STAFF REPORT 

The American Recovery and Reinvestment Act: 

Helping Middle-Class Families 

Introduction 

One of the central goals of the Middle Class Taskforce is to identify public policies that will help 

middle class families by improving their living standards. This taskforce goal is an especially 

important one, because even in normal times of economic growth in recent years, the middle 

class has not gotten very far ahead. In fact, even during the economic expansion of the 2000s, as 

we show below, the real income of working-age, middle-class households actually fell by about 

$2,000. 

In this current period of widespread economic hardship, a key tool for helping these families is 

the American Recovery and Reinvestment Act, or ARRA. The ARRA is the $787 billion 

package supported by the Obama/Biden administration, which was passed by Congress and 

signed into law on February 17, 2009. This staff report focuses on how the ARRA helps middleincome families. 

The ARRA helps struggling families in a variety of ways. First, by creating and saving jobs — 

3.5 million by the end of next year, according to estimates by the Council of Economic Advisers 

— the ARRA gives a crucial boost to family incomes, which we quantify below. Second, the 

ARRA creates and expands a number of provisions that raise family income, directly and 

indirectly. Tax cuts and programs targeted both at middle- and lower-income families give a 

direct boost to after-tax income. Expansions to safety net programs, like the Supplemental 

Nutrition Assistance Program (SNAP, formerly food stamps), help lower-income, vulnerable 

families deal with hardships. And expansions to unemployment insurance and healthcare 

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programs in the ARRA help families across the income spectrum who are suffering from the loss 

of jobs, health coverage, and income. 

In this staff report to the Middle Class Taskforce, we examine the impact of these various parts 

of the ARRA on the incomes of different types of families at different parts in the income scale. 

Some of our key findings are: 

• Jobs created by the ARRA are predicted to lower the unemployment rate by almost two 

percentage points. We expect this change to increase average middle-class incomes by 

over $1,300, or 2.3%. 

• Depending on family type and circumstances, the tax benefits from the ARRA provisions 

can add $2,000 or more to after-tax family income. 

• Combining job and tax effects, the ARRA will lift incomes by around $3,000 for many 

middle-class families, significantly offsetting their income losses over the recession. 

• For middle-class families hit with spells of unemployment, tax credits and safety net 

expansion in the ARRA, combined with existing unemployment insurance programs, can 

replace much of the income loss that occurs when a wage-earner in the family loses his or 

her job. 

Our staff report begins with a historical look at middle-class incomes, focusing on the 

income/productivity split that has become so pronounced and problematic in recent years. Next, 

we discuss the boost to family incomes provided by reduced unemployment, and we provide an 

estimate of this effect for different types of families. Finally, we look at other ways the ARRA 

lifts incomes, through the tax and safety net systems. 

The Obama/Biden administration is committed to addressing the economic challenges facing the 

American middle class, and the American Recovery and Reinvestment Act is one of the first, 

critical steps to fulfilling that commitment. By creating jobs and boosting the incomes of 

working families, the American Recovery and Reinvestment Act will help to support the broad 

middle class while putting the economy as a whole on the path to recovery. 

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Middle-Class Incomes and Productivity Growth

Economic theory broadly states that as an economy becomes more productive, the living 

standards of its families rise. On average, this is certainly true. If productivity, or output per 

hour of work, goes up two percent, that means we can enjoy two percent more economic output 

without working more hours to create it. 

However, this theory is too simplistic to capture important changes to the dynamics of the 

economy that have made life much tougher for middle-class families over the years. One critical 

change has to do with the increase in economic inequality. The theory above is stated in terms of 

averages, but if much of the economy’s growth is flowing to the top of the income scale while 

bypassing the middle, the society will be getting richer on average even though middle-class 

families are being left behind. As the figures below reveal, this is precisely what has been 

occurring in recent years. 

Figure 1 takes a long-term view, plotting the growth of productivity against the real income 

growth of the median family—the family right in the middle of the income scale—from 1947 

through 2007 (most recent data). 

