California’s Workers Are Increasingly Locked Out of the State’s Prosperity

Introduction 

It’s hard work to be able to afford to live, raise a family, and eventually retire in California, especially for workers with low or moderate incomes. While the plight of these workers has never been easy — and workers who are black, Latinx, or women experience some of the greatest economic disadvantages and discrimination in the workplace — research shows that wages and benefits have significantly eroded for many Californians in recent decades. Many workers are being paid little more today than workers were in 1979 even as worker productivity has risen. Fewer employees have access to retirement plans sponsored by their employers, leaving individual workers on their own to stretch limited dollars and resources to plan how they’ll spend their later years affording the high cost of living and health care in California. And as union representation has declined, most workers today cannot negotiate collectively for better working conditions, higher pay, and benefits, such as retirement and health care, like their parents and grandparents did. On top of all this, workers who take on contingent and independent work (often referred to as “gig work”), which in many cases appears to be motivated by the need to supplement their primary job or fill gaps in their employment, are rarely granted the same rights and legal protections as traditional employees. In other words, this work arrangement further shifts responsibilities away from businesses, causing workers to shoulder significant risk and, where supports exist, causing the public sector to help fill the gap.

In this report, we look at five key changes in the job market that show that the contract between workers and businesses has shifted such that many Californians can no longer count on their jobs to provide economic security. Specifically:

• Wages have stagnated for low- and mid-wage workers and pay disparities by race, ethnicity, and gender persist;
• Workers’ share of California’s income has fallen;
• Workers’ access to employer-sponsored retirement plans has declined;
• Union representation has dropped, diminishing workers’ ability to collectively negotiate for better working conditions; and
• A small, but rising, share of workers is taking on gig work.

This report also shows how state leaders have begun to take steps to respond to some of these challenges, but highlights the fact that additional policies are needed to ensure that California’s workers can share in the prosperity that they help to create.

Wages Have Stagnated for Low- and Mid-wage Workers and Pay Disparities by Race, Ethnicity, and Gender Persist

Earnings for California’s workers at the low end and middle of the wage scale have generally declined or stagnated for decades. In 2018, the median hourly earnings for workers ages 25 to 64 was $21.79, just 1% higher than in 1979, after adjusting for inflation ($21.50, in 2018 dollars) (Figure 1). Inflation-adjusted hourly earnings for low-wage workers, those at the 10^th percentile, increased only slightly more, by 4%, from $10.71 in 1979 to $11.12 in 2018. Much of this increase occurred in recent years, likely due to the rising state minimum wage as well as the improving job market. In contrast with the experience of low- and mid-wage workers, high-wage workers — those at the 90^th percentile — saw their hourly earnings increase by 43%, after adjusting for inflation, from $40.19 in 1979 to $57.65 in 2018. These hourly wage disparities translate into sizeable income gaps. Someone earning at the 90^th percentile in 2018 would earn an annual salary of $115,300 if she worked full-time, year-round, while someone working just as much but earning at the 10^th percentile would have an annual income of just $22,240. (As striking as this income gap is, disparities in wealth are even greater.)^[1]

Decades of stagnating wages represent an especially big challenge considering California’s high cost of living and particularly high housing costs. In just the last decade alone, the increase in the typical household’s rent far outpaced the rise in the typical full-time worker’s annual earnings, suggesting that working families and individuals are finding it increasingly difficult to make ends meet.^[2] In fact, the basic cost of living in many parts of the state is more than many single individuals or families can expect to earn, even if all adults are working full-time.^[3]

Black and Latinx workers in California are disproportionately represented at the low-end of the wage scale where wages have stagnated. They also are typically paid far less than white workers. Between 2016 and 2018, the median hourly wage for Latinx workers ($16.51) was just 60% of the median hourly wage of their white counterparts ($27.64) and the median hourly wage for black workers ($19.04) was just 69% of that of white workers (Figure 2).^[4]

Other workers of color also tend to be paid less per hour than white workers. The median hourly wage for American Indian and Alaska Native workers ($20.41) and for Hawaiian and Pacific Islander workers ($20.66) was only about three-quarters of that of white workers between 2016 and 2018. Additionally, the median hourly wage for workers who identify with more than one race ($22.92) was 83% of their white counterparts’ median wage. The typical hourly earnings for Asian workers ($27.27), on the other hand, was nearly on par with what white workers were typically paid (27.64).^[5]

Gender disparities in hourly earnings also persist. Women in California are paid less per hour than men across the earnings distribution. For instance, the median hourly wage for women ($19.95) was about 85% of that of men ($23.38) between 2016 and 2018. Among highly paid workers, this gap was even wider. Women at the 90^th percentile earned $37.18 per hour — 81% of what men at the 90^th percentile earned per hour ($45.64). At the low-end of the wage scale, the gender wage gap was narrower, but still notable. Women at the 10^th percentile earned $12.22 per hour between 2016 and 2018 — 89% of what men at the 10^th percentile earned per hour ($13.72).^[6]

