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Page 1: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

20

.

Income Inequality and Poverty

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Page 2: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Facts About Income Inequality

• Average household income

• $66,424 in 2008

• Among the highest in the world

• Distribution by quintiles

• Income mobility

• People change quintiles

• Government redistribution

• Taxes and transfers

LO1 20-2

Page 3: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Facts About Income Inequality

(1)

Personal

Income Category

(2)

Percentage of All

Households in this Category

Under $10,000 7.1

$10,000-$14,999 5.8

$15,000-$24,999 11.8

$25,000-$34,999 10.9

$35,000-$49,999 14.0

$50,000-$74,999 17.9

$75,000-$99,999 11.9

$100,000 and above 20.5

100.0

Source: Bureau of the Census, http://www.census.gov. Numbers do not add up to 100 percent due to rounding.

LO1 20-3

Page 4: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Facts About Income Inequality

(1)Quintile

(2)Percentage ofTotal Income

Lowest 20%

Second 20%

Third 20%

Fourth 20%

Highest 20%

Total

Distribution by Quintiles, 2008

3.4

8.6

14.5

22.9

50.5

100.0

Source: Bureau of the Census, http://www.census.gov

(3)Upper

Income Limit

$20,712

39,000

62,725

100,240

No Limit

LO1 20-4

Page 5: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Facts about Income Inequality

Lorenz Curve and Gini Ratio

20 40 60 80 100

20

40

60

80

100

0

Perfect Equality

Lorenz Curve(Actual Distribution)

Complete Inequality

A B

ab

c

d

e

f

Gini Ratio =Area A

Area A + Area B

Percentage of Households

Per

cen

tag

e o

f In

co

me

LO1 20-5

Page 6: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Facts About Income Inequality

20 40 60 80 100

20

40

60

80

100

0

Lorenz CurveBefore Taxes and

Transfers

Percentage of Households

Per

cen

tag

e o

f In

co

me

Lorenz CurveAfter Taxes and

Transfers

Impact of government taxes and transfers

LO1 20-6

Page 7: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Causes of Income Inequality

• Ability

• Education and training

• Discrimination

• Preferences and risks

• Unequal distribution of wealth

• Market power

• Luck, connections, and misfortune

LO2 20-7

Page 8: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Income Inequality Over Time

LO3 20-8

Page 9: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

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

LO3 20-9

Page 10: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Income Inequality Over Time

LO4 20-10

Page 11: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Equality Versus Efficiency

• The case for equality

• Maximizing total utility

• The case for inequality

• Incentives and efficiency

• The equality-efficiency tradeoff

LO4 20-11

Page 12: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

The Utility-Maximizing Distribution of Income

Anderson’s MarginalUtility From Income

Brooks’ MarginalUtility From Income

0 0

Mar

gin

al U

tilit

y

Mar

gin

al U

tilit

y

Income Income

$5000 $5000$2500 $7500

MUBMUA

a

a’ b’

b

Utility Gain(Entire Blue Area)

Utility Loss(Entire Red Area)

Equality Versus Efficiency

LO4 20-12

Page 13: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

The Economics of Poverty

• Definition of poverty in 2008

• Single person < $10,201

• Family of 4 < $21,834

• Family of 6 < $28,769

• 39.8 million Americans

• Poverty rate 13.2%

LO5 20-13

Page 14: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Incidence of Poverty

LO5 20-14

Page 15: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Poverty Trends

• Poverty rate trends

• Significant decline 1959-1969

• Stable in 11-13% range since

• Rises with recession

• Measurement issues

• Arbitrary threshold

• Consumption vs. income

LO5 20-15

Page 16: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Poverty Trends

LO5 20-16

Page 17: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

The U.S. Income-Maintenance System

• Entitlement programs

• All those eligible receive aid

• Social insurance programs

• Social security and Medicare

• Unemployment compensation

• Public assistance programs

• Welfare

LO6 20-17

Page 18: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Public Assistance Programs

• Supplemental Security Income (SSI)

• Temporary Assistance for Needy Families (TANF)

• Supplemental Nutrition Assistance Program (SNAP)

• Medicaid

• Earned Income Tax Credit

LO6 20-18

Page 19: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Discrimination

• Inferior treatment

• Taste-for-discrimination model

• Prejudiced people receive disutility

• Willing to pay to avoid

• Discrimination coefficient

• Prejudice and the market African-American—White wage ratio

• Competition and discrimination

LO7 20-19

Page 20: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Taste for Discrimination Model

Afr

ican

-Am

eric

an W

age

Rat

e(D

oll

ars)

African-American Employment (Millions)

0

D3

D2

D1

S

12 16 18

6

$98

MoreDiscrimination

LessDiscrimination

LO7 20-20

Page 21: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Discrimination

• Statistical discrimination

• Judged on average group characteristics

• Labor market example

• Profitable, undesirable, but not malicious

LO7 20-21

Page 22: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

• Occupational segregation

• The crowding model

• Crowd certain groups into less desirable occupations

• Effects of crowding

• Elimination of crowding

LO7

Discrimination

20-22

Page 23: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Occupational SegregationW

age

Rat

e

B BBM M

W

3 4 3 4 64

Dx Dy Dz

Occupation X Occupation Y Occupation Z

Quantity of Labor(Millions)

Quantity of Labor(Millions)

Quantity of Labor(Millions)

Crowding women into one occupation (Z)…

results in men enjoying higher wages in the other occupations (X and Y).

000

LO7 20-23

Page 24: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

U.S. Family Wealth

Median and Average Family Wealth, Survey Years 1995-2007

(In 2007 Dollars)

19951998200120042007

$78,20093,100

101,300102,300120,600

$260,800360,100464,800493,500557,800

• Family wealth rose rapidly between 1995 and 2007

Year Median Average*

*The average greatly exceeds the medians because the averages are boosted by the multibillion dollar wealth of a relatively few families.

LO7 20-24

Page 25: 20. Income Inequality and Poverty McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

U.S. Family Wealth

• Family wealth became more unequal between 1995 and 2007

Percentage of Total Family Wealth Held by Different Groups, Survey

Years 1995-2007

19951998200120042007

32.2%31.430.230.528.5

34.6%33.932.733.433.8

67.8%68.669.869.571.5

Year Bottom 90% Top 1%Bottom 10%

Percentage of Total Wealth by Group

LO7 20-25


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