Note that between 1947 and 1979, both productivity and middle-class income more than 

doubled, and that their growth rates were about the same. But since the 1980s, middle incomes 

have grown only 25% as fast as productivity, as the wedge of inequality has funneled most of the 

growth to higher income groups. 

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111.8%

118.3%

69.8%

17.7%

0%

20%

40%

60%

80%

100%

120%

140%

1947-1979 1979-2007

Percentage growth

INCOME

INCOME

PRODUCTIVITY

PRODUCTIVIT

Y

Figure 1. Median family income and productivity, 1947-2007

Figure 2, below, takes a closer look at working-age families in the recent past, when 

productivity and the income of working families sharply diverged. The figure plots the real 

median income of working-age households, those headed by someone less than 65 years old, 

since retirement-aged families are less likely to be connected to the workforce. Over this period, 

while productivity rose by a solid 18.5%, the real income of these middle class families fell 

almost 4%, as they lost over $2,000 dollars (in 2007 dollars). 

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-3.7%

+18.5%

90

95

100

105

110

115

120

2000 2001 2002 2003 2004 2005 2006 2007

Non-elderly median income and output per hour

(index, 2000 = 100)

Productivity

Median Income

Figure 2. Productivity outpaces median income for working-age households

Note that the income dynamics shown in Figure 2 occurred when the economy was expanding, 

over a period when jobs were growing and unemployment was falling. Since the recession 

officially began in December 2007, employment is down by over four million and the 

unemployment rate has climbed from about five to about eight percent. As we quantify below, 

this rise in joblessness is putting further downward pressure on the real incomes of middle-class 

families. 

These facts and figures present the challenge we face: our policies must create the glue to 

reconnect the living standards of middle-class families to the economic growth they themselves 

are creating, and that is one of the main reasons for the creation of the Middle Class Taskforce. 

But first, of course, we must deal with the challenge of a deep recession and its impact on 

families that were already facing a tough climb, even in relatively good economic times. This is 

the challenge we are addressing through the American Recovery and Reinvestment Act.1

 

1

 To learn more about the policy components of the ARRA, see www.recovery.gov. 

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Job Creation, Unemployment, and Family Incomes

The primary goal of the American Recovery and Reinvestment Act is job creation. Estimates by 

administration economists predict that the ARRA will create or save 3.5 million jobs by the end 

of 2010 and will lower the unemployment rate by 1.8 percentage points compared to what would 

happen with no stimulus. 

Most working-age, middle-class families depend on their paychecks, so creating more jobs and 

lowering the unemployment rate will have a direct, positive effect on their incomes. Economists 

have studied this effect, in which a lower unemployment rate is associated with increased 

income. Such studies imply that every 1 percentage point decrease in the unemployment rate 

raises family incomes by 1-2%. 

Interestingly, this effect varies with income levels. The incomes of lower-income families tend 

to be more responsive to changes in unemployment than higher-income families. One reason for 

this increased sensitivity is that their unemployment rates tend to move more than the overall 

rate, such that a one point drop in the overall jobless rate might mean a two percentage point 

drop for, say, a low-income family.2

 Applying this relationship to the 1.8-point decline in 

unemployment we expect from the ARRA, we predict an increase of over $1,300 in the 

incomes of middle income families.

3

 This 2.3% boost in their income, which is around $60,000, 

represents a sizable benefit for families in the core of the middle class, partially offsetting the 

effects of the increase in unemployment over the recession and easing the pressure on family 

budgets during these tough economic times. 

 

2

 This is a well-known relationship in the case of minority unemployment. Thus far in the current recession, overall 

unemployment is up 3.2 points, while that of African-Americans is up 4.5 points. 

3 Estimated using elasticity estimates from: Blank, Rebecca and David Card. 1993. “Poverty, Income Distribution 

and Growth: Are They Still Related?” Brookings Papers on Economic Activity, 2. The estimated increase in income 

applies to a family making, $60,989 in early 2009. We derive this value by adjusting the average income (in 2008 

dollars) of the middle fifth of families from 2007 for the increase in unemployment since then, using the elasticity in 

the Blank and Card paper.