Discrimination — both explicit and implicit — contributes to racial, ethnic, and gender disparities in workers’ wages in two ways. First, discrimination is a factor in racial, ethnic, and gender differences in worker characteristics that directly affect how much workers are paid, such as educational attainment and occupation. For example, discrimination can affect where families live, which can determine whether their children have access to high-quality schools, which in turn can influence whether their children attend college, which affects the career opportunities they are able to pursue as adults. At the same time, racial, ethnic, and gender discrimination in the workplace plays an important role in pay disparities between otherwise similar workers. Specifically, research finds that differences in education, occupation, and other easily measurable worker characteristics cannot fully explain why workers of color tend to earn less than white workers and why women typically earn less than men. This indicates that harder-to-measure factors, such as workplace discrimination, play a role. For instance, one study found that nearly half of the earnings gap between black and white men could not be explained by easily measurable worker factors, such as educational attainment.^[7] It also found that the unexplained portion of the wage gap had increased substantially since 1979 for both men and women. Another study found that much of the earnings gap between Latinx and white workers could not be explained by worker characteristics, including age — which serves as a proxy for years of work experience — and immigration status.^[8] Additionally, one study found that more than one-third of the difference in women’s and men’s pay cannot be explained by gender differences in easily measurable factors, such as occupation and race.^[9]

Workers’ Share of California’s Income Has Fallen in the Past Two Decades

The state’s economy — as measured by its Gross Domestic Product (GDP) — can be broken into two main segments: 1) income going to worker compensation in the form of wages, salaries, and benefits, and 2) income going to owners of capital, such as corporate profits and rents collected by property owners. Additionally, a smaller third segment represents taxes paid by businesses as costs of production.

While California’s private-sector economy has grown by more than half since the beginning of the 21^st century, a declining share has been going to workers. (Private-sector GDP accounts for nearly 90% of California’s total GDP.) Since 2001, the share of state private-sector GDP that has gone to worker compensation has fallen by 5.6 percentage points — from 52.9% to 47.3% (Figure 3). While workers’ share of income has increased from its 20-year low point in 2010, it still has yet to recover from its sharp decrease since its peak in 2001. Meanwhile, the share of the state’s private-sector GDP comprised of capital income increased from 41.0% in 2001 to 46.0% in 2017.^[10]

National data examining workers’ share of net income generated only by private corporations — representing a clearer picture of how much income generated by businesses is paid to workers employed in those businesses — also show a similar sharp decline after 2001.^[11] These data suggest that workers have lost bargaining strength relative to their employers.

This divergence between the shares of both state and national income going to workers and owners of capital contributes to rising income inequality since lower- and middle-income households depend more heavily on income from employment while high-income households receive larger shares of their income from investments. Additionally, capital income itself is highly concentrated among the highest-income households.

The decline in labor’s share of income has also contributed to the growing gap between productivity growth and workers’ pay. When workers become more productive (that is, they produce more per hour worked), businesses become more profitable, and that can result in higher compensation for workers. Instead businesses can choose to retain those profits or distribute them to shareholders. At the national level, productivity and compensation for the average worker grew at roughly the same rates until the early 1970s; after that, productivity grew much faster than the typical worker’s compensation, as the benefits of productivity growth have increasingly gone to the owners of capital and highly paid managers while wages have stagnated.^[12] An increasingly substantial portion of the gap between productivity and compensation growth can be explained by the decline in workers’ share of income.^[13]

California Workers’ Access to Employer-Sponsored Retirement Plans Has Declined

California’s workers today are far less likely to have access to employer-sponsored retirement plans than workers did 40 years ago. As of 2018, fewer than 2 in 5 private-sector workers ages 25 to 64 (39%) had access to a retirement plan sponsored by their employer, compared to more than half (54%) of prime working-age private-sector workers in 1980 (Figure 4).^[14] Meanwhile, more than two-thirds of public-sector workers ages 25 to 64 (68%) had access to an employer-sponsored retirement plan in 2018, down from 83% in 1980.^[15] While access to this benefit has eroded for both private- and public-sector workers, employees in the public sector are far more likely than their private sector counterparts to have the ability to save for retirement through their job.

