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The relationship between the family poverty rate and the real compensation of workers is consistent with the notion of a "poverty-welfare" curve that we developed in 1985.[1] The essence of the poverty-welfare curve is the notion that up to a certain level of public aid expenditures by government, their effect is to enhance the money income and reduce the poverty rate of those receiving the expenditures. However, eventually, the labor-market disincentive effects associated with the receipt of public aid expenditures overwhelm the income enhancing effects, leading to a reduction in levels of money income and increases in the poverty rate among those at the lower end of the income distribution. In the analysis described here, relatively low levels of Federal government spending stimulate productivity and labor compensation increases and reduce the family poverty rate. However, excessive levels of government spending do just the reverse.
In the statistical analysis of the poverty-welfare curve, we found that the critical, or threshold, level of public aid spending was reached in the period 1971-1973. This is extremely consistent with the statistical results reported here, which show a critical level of Federal non-defense spending equal to 13.1 percent of Gross Domestic Product. Over the fiscal years 1971-1973, non-defense Federal government spending averaged 13.0 percent of Gross Domestic Product.
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