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Table 1, below, illustrates the estimated impact of reduced unemployment on family incomes for 

the second and third (or middle) fifths of the income distribution: 

 

Table 1. Effects of unemployment on family income, by income quintile

 

 Family income Estimated Effects of reduced Percentage 

 quintile average income unemployment change in income 

 

 Second Fifth $37,380 $1,157 3.1% 

 Middle Fifth $60,989 $1,383 2.3% 

 

Source: US Bureau of the Census, family income by fifth, adjusted as stated in footnote #3 

 

As a result, all the job-creation measures in the American Recovery and Reinvestment Act give a 

two-for-one deal to middle-class workers and families. Not only will the ARRA provide muchneeded job opportunities to middle-class workers who have been laid off in this recession, but it 

will make life easier for struggling families across America by lowering unemployment and 

lifting the wages on which they depend. 

Tax Benefits in the American Recovery and Reinvestment Act 

While the central focus of the American Recovery and Reinvestment Act is on job creation, the 

ARRA will also put $232 billion of tax cuts and expanded credits for individuals into the directly 

into the hands of lower and middle-income families. These tax benefits will not only help 

families whose well-being has been diminished by lost jobs, declining home values, and falling 

stock prices, but will stimulate the economy by boosting spending, taking advantage of the socalled multiplier effect.4

 

The tax provisions of the ARRA (see box) are targeted to families who need help the most, 

including families with dependent children and parents putting their kids through college. 

 

4

 This is the effect that occurs when increased spending creates a chain of economic activity throughout different 

parts of the economy. For example, when the ARRA raises a family’s income due to a tax cut, and they spend the 

extra income on more food or clothes, that means more shelves need to be restocked and more inventory has to be 

ordered and delivered, etc. Thus, “downstream” spending creates more “upstream” demand. 

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The cornerstone of this part of the ARRA is the Making Work Pay tax credit, which will reach 

129 million working households, or about 95% of all working households – the largest number 

of people ever to benefit from a tax cut. The Making Work Pay credit will give up to $400 to 

individual tax filers and $800 to married couples filing joint returns, and is fully refundable so 

that low-income workers can benefit from the credit. Most employers will handle this tax credit 

using updated withholding formulas, which means that most workers will receive the Making 

Work Pay tax credit directly in the form of increased take-home pay starting by April 1. 

TAX CREDITS AND OTHER KEY SUPPORTS IN THE AMERICAN 

RECOVERY AND REINVESTMENT ACT 

• The Making Work Pay (MWP) tax credit, a refundable credit that will give $400 for 

individuals and $800 for married couples to 95% of American workers. 

• Expansions to the Earned Income Tax Credit (EITC) that will help low- and middleincome married couples and families with children. 

• Expansions to the Child Tax Credit (CTC) that will enable lower-income families to 

take advantage of the credit. 

• The American Opportunity Tax Credit (AOTC), which expands tax credits for college 

education, and offers the credits to a wider range of families. 

• Temporary tax cuts designed to boost the economy and help middle-class families, 

including a tax credit for first-time homebuyers and a deduction for car purchases. 

• Expansions to the unemployment insurance program, which will increase the weekly 

benefit by $25 and extend benefits so that middle-class workers can better replace 

their lost income if they lose their jobs, as well as a provision to exclude UI benefits 

from taxable income. 

• Expansions to the Supplemental Nutrition Assistance Program (SNAP, formerly food 

stamps) that will help some of those hit hardest by the recession to provide healthy 

food for their families and help protect their family budgets. 

The Making Work Pay tax credit is complemented by significant expansions to the Earned 

Income Tax Credit and the Child Tax Credit, which will ensure that lower-income families who 

work full-time can raise their children above the poverty line. The expansions to these tax 

credits are targeted to low-income married couples and families with children, and they reflect 

the Obama/Biden administration’s commitment to the principle that no American working fulltime should be faced to raise his or her children in poverty. 

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At the same time, the expansion of these two credits will help middle-class families who, due to 

their lower-middle income status, or due to job loss, fall into the eligibility zone for these credits, 

a point we stress below in various examples. 