The rising share of workers without access to employer-sponsored retirement plans is a troubling trend given that workers who lack these plans tend not to have the ability to save for retirement at all given limited resources, and that Social Security benefits — while critical — are not sufficient to provide security in retirement for many people.^[16] Moreover, changes in the type of retirement plans offered by employers mean that many workers cannot count on having a secure retirement even if they do participate in these plans. Specifically, private-sector employers are much less likely today to offer “defined-benefit” plans, which are employer-funded and guarantee workers a fixed benefit in retirement typically based on salary, years of work, and age at retirement.^[17] Instead, they are much more likely to offer “defined-contribution” plans, such as 401(k)s, which do not guarantee a fixed benefit and which shift substantial, and sometimes all, responsibility onto workers to save and invest since employers generally are not required to make any contributions to these plans.^[18]  

The Share of California Workers With Union Representation Is on the Decline

The share of workers in California who are either union members or who are covered by a union contract has been decreasing for decades. In 1984, one in four (25%) workers belonged to a union, including 57% of public sector workers and 19% of private sector workers (Figure 5). By 2018, that share had fallen to about one in six (16%), including 53% of public sector workers and 9% of private sector workers.

Nationally, the fall in union membership is associated with changes such as manufacturing’s shrinking share of the workforce, a shifting global economy, and a restrictive political environment.^[19] The falling unionization rate is also associated with weaker protections for workers. Workers in a union tend to have higher wages, as well as greater access to employment-based health coverage and retirement benefits, compared to similar workers without union coverage.^[20] Unions are also particularly beneficial to women, black and Latinx workers, and immigrants.^[21] Additionally, research indicates that workers whose workplace is not unionized also gain when a substantial share of workers in their industry are represented by unions. For example, in industries with sufficient worker representation, nonunion firms must offer higher wages and benefits to compete with unionized workplaces.^[22]

As noted above, the share of workers who are members of unions or covered by union contracts is much higher in the public sector than in the private sector. However, a recent Supreme Court decision (Janus vs AFSCME Council 31), which prohibits public sector unions from collecting fees from workers who are covered by union contracts but are not themselves union members, is likely to weaken public sector unions moving forward by decreasing the financial resources available to them. This decline in the strength of public sector unions, on top of the overall decline in the share of California workers who are represented by unions, could lead to negative consequences for the well-being of California’s workers, including rising wage, income, and workplace inequality.^[23]

Data on Contingent Work Are Limited, But Show That A Small but Growing Share of California Tax Filers Has Earnings From Independent Contracting

Economists, scholars, and advocates have raised concerns about a rise in “contingent work,” or jobs that fail to provide workers with stable or predictable incomes, benefits, and/or key worker protections. These jobs may include some workers in on-call, temporary agency, and contract company jobs, as well as some kinds of independent contractors.^[24]

Lack of good data makes it difficult to know how common these various forms of work and workers are today, particularly at the state level, and whether they are more common than in the past. However, a recent study provides detailed information about one subset of these workers: independent contractors who work for companies and whose earnings are reported to tax agencies. These data are particularly relevant to recent debates about changes in the job market that have focused on the rapid growth of the “online gig economy,” where web applications are used to request and schedule workers who provide services, such as ride-sharing and delivery. Concerns have been raised that these “apps” are fueling the growth of a contingent workforce made up of workers generally classified as independent contractors who actually should be classified as employees.^[25] This distinction is important because independent contractors, unlike traditional employees, are not protected by labor laws, including minimum wage and anti-discrimination provisions; do not qualify for employer-provided benefits; are excluded from social insurance programs, such as unemployment insurance and workers’ compensation; and cannot organize in labor unions. When workers are misclassified as independent contractors instead of employees they are more likely to lack key worker protections and benefits.^[26]

The aforementioned study finds that nationally a small, but growing share of workers has earnings from independent contracting with businesses.^[27] Similarly, in California, 13.7% of workers had earnings from this source in 2016, up from 11.5% in 2000 — a 2.2 percentage point increase (Figure 6).^[28] The majority of this growth (1.2 percentage points) occurred since 2012 and was entirely driven by an increase in workers engaged in online gig work. In fact, if it weren’t for online gig work, the share of workers with earnings from independent contracting in California would have declined slightly between 2012 and 2016. (Online gig work was virtually non-existent prior to 2012.)

Nevertheless, online gig workers make up just a fraction of the total workers examined through this study and only a small share of firm-facing independent contractors.^[29] In addition, the majority of these workers appear to receive only small amounts of income from online gigs and use this form of work to supplement a wage and salary job that constitutes the primary source of their earnings.^[30] It is not clear whether these workers are using online gig work to cover gaps in employment while they are between wage and salary jobs or to boost their incomes by working contracting gigs on the side at the same time that they are working in wage and salary jobs.

Although this study contributes significantly to our understanding of independent contracting, it does not provide a complete picture of this work, nor of the broader category of contingent work. For example, it does not include people engaged in independent contracting with individuals or households, such as nannies, landscapers, housecleaners, and day laborers, and it excludes all “under the table” independent contracting that is not reported to tax agencies.^[31] Even among the workers covered by the data, it also does not shed light on the extent to which these workers are properly classified as independent contractors or are misclassified and should be considered employees, nor what impact misclassification may have on these workers’ economic security. Nevertheless, this study shows that at the very least millions of Californians are engaged in a form of work that is excluded from labor laws and social insurance programs, raising questions about what these forms of work mean for workers’ economic security. More data are needed to better understand the full scale and range of contingent work arrangements and how these arrangements affect workers.

