilitiesare calculated over all spells with observedbeginnings. Spells in progress at the time anindividualleft the sample are included in
the calculationsin all prioryears.
I next adapt this frameworkto look forchanges in the probability of escaping
povertyover time. First, I estimate hazard
rates for ending povertyspells using a logit
specification, including series of dummy
variablesfor the durationof the spell andfor the calendar year in which the spell iscurrentlyobserved.2This is expressedas

I. DataandMethodology
The data and basic methodology usedhere follow closely those used by Bane andEllwood (1986). The data come from the1968-1988 waves of the Panel Study of Income Dynamics(PSID). Persons are classified as poor in any year in which theirhousehold'smoney income is less than 1.25
times the official Census Bureau poverty
line. This use of 1.25 times the povertyline
is meant to account for the consistently
lower rates of poverty estimated from thetDiscussants: James Walker, University of Wisconsin; Maria Hanratty, Princeton University; BruceMeyer, Northwestern University; John Fitzgerald,
Bowdoin College.
*Department of Economics and Population Studies
Center, University of Michigan, Ann Arbor, MI 48109.
Thanks to Gary Solon, Marianne Page, David Jaeger,
Charles Fleischman, and participants in the labor seminar at the University of Michigan for helpful comments. Financial support from an NICHD training
grant is gratefully acknowledged.
1While the results here are in terms of exit rates,
these exit rates can be used to estimate distributions ofspell durations, as shown in Bane and Ellwood (1986).

(dtexp(ad + f3t)
1+ exp(ad l+ 3

2Because the PSID oversampleslow-incomehouseholds, all estimates are weighted by the inverse samplingprobabilities.Standard-error
estimatesreflecttheuse of weightsand the sample designof the survey.
34

VOL. 84 NO. 2

where Pdt is the exit probabilityin year t
for an individualwith currentspell durationd. The estimates of f3 represent yearspecificeffects on povertyexit rates that arelikely to varywith business-cycleconditions.
To distinguishmacroeconomiceffects fromtrends, the estimated year effects can be
decomposedas(2)

P=t 30 +35

PERSISTENCE IN POVERTYAND WELFARE

It + 82Ct + etwhere Ct is a business-cycleindicator. In
estimating equation (2) below, I use thepercentage change in real gross national
product as the cycle indicator.Taking thederivativeof equation (2) with respect tothe cycle and trend terms, and using thechain rule, the marginaleffects on exit rates
of business-cycleconditions and the trend
are equal to the coefficientsfrom equation(2) multipliedby Pd t(l -Pdt)'
II. Exit Rates fromPovertySpells

I begin by replicating the Bane andEllwood(1986) resultson exit rates by spell
duration, pooling all years from 1970
through 1987. Eliminating some one-year
spells into and out of povertyas Bane andEllwooddid, the estimatedexit probabilities
are almost identical to those Bane andEllwood reported for 1970-1981. Without
this adjustment,the estimatedprobabilityof
escapingpovertyis 0.53 duringthe firstyearof a spell; this probabilityfalls to 0.36 in thesecond year, and to 0.2 or less after five
years in poverty.These exit rates also vary
substantially across demographic groups.
Exit rates for persons living in households
headed by white males are highest, while
those for households headed by black females are much lower, ranging from only
0.4 in the initial year of a spell to less than
0.2 after four or more years in poverty.
I next look at year-to-yearvariation inexit rates by estimatingequation(1). These
results show relatively large differences in
the likelihoodof escapingpovertyfromyear
to year. For one-year spells of poverty,theestimatedexit rates vary from a low of 0.44
in 1980, to a high of 0.65 in 1973.(Both exit
rates have an estimated standard error of

TABLE 1-DECOMPOSITIONOF YEAR EFFECTS(1970-1987)ON POVERTY EXIT RATES

Category
All spells
Trend
Cycle
White males
Trend
Cycle
Black males
Trend
Cycle
White females
Trend
Cycle
Black females
Trend
Cycle

CoefficientStandarderror- 0.023
0.066(0.007)(0.015)- 0.0150.105(0.010)(0.021)- 0.0150.039(0.017)(0.034)- 0.0380.047(0.012)(0.025)- 0.034
0.030(0.014)(0.028)

2

0.64
0.64
0.12
0.45
0.31

Note: Categories refer to race and gender of household head at the start of the poverty spell.

0.04.) Variationin exit rates seems to correspond to economicconditions.In the recession years of 1975 and 1982, for example,
the exit rates were 0.47 and 0.45, while in1984 the exit rate was 0.58.
To summarizethe effects of business cycles and trends on exit rates, results fromordinaryleast-squares(OLS) estimation ofequation (2) are shown in Table 1.3 The
estimation of equation (1), on which theseresults are based, included controlsfor ageof the person, and race and gender ofhouseholdhead, in additionto the year andduration effects, to control for potentialchanges in the compositionof the poverty
populationover time. These resultsindicate
a negative trend in exit rates from poverty,
holding constant the growth rate of GNP.
The estimatedtrend term implies an annual
decreasein the probabilityof exitingpovertyof - 0.006, evaluated at p = 0.5, or of- 0.004 evaluated at a probabilityof 0.2,
more appropriatefor longer spells. Evaluated at a probabilityof 0.5, a 1-percent

3Standarddiagnostictests for serial correlationand
heteroscedasticityin the estimation of equation (2)confirmthat OLS estimationis appropriatehere.