The ARRA also reflects the administration’s commitment to keeping the American dream within 

reach for middle-class families, which means providing every family with the opportunity to 

send their children to college. The American Opportunity Tax Credit aims to give families that 

chance to make sure their children have the education they need to succeed. The American 

Opportunity Tax Credit increases the maximum tax credit for higher education from $1,800 to 

$2,500 and extends the duration of the credit from two to four years. Just as importantly, the 

ARRA makes the credit partially refundable, which allows lower income families to take 

advantage of the credit. Making higher education available to the children of low-income 

families will help to make sure disadvantaged children can one day reach the middle class, and 

will help build the foundation of a strong middle class for years to come.5

These tax initiatives put money directly into the hands of working- and middle-class families 

across America, offering much-needed support to many different types of families. Table 2, 

below, illustrates the potential benefits of these tax initiatives to two example families: 

• The first family is married with three children, and makes $40,000 a year. This family 

receives the Making Work Pay tax credit and benefits significantly from the expansion of 

the Earned Income Tax Credit. 

• The second family is married with two children, one of whom is in college, and makes 

$70,000 a year. This family’s income is too high to qualify for the Earned Income Tax 

Credit or benefit from expansions to the Child Tax Credit, but they still receive the 

Making Work Pay tax credit. In addition, this family benefits from the American 

Opportunity Tax Credit, which gives them an extra $700 a year compared to prior law to 

help put their child through school. 

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Table 2. Benefits of selected tax credits for sample families 

 

 Making Expanded American 

 Work Pay Earned Income Opportunity 

 Income Tax Credit Tax Credit Tax Credit TOTAL 

 

 Family 1: Married, with three children 

 $40,000 $800 $1,025 $0 $1,825 

 

 Family 2: Married, with two children, one in college 

 $70,000 $800 $0 $700 $1,500 

 

 

Furthermore, the tax credits in the ARRA work together with the effects of the reduced 

unemployment rate as a result of jobs created by the ARRA (discussed in the previous section) to 

significantly increase the incomes of working- and middle-class families. Table 3, below, 

illustrates the combined impact of the tax credits and job-creation measures in the American 

Recovery and Reinvestment Act, for the same two sample families described above: 

 

Table 3. Total estimated effect of the ARRA on family income for sample families

 

 Effects of Effects of reduced 

 Income tax credits unemployment TOTAL 

 

 Family 1: Married, with three children 

 $40,000 $1,825 $1,238 $3,063 

 

 Family 2: Married, with two children, one in college 

 $70,000 $1,500 $1,588 $3,088 

 

 

As this table shows, the tax credits in the ARRA, along with the effects of job creation, can mean 

thousands of dollars of income for middle-class families. This boost to the income of families 

across the country will help middle-class Americans make it through these difficult economic 

times while starting to put the economy as a whole on the road to recovery. 

 5

 The ARRA also boosts college affordability by increasing Pell Grant funding by $17 billion. As noted at 

www.recovery.gov, this change is expected to reach seven million students by funding the shortfall in the current 

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Yet while the examples above demonstrate ARRA’s sizable benefits for family incomes, they 

understate the importance of the ARRA to middle-class families because they focus on families 

with incomes too high to benefit from expansions to other programs like the Child Tax Credit. 

The ARRA significantly expands several programs, including the Child Tax Credit, the 

unemployment insurance program, and the Supplemental Nutrition Assistance Program, that help 

to strengthen the safety-net for working Americans. 

This system of supports is invaluable during hard economic times such as the current recession; 

with the unemployment rate at 8.1% in February and over 12 million people jobless, many 

middle-class families will face spells without work. In these situations, the ARRA, in tandem 

with existing unemployment insurance benefits, will help deliver significant relief. As an 

example, consider a married couple with two children, with one spouse earning $30,000 and the 

other earning $20,000. Now, imagine that the higher-earning spouse loses his or her job and is 

out of work for three months of the year. According to an analysis by the Center on Budget and 

Policy Priorities (CBPP), various elements of the ARRA would lift their income by about 

$1,670.6

 This increase comes on top of existing unemployment insurance benefits—assuming 

the worker qualifies—which in a typical state might contribute about $3,750 to this family’s 

income, at least for a limited time period.7

 Putting these benefits together, this family could get 

back 70% of their lost earnings. 