State Leaders Can Help More Workers Share in the Prosperity Workers Help Create

Major changes in the job market in recent decades show that businesses are assuming less responsibility for helping workers achieve economic security, leaving workers to shoulder much greater risk than in the past and causing the public sector to fill in, where supports are available. The end result is that California’s workers are increasingly locked out of the prosperity that they helped to create.

The challenges facing workers today present an opportunity for state leaders to restore the promise that hard work pays off and to leverage the potential of the state’s workforce to build a stronger economy. California’s leaders have already begun to respond to some of these challenges, including by raising the state’s minimum wage, establishing and subsequently expanding the CalEITC — a refundable state tax credit targeted to low-earning workers — and creating CalSavers, a workplace retirement savings option for private sector employees.^[32] But far more is needed for workers and their families to be able to thrive and improve the quality of their lives. Additional policies in a range of areas are needed, including:

• Policies that continue to address wage stagnation. Lawmakers have taken steps to boost the earnings of the lowest-paid workers in the state, but these workers still struggle to afford California’s high cost of living. More is needed to address wage stagnation, including among mid-wage workers. Policies aimed at increasing workers’ bargaining rights would help. Additionally, greater investments in career pathways, career technical education, and adult education could help some individuals advance and prepare for jobs in high-demand, better-paying industries.
• Policies that address the state’s high cost of living, particularly high housing costs. Stagnating earnings, together with the rising cost of basic expenses, like housing, have made it increasingly difficult for workers to make ends meet. This means that boosting workers’ earnings alone is not enough to increase families’ economic security. Policymakers also need to increase access to affordable housing, health care, and child care, which are many families’ biggest expenses.
• Polices that reduce racial, ethnic, and gender disparities. Workers of color, particularly black and Latinx workers, and women experience some of the greatest disadvantages and discrimination in the job market. Given this, lawmakers should prioritize policies that reduce persistent disparities in pay and access to workplace benefits by race, ethnicity, and gender so that all of California’s workers have the same opportunity to advance and enhance their lives.
• Policies that make sure today’s workers are on track to having a secure retirement. With the enactment of CalSavers, California’s leaders took an important first step in helping to address workers’ declining access to employer-sponsored retirement plans. As this program scales up in coming years, policymakers should monitor its impact and assess additional policies that would further improve workers’ ability to build sufficient retirement savings.
• Policies that increase workers’ collective bargaining power in an era of declining union representation. The shift in responsibility for workers’ economic security away from businesses has paralleled a decline in workers’ union representation, pointing to the need for policies that can restore workers’ voices in determining their working conditions.
• Policies that raise standards for contingent workers and ensure that everyone who works has basic rights and protections. Although data limitations make it difficult to know whether contingent workers represent a growing share of the workforce, it is the case that a sizeable number of workers hold jobs that fail to provide stable or predictable incomes, benefits, and/or key worker protections. Addressing the failure of these jobs to ensure a basic level of economic security is an area where public policy solutions are greatly needed. Specific issues the state’s leaders should take on include:
  • Making sure that businesses do not improperly classify employees as independent contractors;
  • Extending basic rights, benefits, and protections to all workers, regardless of their classification;
  • Addressing irregular work schedules and insufficient work hours; and
  • Holding businesses accountable for the working conditions of workers employed by firms with whom they subcontract.

Californians labor every day to provide for their families, build success in their workplaces, and keep the state’s economy strong, but there is no guarantee that their contributions will be rewarded with economic security. As a result, the well-being of California’s people as well as the strength of the state’s economy are increasingly at risk. This problem necessitates public policy responses to ensure that all of us — businesses, government, and workers — share in the responsibility for taking care of workers so that the people who help make California’s prosperity possible can prosper themselves.

Policymakers Must Work to Ensure that All Californians Share in the State’s Economic Gains

New Census figures released today show rising income inequality across the state and millions of California residents who are struggling to get by on extremely low incomes, while higher-income households experienced more income growth. Even as the latest figures also show there is a decline in the official poverty rate in California, these findings underscore the need for policymakers to ensure that the benefits of California’s strong economy and recent economic growth are shared among all Californians.

The latest Census figures indicate that median household income in California grew to $75,277 in 2018, an increase of 2.3% over the prior year after adjusting for inflation. Median annual earnings for all workers also increased by 0.9% compared to inflation-adjusted earnings in 2017, and a smaller share of Californians were unemployed. These modest economic gains for typical households and workers are encouraging, but must be considered within the broader context of rising inequality within the state over the past several years. From 2006 to 2018, the median household income in California increased by 6.4%, after adjusting for inflation, but the average real income for the lowest quintile of households (those in the bottom 20%) actually decreased by 5.3% – while the inflation-adjusted average income for the top 5% of households increased by 18.6%, or nearly three times as much as the increase in the median income (see Figure 1). At the same time, the cost of living – particularly the cost of housing – has increased much faster than wages for typical workers, as noted in the Budget Center’s report on Supplemental Poverty Measure data released earlier this month. As a result, many Californians with middle and low incomes find themselves unable to make ends meet.