36

AEA PAPERS AND PROCEEDINGS

increasein real GNP increasesthe probability of ending a povertyspell by 0.017.
One concern with the above approachisthat it assumes a proportionalshift in thehazard function across all spell durations
over time. It is possible that short and longpoverty spells might respond differentlyto
both secular and cyclicalinfluences.To test
this hypothesis, interaction terms between
calendaryears and durationswere added tothe estimationof equation (1), and the resulting year effects for spells of a given
duration were decomposed according toequation (2). The trend effect is slightly
larger in absolute value for longer spells,
but there were no statistically significant
differencesin the trend or cycle coefficientsfor short versus long spells.
Variation over time in mobility out ofpovertyfor differentdemographicgroupsis
next explored,and the results are shown in
the last four sections of Table 1. The trend
in exits is not statistically significant forhouseholdsheaded by blackor white males.
Households headed by white females experiencedthe largestdecreasein mobilityfrom
povertyover this period, and those headedby black females show a similar pattern.
Among personslivingin householdsheaded
by females, the likelihood of ending apoverty spell has decreased by approximately one percentage point per year overthis period. Some differences across racial
groups appear in the relationshipbetween
exit rates and economicgrowth.The growthrate of real GNP does not have a significant
impacton mobilityout of povertyfor households headed by blacks. Similarly,Rebecca
Blank (1991) finds that the responsivenessof the poverty rate among blacks to economic growthduringthe 1970's and 1980's
is much lower than the responsivenessof
the white povertyrate.
Given the decreased mobility among female-headed households, exits from thesepovertyspells were exploredfurther.Inclusion of controls for age of the household
head and for the ages and numberof children did not alter the basic result. Following Bane and Ellwood (1986), I examinedthe events associatedwith startingand ending these povertyspells. This could be im-MAY 1994

TABLE 2-SURVIVALPROBABILITIES FORNONPOVERTY SPELLS, PERSONS PREVIOUSLY POOR,

1970-1987
Length oftime above
poverty line
1 year
2 years
3 years
4 years
5 years
6 years
7 years
8 years
9 years
10 years

Probabilityof returning
to poverty

Survival rate
above thepoverty line

0.269
0.159
0.108
0.089
0.080
0.073
0.059
0.042
0.049
0.041

0.732
0.616
0.549
0.501
0.461
0.427
0.402
0.385
0.366
0.351

portantsince differencesin the events leading into poverty(e.g., changes in the headof household) were shown by Bane andEllwood to be related to different average
durations. There were only very smallchanges over time in the distributionsof
beginning and ending events amongfemale-headed households, however. The
decreased mobility out of poverty is noteasily explained by changes in personal
characteristics of female-headed households, or by differencesin the events leading into or out of poverty.
III. MultipleSpells

One shortcomingof focusing on single
spells is that it ignores the tendency for
persons to experiencerepeated episodes ofpoverty.One way to assess the importanceof repeated spells of povertyis to examine
the duration of subsequent nonpoverty
spells. In the same manner as for spells ofpoverty,exit rateswere calculatedusingonly
noncensored observations. Table 2 showsthese estimates of the likelihood of returning to povertyby time elapsed since the endof the last povertyspell. After one year outof poverty, 27 percent of those previously
poor have started a new poverty spell. Of
those that survive nonpoor for a secondyear, 16 percent will fall back into poverty
duringthe next year. The second columnofTable 2 reports the fraction of persons remaining nonpoor for a given number ofVOL. 84 NO. 2PERSISTENCE IN POVER7TYANDWELFARE

years. Of persons escaping poverty, morethan half of them will return to poverty
within five years.
Repeated spells of poverty are particularly common for those who have recently
ended long povertyspells. For those exiting
shortpovertyspells, abouthalf remainabove
the poverty line for five or more years.
Among persons escaping poverty after fiveor more years poor, fewer than one-third
remain above the povertyline for the next
five years.
Finally,to examine temporalvariationin
the probabilityof reenteringpoverty,calendar-yeartermswere includedin the estimation of these probabilities,and these year
effects were used to estimate equation (2).
The resultsindicatedno overalltrend in theprobabilityof reenteringpoverty.However,when separate year effects were estimatedby race and gender of the householdhead,
the results for white females showed a significantupwardtrend. This effect was estimated at 0.034 (SE = 0.016) and indicates
an annual increase in the probabilityof
returningto povertyof approximately0.006(evaluatedat a probabilityof 0.25) for persons in households that were headed bywhite females.
IV. Conclusion
Given concern over the persistence ofpoverty,changesin the length of time spent37

below the povertyline can be viewed as animportantmeasureof changesin the extentof poverty.I find that mobilityout of poverty
spells, conditional on business-cycleconditions, decreased over the period from 1970
through 1987. This decline in mobilitywas
concentratedamong female-headedhouseholds and has occurredfor povertyspells of
all lengths.
Additionally,I find that exits from individual spells of povertyoften do not imply
permanenttransitionsout of poverty,withhalf of all those who escape poverty again
falling below the poverty line within thenext five years. This tendencyto experience
repeatedspells of povertyhas increasedover
the period studied here for personslivingin
householdsheaded by white females. Thesefindings suggest the importanceof further
researchon the factorsassociatedwith morepermanent transitionsout of poverty, particularlyfor persons in households headed
by women.
REFERENCES
Bane, Mary Jo and Ellwood,David. "Slipping
Into and Out of Poverty: The Dynamicsof Spells." Journal of Human Resources,Winter 1986, 21(1), pp. 1-23.
Blank, Rebecca. "Why Were Poverty Rates
So High in the 1980s?" National Bureauof Economic Research (Cambridge, MA)
Working Paper No. 3878, 1991.