Income Inequality and Poverty

1. 32 Income Inequality and Poverty

2. Chapter Objectives • How Income Inequality in the United States is Measured and Described • The Extent and Sources of Income Inequality • How Income Inequality Has Changed Since 1970 • The Economic Arguments For and Against Income Inequality • How Poverty is Measured and its Incidence by Age, Gender, Ethnicity, and Other Characteristics • The Major Components of the Income-Maintenance Program in the United States

3. 8.7 6.7 12.9 11.9 14.8 18.3 11.0 15.7 100.0 Facts About Income Inequality • Average Household Income $60,258 in 2004 - Among the Highest in the World Distribution of U.S. Income by Households, 2004 (1) Personal Income Category (2) Percentage of All Households in this Category Under $10,000 $10,000 - $14,999 $15,000 - $24,999 $25,000 - $34,999 $35,000 - $49,999 $50,000 - $74,999 $75,000 - $99,999 $100,000 and Above Source: Bureau of the Census

4. Facts About Income Inequality • Division Into 5 Equal Groups Distribution by Quintiles, 2004 (2) Percentage of Total Income (3) Upper Income Limit (1) Quintile Lowest 20% Second 20% Third 20% Fourth 20% Highest 20% Total 3.4 8.7 14.7 22.2 50.1 100.0 $18,500 34,738 55,331 88,029 No Limit Source: Bureau of the Census Income Mobility: The Time Dimension

5. 100 80 W 32.1 60 G 32.1 Percentage of Income 40 20 0 20 40 60 80 100 Percentage of Households Area A Gini Ratio = Area A + Area B Facts About Income Inequality • Lorenz Curve and Gini Ratio The Lorenz Curve e Lorenz Curve (Actual Distribution) Perfect Equality d A B c Complete Inequality b a f

6. 100 80 60 Percentage of Income 40 20 0 20 40 60 80 100 Percentage of Households Facts About Income Inequality • Effect of Government Redistribution Lorenz Curve After Taxes and Transfers Lorenz Curve Before Taxes and Transfers Impact of Government Taxes and Transfers

7. Facts About Income Inequality • Effect of Government Redistribution • Noncash Transfers • Percentage of Total Income Received, 2003 (2) Before Taxes And Transfers (3) After Taxes And Transfers (1) Quintile Lowest 20% Second 20% Third 20% Fourth 20% Highest 20% .8 7.2 14.8 24.0 53.1 4.5 10.7 16.4 24.0 44.4 Source: Bureau of the Census

8. Causes of Income Inequality • Ability • Education and Training • Discrimination • Preferences and Risks • Unequal Distribution of Wealth • Market Power • Luck, Connections, and Misfortune

9. Causes of Income Inequality • Income Inequality Over Time • Rising Income Inequality Since 1970 • Causes of Growing Inequality • Greater Demand for Highly Skilled Workers • Demographic Changes • International Trade, Immigration, and Decline in Unionism

10. GLOBAL PERSPECTIVE Causes of Income Inequality Percentage of Total Income Received by the Top One-Tenth of Income Receivers, Selected Nations 0 10 20 30 40 50 Guatemala Brazil South Africa Mexico United States Italy Sweden Germany 48.3 46.9 44.7 43.1 29.9 26.8 22.2 22.1 Source: World Bank, World Development Indicators, 2005

11. Equality Versus Efficiency • The Case for Equality: Maximizing Total Utility • The Case for Inequality: Incentives and Efficiency • The Equality-Efficiency Tradeoff

12. Marginal Utility Marginal Utility 0 0 Income Income Equality Versus Efficiency The Utility-Maximizing Distribution of Income Brooks’ Marginal Utility From Income Anderson’s Marginal Utility From Income Utility Gain (Entire Blue Area) Utility Loss (Entire Red Area) a b’ a’ b MUA MUB $5000 $2500 $7500 $5000

13. The Economics of Poverty • Definition of Poverty • Single in 2004 was $9,645 • Family of 4 was $19,307 • Family of 6 was $25,785 • 37 Million Americans • Poverty Rate 12.7% • Disproportionate Sharing • Incidence of Poverty

14. The Economics of Poverty Poverty Rates Among Selected Population Groups,2004 0 10 20 30 Female-Householders African-Americans Hispanics Foreign-Born (Not Citizens) Children Under 18 Women Total Population Men Whites Asian Persons 65 or Older Married-Couple Families Full-Time Workers 28.4 24.7 21.9 21.4 17.8 13.9 12.7 11.5 10.8 9.8 9.8 5.5 2.8

15. The Economics of Poverty • Poverty Trends • Fell Between 1959 and 1969 • Stable in 1970s • Rose in the Early 1980s • Up and Down Late 1990s and 2000s • Rose with Recession 2001 - 2004 • Measurement Issues

16. U.S. Income-Maintenance System • Entitlement Programs • Social Insurance Programs • Social Security • Medicare • Unemployment Compensation • Public Assistance “Welfare” • Supplemental Security Income (SSI) Program • Temporary Assistance for Needy Families (TANF) • Food-Stamp Program

17. W 32.2 U.S. Income-Maintenance System • Medicaid • Earned-Income Tax Credit (EITC) • Welfare: Goals and Conflicts • Common Features • Conflicts Between Goals • Welfare Reform

18. Year Median Average U.S. Family Wealth and Its Distribution Last Word • Family Wealth Rose Rapidly and Became More Unequal Between 1995 and 2004 Median and Average Family Wealth, 1995-2004 In 2004 Dollars 1995 1998 2001 2004 $70,800 83,100 91,700 93,100 $260,800 327,500 421,500 448,200

19. Percentile of Wealth Distribution Year Bottom 90% Bottom 10% Top 1% U.S. Family Wealth and Its Distribution Last Word • Family Wealth Rose Rapidly and Became More Unequal Between 1995 and 2004 Percentage of Total Family Wealth Held by Different Percentile Groups, 1995-2004 67.8% 68.6 69.8 30.5 1995 1998 2001 2004 32.2% 31.4 30.2 30.5 34.6% 33.9 32.7 33.4

20. income inequality Lorenz curve Gini ratio income mobility noncash transfers equality-efficiency tradeoff poverty rate entitlement programs social insurance programs Social Security Medicare unemployment compensation public assistance programs Supplemental Security Income (SSI) Temporary Assistance for Needy Families (TANF) food-stamp program Medicaid earned-income tax credit (EITC) Key Terms

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