Also troubling are new data from the Census Bureau that show that millions of people in California continue to struggle to get by on the extremely low incomes reflected in the official federal poverty line. There is slight progress to be noted: California’s official poverty rate of 12.8% for 2018 was lower compared to the previous year, when it was 13.3%. The state’s official child poverty rate also dropped to 17.4% in 2018, from a rate of 18.1% in 2017. However, 4.9 million Californians, including 1.5 million children, still lived in poverty in 2018 based on the official poverty measure. For a family of two adults and two children, for example, this means living on an annual cash income of less than $25,465. Moreover, the state’s poverty rate under the official poverty measure still has not dropped to its pre-Great Recession levels (see Figure 2). The child poverty rate in 2018 is not statistically different from the pre-recession rate.

Also troubling, 2.2 million individuals, including 660,000 children, lived in deep poverty in 2018 based on the official poverty measure, meaning that their families had cash incomes of less than half of the official poverty threshold last year, or less than $12,732 for a two-parent family with two children to pay for basic needs. The state’s deep poverty rates were 5.9% overall and 7.5% for children in 2018.

The latest Census figures also reveal stark differences in people’s economic well-being across California’s counties. In 2018, the official poverty rate ranged from a low of 6.0% to a high of 23.1% across the counties, while the official child poverty rate ranged from 3.9% to 32.2%. In eight counties, more than 1 in 5 people lived in poverty, largely in the Central Valley (see Figure 3). Additionally, more than 1 in 5 children lived in poverty in 16 counties, and this includes four counties – again, mostly in the Central Valley – where over 30% of children were in poverty (see link to downloadable data).

Download map data.

Although these Census figures published today show that poverty remains unacceptably high in California, they understate the problem of economic hardship in many parts of the state because they reflect an outdated measure of poverty. Census figures released earlier this month based on an improved measure – the Supplemental Poverty Measure (SPM), which accounts for the high cost of housing in many parts of the state – show that roughly 7.1 million Californians per year, more than 1 in 6 state residents (18.1%), could not adequately support themselves and their families between 2016 and 2018. This rate is much higher than the official poverty rate measured over the same time frame in the same data of 12.5% (see Figure 4). Under this more accurate measure of hardship, California continues to have the highest poverty rate and by far the most residents in poverty of the 50 states. (See the Budget Center’s guide to poverty measures for California for more details on the differences between the official and supplemental measures.)

The new Census poverty figures underscore the need for policymakers to do more to ensure that all people can share in our state’s economic progress. Some encouraging recent investments in the 2019-20 state budget include an expanded CalEITC – a refundable state tax credit targeted to low-earning workers – and improvements to the CalWORKs program, which provides modest cash assistance for low-income children and their families.  These investments represent important opportunities to help Californians avoid and overcome poverty and address the serious negative consequences of living in poverty.

Other specific steps that policymakers can take include:

• Make sure workers earn enough to support themselves and their families. Most families in poverty work, which means that decades of wage stagnation have been a key barrier to economic security and opportunity, as noted in the Budget Center’s recent Labor Day report. In recent years, lawmakers have taken steps to address this challenge, such as raising the state’s minimum wage and establishing and subsequently expanding the CalEITC. Policymakers could build on these important investments by extending the CalEITC to workers who remain excluded (such as those filing taxes with an Individual Taxpayer Identification Number). Greater investments in career pathways, career technical education, and adult education could also help some individuals advance and prepare for jobs in high-demand, better-paying industries. Additionally, women and workers of color, particularly black and Latinx workers, experience some of the greatest disadvantages and discrimination in the job market. Given this, lawmakers should prioritize policies that reduce persistent disparities in pay and access to workplace benefits by race, ethnicity, and gender.

• Help families afford their basic needs. With the rising cost of basic expenses, particularly housing, boosting earnings is not enough to increase economic security. With housing costs far outpacing many families’ earnings in recent years, it has become increasingly challenging for people with low incomes to keep a roof over their heads. Over half of California renters are housing cost-burdened, meaning that they pay more than 30 percent of their income toward housing, and nearly a third spend more than half of their income on housing. Since housing costs are most families’ biggest basic expense, addressing the housing affordability crisis is key to broadening economic security in California. Policymakers should also continue to invest in affordable child care, another major basic expense for many working families.

