Whether a household is under the official poverty line or not is determined by level of income. Labor markets and poverty are directly related because most of a family’s income is from labor. Almost 75 percent of a family’s income comes from labor, and labor income is a big portion of the total income for people who receive government transfers. The distribution of income, however, greatly varies in the United States and has become more extreme in recent decades. In 2012, the average household income for the lowest 20 percent of income earners was $11,490, and for the top 20 percent was $181,905. Labor market forces produce and sustain labor income and income inequality.

Standard labor market theory assumes that each worker receives wages equal to ...