Income Distribution and Poverty

1. 0 Income Distribution and Poverty 18 • How much inequality and poverty exist in our society? • What policies are used to fight poverty? • What are the problems with these policies?

2. Introduction 0 • Income is generally determined by earnings • Earnings are a function of productivity • What if productivity of resources varies across individuals? • The result is income inequality.

3. The U.S. Income Distribution: 2005 0

4. The U.S. Income Distribution: 2005 0

5. U.S. Inequality Over Time 0 Income share of the top 20% divided by income share of the bottom 20%

6. Lorenz Curve • The distribution of income can be represented by a Lorenz curve. • In a Lorenz curve: • the horizontal axis measures the cumulative percentage of households • the vertical axis measures the cumulative percentage of households

7. ACTIVE LEARNING 1: Lorenz Curve Using the distribution of income for 2005, draw a Lorenz curve. 6

8. ACTIVE LEARNING 1: Answer Create cumulative totals of the columns. 7

9. ACTIVE LEARNING 1: Answer Plot the cumulative number of households against the total share. 8

10. ACTIVE LEARNING 1: Answer A Lorenz curve that is a straight diagonal line would indicate an equal distribution of income. 9

11. Gini Coefficient • Another way to describe income inequality is by using a Gini coefficient. • related to the Lorenz curve

12. A B Gini Coefficient Let A = area between the line of perfect equality and the Lorenz curve Let B = area below the Lorenz curve Gini coefficient = A /(A + B) A higher Gini coefficient means greater inequality

13. Gini Coefficient for the U.S.

14. Inequality Around the World 0 Income share of the top 20% divided by income share of the bottom 20%

15. Gini Coefficients Around the World

16. Gini Coefficients Around the World Green = greater equalityRed = greater inequality

17. Poverty 0 • Poverty line: an absolute level of income set by the government for each family size below which a family is deemed to be in poverty • Poverty rate: the percentage of the population whose family income falls below the poverty line • In 2005 in the U.S., • median household income = $46,326 • poverty line for family of four = $19,806 • poverty rate = 12.6%

18. The U.S. Poverty Rate Over Time 0 Percent of the population below poverty line

19. U.S. Poverty Rates by Group, 2005 0

20. Policies to Reduce Poverty 0 • Poor families more likely to experience • homelessness • drug dependence • health problems • teen pregnancy • illiteracy • unemployment • Most people believe the government should provide a “safety net.” • We now consider a few such policies…

21. 1. Minimum-Wage Laws 0 • Arguments for: • helps the poor without any cost to the government • little impact on employment if demand for unskilled labor is relatively inelastic • Arguments against: • In the long run, demand for unskilled labor is likely elastic, so minimum wage causes substantial unemployment among the unskilled. • Those helped by minimum wage are more likely to be teens from middle-income families than low-income adult workers.

22. 2. Welfare 0 • Welfare: government programs that supplement the incomes of the needy • Temporary Assistance for Needy Families (TANF) • Supplemental Security Income (SSI) • Critics argue that such programs create incentives to become or remain needy • argue that welfare contributed to the rise of the single-parent family • The severity of such incentive problems is unknown

23. 3. Negative Income Tax 0 • Negative income tax: a tax system that collects revenue from high-income households and gives transfers to low-income households • Example: Taxes owed = (1/3 of income) – $10,000 • If earnings = $90,000, taxes owed = $20,000 • If earnings = $60,000, taxes owed = $10,000 • If earnings = $30,000, taxes owed = $0 • If earnings = $15,000, taxes “owed” = –$5,000i.e., would receive $5000 payment from gov’t • The Earned Income Tax Credit (EITC) is similar to a negative income tax.

24. 4. In-Kind Transfers 0 • In-kind transfers are goods or services provided to the needy. Examples: • homeless shelters • soup kitchens • food stamps • Medicaid • An alternative: cash payments

25. Anti-Poverty Programs andWork Incentives 0 • Assistance from anti-poverty programs declines as income rises. • Poor families face high effective marginal tax rates (exceeding even 100% in some cases!)