• Reject harsh changes to public supports that help families make ends meet and get ahead. Public supports such as food assistance through the Supplemental Nutrition Assistance Program (SNAP) (CalFresh in California) provide vital resources to help Californians make ends meet now. They also help children in poverty succeed over the long term, according to research. Yet the Trump Administration has proposed changes to SNAP rules that would reduce the number of individuals able to access this support. People in communities throughout the state would likely be harmed. The Administration has also announced a change to the rule directing how receipt of public supports can affect whether immigrants can become permanent residents in the US, threatening harm for thousands of families working to build a better future for themselves and our state of immigrants.

This report was updated on October 10, 2019, due to revised SPM data from the US Census Bureau. 

Policymakers Have Opportunity to Promote Economic Security, Break Down Barriers

Approximately 7.1 million Californians lived in poverty each year from 2016 to 2018 – more than 1 in 6 state residents (18.1%) – according to new Census data released this morning based on the Supplemental Poverty Measure (SPM).

The high cost of living in many parts of California is a key reason for California’s high SPM poverty rate, underscoring the continuing need for policies that address the state’s affordability challenges. High living costs are particularly problematic when they rise faster than incomes. This presents a challenge in California because inflation-adjusted wages in recent decades have grown only for the highest-paid workers, while wages for mid-wage and low-wage workers have remained largely flat, as highlighted in the Budget Center’s recent Labor Day report. Public supports like tax credits, public health insurance, and food assistance play a critical role in helping families and individuals meet their basic needs as living expenses rise. New national data also released today show that many more individuals would be living in poverty if they did not have access to these vital public supports.

It’s also important to note today’s SPM figures provide a more accurate indicator of economic need in California than the official federal poverty measure that is frequently used. The SPM accounts for the high cost of living in many parts of the state as well as public supports that help families meet basic needs, among other factors. (See more below on how the SPM addresses shortcomings of the official poverty measure.)

Housing Costs Rising Faster Than Wages Are a Barrier for Californians

California’s high SPM poverty rate largely reflects the high housing costs in many parts of California. The SPM accounts for differences in housing costs across the country, unlike the official poverty measure, and when these costs are factored in, a much larger share of the state’s population is shown to be living in poverty: 18.1% under the SPM from 2016 to 2018, compared to 12.5% under the official measure.

Housing affordability is a problem throughout California, even in areas where housing costs are lower, because incomes are also lower in these areas. Statewide, more than half of renter households pay more than 30% of their incomes toward housing, making them housing cost-burdened, and nearly a third are severely cost-burdened, paying more than half of their incomes toward housing. California’s unaffordable housing costs are particularly a problem because they have been growing far faster than earnings for most workers. While inflation-adjusted median household rents increased by 16.1% from 2006 to 2017, median hourly wages for workers ages 25 to 64 actually declined by 0.5%. This decline in hourly wages for most workers is only one component of a broader picture of changes in the labor market – including a decline in employer-sponsored retirement plans, a drop in union representation, and a small but rising share of workers engaged in gig work –  such that many Californians can no longer count on their jobs to provide economic security.

Housing costs in many parts of California are higher than the national average, as reflected in the relatively high poverty thresholds for many metro areas within the state under the SPM. These relatively high housing costs, which are factored into poverty under the SPM, are a key reason that California’s poverty ranking among the 50 states jumps from 18th under the official poverty measure up to first under the SPM, a dubious distinction.

Policies Are Needed to Help Californians’ Incomes Cover Basic Living Expenses

California’s high supplemental poverty rate focuses attention on two key challenges for the state: a high and rising cost of living, paired with stagnant earnings for all but the highest-paid workers. At the same time, the measurable impact of public supports in reducing poverty suggests that smart public investments to help individuals meet basic needs, together with a strong economy, can help more Californians achieve economic security.

State policymakers have taken several important steps in recent years to help address the challenges that residents with low incomes face in making ends meet. These include establishing the CalEITC – a refundable state tax credit targeted to low-earning workers – and subsequently expanding the credit, including adding a new Young Child Tax Credit for families with the youngest children; increasing the support available to families with children through CalWORKs, California’s welfare-to-work program; increasing access to affordable child care and health insurance; and pursuing multiple strategies to address housing affordability, both this year and in prior years. Policymakers have also taken some important steps to address changes in the labor market that have left workers with stalled wages and shrinking access to benefits, through policies such as raising the state’s minimum wage and creating CalSavers, a workplace retirement savings option for private sector employees.

Given that many Californians continue to live without enough resources to cover the costs of basic necessities, it is important to continue to build on the state’s recent investments to address affordability and the changing labor market. Thoughtful public policies can help make basic necessities like housing, child care, and health care more affordable; can help ensure that incomes for all Californians, not just the highest-paid workers, better match the rising cost of living; and can help restore the promise that all California workers get to share in the economic prosperity that they help to create.