CBPP does a similar simulation for a lower-income couple with two children, in which the sole 

wage-earner has a $30,000 per year job. Because of their lower income, this family ends up with 

more income from the expanded EITC and a boost from the ARRA’s significant expansion of 

the CTC. Here again, ARRA expansions, together with unemployment insurance, replace much 

 program and by adding $500 to the maximum grant. 

6

 These elements include increased unemployment insurance (UI) benefits ($325), the exclusion of UI income from 

taxes ($311), expanded EITC ($236), and the Making Work Pay tax cut for periods in the job market ($800). 

7

 In practice, not every unemployed family receives UI benefits, and not every state benefit is equal. ARRA 

provides incentives to encourage states to change their eligibility rules in order to make UI benefits more accessible, 

particularly to part-time or low-wage workers and workers with family responsibilities. UI benefits last for 26 

weeks, but various extensions related to the recession and the ARRA grant extra months of receipt to states with 

high unemployment (see http://www.nelp.org/page/-/UI/extended.benefits.feb.09.pdf?nocdn=1 for an explanation of 

these extensions). 

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of the family’s lost earnings.8

 By expanding programs that support lower-income households, 

the ARRA helps to ensure that even if middle-class Americans lose their jobs, they will be able 

to keep providing for themselves and their families until they can get back on their feet.

Conclusion 

There are, of course, many other ways that ARRA helps to offset the economic stress that so 

many families are experiencing today. Some of these are hard to quantify. For example, the 

expansion of broadband technology into areas that currently lack internet access could have 

many positive benefits, ranging from greater access to information and entertainment to the 

ability to job hunt across greater areas. Folks who take advantage of ARRA’s weatherization 

subsidies to better insulate their homes could save hundreds of dollars per year on energy costs. 

Someone who loses his or her job and at the same time loses his or her health insurance coverage 

can benefit from a 65% subsidy to COBRA, a program that allows former employees to keep 

their health coverage for a period of time after they are laid off.9

 Thanks to the ARRA 

expansion of Trade Adjustment Assistance, a service worker laid off due to trade competition

will soon receive help that was previously reserved for manufacturing workers.

assrooms.

11

 

10 And state 

fiscal relief is already helping to prevent teachers from being laid off in public schools, a benefit

that means a lot to families with kids in these cl

In other words, there are many ways this comprehensive legislation will help middle-class 

families as they struggle to deal with a period of great economic turmoil. Yet the President and 

Vice President recognize that helping families make it through these hard times is just one part of 

their agenda for lifting up the middle class. They also are acutely aware of the disconnect 

between growth and middle-class incomes that persisted even in good times. They know, 

8

 In this case, the simulation includes increased UI benefits ($325), a smaller amount from the exclusion of UI 

income from taxes ($25), expanded CTC ($483), expanded EITC ($833), the Making Work Pay tax cut for periods 

in the job market ($800), and the Supplemental Nutritional Assistance Program ($129). 

9

 According to the Kaiser Family Foundation, the average premium for an individual plan was about $4,700 for an 

individual and $12,700 for a family in 2007. A 65% subsidy would thus save laid off workers between $250 and 

$700 for up to nine months (after which time the subsidy would terminate). 

10 According to the Department of Labor, workers eligible for this type of assistance “may be eligible for training, 

job search and relocation allowances, income support and other reemployment services.” 

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therefore, that an economic recovery is necessary, but not wholly sufficient to lift the fortunes of 

the middle class and to correct the economic imbalances that held them back in recent years. 

In this regard, future meetings of the Middle Class Taskforce will tackle those policy matters that 

taskforce members believe will help create the policy “glue” to reconnect growth and middleclass prosperity. In April, for example, we plan to tackle an issue of pressing concern to so many 

middle-income families with children: college affordability. 

 11 See http://www.ed.gov/policy/gen/leg/recovery/factsheet/stabilization-fund.html for a discussion of this aspect of 

the ARRA. 

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