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Note About the Census Bureau Data Released Today:

The state-level figures released today reflect average annual supplemental poverty rates during a three-year period, from 2016 to 2018. The SPM addresses a number of shortcomings of the official poverty measure. (See the Budget Center’s Guide to Understanding Poverty Measures for more details on the differences between these poverty measures.) For one, under the official measure, the income threshold for determining who lives in poverty is the same in all parts of the US. For example, a single parent with two children was considered to be living in poverty in 2018 if their annual income was below $20,231, regardless of whether they lived in a low-cost place like rural Mississippi or a high-cost place like San Francisco. The SPM better accounts for differences in the cost of living by adjusting the poverty threshold to reflect differences in the cost of housing throughout the US. For example, the SPM poverty line for a single parent with two children living in a renter household in San Francisco was $32,667 in 2018 – more than 60% higher than the poverty line based on the official measure.

Another shortcoming of the official poverty measure is that it fails to factor in the broad array of resources that families use to pay for basic expenses. The official measure only counts cash income sources, such as earnings from work, Social Security payments, and cash assistance from welfare-to-work programs. It does not take into account noncash resources, such as food or housing assistance, and it fails to consider how tax benefits, such as the federal Earned Income Tax Credit (EITC), increase people’s economic well-being. The SPM improves on the official measure by including these resources. It also better accounts for the resources people actually have available to spend by subtracting from their incomes what is needed to pay for necessary expenses, including work-related expenses, such as child care; medical expenses, such as health insurance premiums and out-of-pocket costs; and state and federal income and payroll taxes.

After incorporating these improvements over the official poverty measure, the SPM produces a more realistic picture of poverty in California: the state’s SPM poverty rate that was nearly 1.5 times the official poverty rate between 2016 and 2018 (18.1% versus 12.5%, respectively).

Although the SPM provides a more accurate picture of economic hardship in California, it does not indicate how much people need to earn to achieve a basic standard of living. Measures of what it actually takes to make ends meet in California show that families need incomes several times higher than the official poverty line to afford basic necessities.

Executive Summary

This Guide to Understanding Poverty Measures Used to Assess Economic Well-Being in California is designed to help policy stakeholders understand the details of and differences between the three major measures of poverty available for California — the official poverty measure, the Supplemental Poverty Measure, and the California Poverty Measure — and provides guidance on when each measure is most appropriate to use to understand the poverty Californians experience.

The first section of the guide provides a brief history of the three poverty measures and describes how each one determines a family’s or individual’s poverty status. The second section explains which data sources the measures are based on and discusses how to find and use the data for each one. The final section of this guide outlines the major advantages and limitations of each measure and provides guidance on when to use one measure over another. Tables, figures, and additional downloadable resources (listed below) provide supplementary information.

Download the Guide to Understanding Poverty Measures Used to Assess Economic Well-Being in California.

Related Downloadable Resources

• Quick Guide to Using Different Poverty Measures for California
• Summary of Differences in How Poverty Status Is Calculated Under Different Poverty Measures for California
• Comparison of Official, Supplemental, and California Poverty Measure Thresholds, 2017 (excel file)
• Webinar and Slide Deck: Understanding Poverty Measures Used to Assess Economic Well-Being in California

The Trump Administration has quietly announced a proposal to change the way the federal poverty line is updated each year for inflation. This proposal is far more than a minor technical change affecting government statistics — it would cut low-income Californians’ access to health care, basic nutrition, and other essential needs. These consequences arise because the federal poverty line forms the basis of criteria that determine whether individuals are eligible to access many vital public supports that are funded (at least in part) by federal dollars — like public health insurance through Medi-Cal, food assistance through CalFresh, and home energy assistance through the Low Income Home Energy Assistance Program (LIHEAP). As a result, changing the method for updating the poverty line as proposed would threaten low-income Californians’ ability to meet their most basic needs.

The Trump Administration’s under-the-radar proposal, included in a notice requesting public comments issued by the Office of Management and Budget (OMB), puts forward the idea of updating the Census Bureau’s official poverty thresholds, or poverty line, using an alternative measure of inflation in place of the inflation measure currently used to update the thresholds each year (the Consumer Price Index for All Urban Consumers, or CPI-U). Two alternative inflation measures specifically mentioned as options are the chained Consumer Price Index (the chained CPI, or C-CPI-U) or the Personal Consumption Expenditures Price Index (PCE Price Index). Using either of these alternative inflation measures would make the poverty thresholds increase more slowly over time. There are several reasons that this proposed change would actually make the federal poverty line less accurate rather than more accurate as a measure of basic economic security. What is more, the Trump Administration is explicitly not requesting input to understand how this change would affect people’s access to vital public supports that help address families’ and individuals’ most basic needs.

Slowing Down the Annual Increase in the Poverty Line Would Make It Less Accurate, Not More Accurate, Especially in California

Switching to a slower-rising inflation measure to update the federal poverty line each year would make the official poverty thresholds less accurate as a measure of a minimum adequate level of economic security. The federal poverty line is already far lower than the basic cost to support a family, particularly in California, where the cost of living is high in many regions. According to the Budget Center’s Making Ends Meet analysis, the statewide average cost of a basic family budget for a working single parent with two children — including housing and utilities, food, child care, health care, transportation, taxes, and miscellaneous other basic necessities — totals nearly $66,000 (in 2017 dollars), while the 2017 official poverty threshold for the same family was only $19,749. In the most expensive parts of the state the cost of basic needs is much higher — as much as $103,423 for this same family in San Francisco County, or more than five times the federal poverty line. Even in Fresno County, a county with relatively low costs, the basic family budget for a single parent with two children is more than $50,000, or two and a half times the poverty line. Slowing down the rate by which the poverty thresholds are updated each year would only make this disconnect worse.

The slower-rising chained CPI and PCE Price Index are also unlikely to be more accurate ways to measure inflation specifically for low-income households, or to update a poverty threshold, which represents a minimum level of resources to meet basic needs. The largest basic needs expense in a household budget is typically housing, and housing costs in California in recent years have increased much faster than even the standard CPI-U inflation measure currently used to update the federal poverty line. While the CPI-U rose by 21.6% from 2006 to 2017, median household rent in California rose by 41.6%, or nearly twice as fast. Research has shown that costs for the overall bundle of goods typically purchased by low-income households have risen faster than costs for the goods typically purchased by higher-income households. Also, the reason that the chained CPI increases more slowly than the standard CPI-U inflation measure used currently to update the poverty line is because the chained CPI assumes that consumers will trade more expensive items for similar less expensive items as prices change (e.g., they will buy chicken instead of beef if the price of beef rises). The PCE Price Index makes the same assumption. However, housing and child care are typically the two largest expenses in the basic family budgets for working families, and both are items where it is unlikely that families can easily switch to a similar, lower-cost alternative if they face an increase in price.

The Trump Administration has framed considering alternative inflation measures as an important technical question for accurate calculation of the federal poverty line, but research on ways to improve the measurement of poverty has not identified slowing down the annual inflation update as a key strategy. An expert panel of the National Academy of Sciences examined many technical aspects of the official federal poverty measure in 1995 and issued recommendations for improving the government measure of poverty, resulting in the creation of the Supplemental Poverty Measure (SPM). The SPM poverty line is higher than the official poverty line for most people, particularly in California. For example, the SPM poverty threshold for a family of two adults and two children who rent their home in the Los Angeles metropolitan area was $34,308 in 2017, while the official federal poverty threshold for the same family was only $24,858. The SPM incorporates many other improvements to measuring poverty. (See the Budget Center poverty explainer webinar for more details on the SPM.) If the objective is to improve poverty measurement, it would make more sense to consider all of these types of improvements rather than focusing on just one item, the choice of inflation measure. This is particularly true because switching to one of the proposed alternative inflation measures alone would cause the poverty thresholds to shrink over time, when research provides more support for increasing the thresholds.

Changing the Way the Poverty Thresholds Are Updated Could Reduce Low-Income Californians’ Access to Vital Public Supports

This proposal would have serious, concrete consequences in the lives of low-income individuals and families. That is because the federal poverty thresholds are the basis for the federal poverty guidelines that are used to determine eligibility, benefits, and funding levels for a wide variety of public supports and federal grants that help families and individuals meet their basic needs. Millions of Californians with low incomes are enrolled in Medi-Cal (known as Medicaid at the federal level) for public health insurance, for example, and millions of Californians access CalFresh food assistance (known as the Supplemental Nutrition Assistance Program, or SNAP, at the federal level) to meet their basic need for food. To be eligible to access these public supports, a family’s or individual’s income must be less than the federal poverty guideline or a multiple of it. Slowing down the annual increase in the poverty guidelines would result in fewer Californians eligible to access these critical public supports over time, with a small impact at first but a large impact over the long term.

The Public Can Submit Comments on This Proposal Now

The public has until Friday, June 21 to submit comments to the Office of Management and Budget via an online submission form  on this proposed change to how the poverty line is updated each year for inflation. Individuals and organizations are encouraged to share the implications of the proposal for their households or those they serve, keeping comments substantive and unique, with at least 70% of the content different from other submitted comments. The Trump Administration explicitly did not request public comments on how the proposed change to the poverty thresholds would affect the federal poverty guidelines and eligibility for vital public supports. However, organizations can draw attention to the importance of this cascading effect of the proposal by describing what questions the federal government should take the time to research, and what additional input the government should solicit and consider, before deciding whether to move forward with the change.

The poverty line is more than a measure, and ensuring that low-income Californians have access to vital public supports such as health care and food assistance, and that those benefits are not diminished over time under the guise of a technical change, should be a priority for all Californians.