Chapter Twenty

Sandeep Arakali

Susan Dong

4th hour

~Mary Colum

How much inequality is there in our

society?

How many people live in poverty?

What problems arise in measuring the

amount of inequality?

How often do people move among income

classes?

Section One

The percentage of people and households that are earning in each

bracket.

Working Americans 15 years or older, adjusted for 2004 inflation

1950 1960 1970 1980 1990 2000 2004

Overall Male$17,07

6$22,051 $28,100 $27,206 $28,439 $31,089 $30,513

Female $6,333 $6,815 $9,424 $10,683 $14,112 $17,619 $17,629

White/

EuropeanMale

$18,00

1$23,219 $30,536 $28,939 $29,668 $32,684 $31,335

Female $7,044 $7,307 $9,546 $10,741 $14,459 $17,637 $17,648

Black/

African

American

Male $9,775 $12,215 $17,513 $17,390 $18,034 $23,411 $22,740

Female $3,150 $4,524 $8,691 $9,944 $11,671 $17,420 $18,379

Asian Male NA NA NA NA $27,179 $33,820 $32,419

Female NA NA NA NA $15,536 $19,038 $20,618

THE POVERTY RATE THE POVERTY LINE

A commonly used gauge of

the distribution of income

The percentage of the

population whose family

income falls below an

absolute value (the poverty

line)

Set by the federal

government

Three times the cost of

providing an adequate diet

Adjusted every year to

account for changes in the

level of prices

Depends on family size

Section Two

Through government programs and

various non-profit organizations, the poor

receive many nonmonetary items

These could include food stamps, housing

vouchers and medical services

If in-kind transfers were to be included in

income at their market value, the number

of those in poverty would be 10% lower

The regular pattern of income variation is

called the life cycle

The Life Cycle• A young worker has a low income

• Income rises as the worker gains maturity

and experience

• Income peaks at around age 50 and then

falls sharply when the worker retires at

around 65

The standard of living in any year depends on

more than lifetime income rather than that specific

year’s income

Young people borrow money to pay for school or a

new home

Older people repay those loans when their

incomes rise

Large income declines after retirement do not

affect the standard of living

Inequality in the distribution of annual income, but

does not represent true inequality in living

standards

TRANSITORY INCOME PERMANENT INCOME

An unexpected natural

disaster or other

uncontrollable force could

cause prices of goods to rise

or fall

This contributes to varying

incomes for households

yearly

The average income, based

on the transitory incomes

Smoothens out the bumps

within transitory income

A family’s ability to buy

goods and services depends

largely on this

The US is one of the countries most well-

known for the citizens’ abilities to be born

poor and die rich

The opposite, of course, is just as likely to

occur

Some mobility reflects transitory variation

in income, others reflect more persistent

changes in income

Many of those who live below the poverty

line only do so for a temporary period

In a 10 year period, 1 in 4 families fall

below the poverty line in at least 1 year.

Fewer than 3% of families are poor for 8 or

more years

The temporarily poor and the persistently

poor face different problems

If a father earns 20% above his

generation’s average income, his son will

earn 8% above his own generation’s

average income

In the US economy, four of five millionaires

are self-made

Section 3

Utility: level of happiness

and satisfaction you

receive

Utilitarians maximize

utility by taking money

from the rich and giving it

to the poor (law of

diminishing marginal

utility)

DO NOT believe in equal

income for everyone

“Leaky bucket” storyJohn Stuart Mill: guy who

thought up of utilitarianism

Liberals aim to bring the poorest person in society up to a certain standard (maximum criterion)

Developed by John Rawls and his “veil of ignorance” theory

Liberalism acts as social insurance if you become poor

Libertarians believe government should enforce the laws but NOT redistribute income

Inequality is okay because income will distribute itself naturally based on people’s abilities

Trade is okay; stealing is not

Section 4

Minimum wage is a legal limit on the minimum salary any worker can receive

Same as a binding price floor for the labor market

Effect of minimum wage is to decrease employment but increase wages for workers who keep their jobs

D

Workers

Min. Wage

Q’ Q

SWage

Jobs

Lost

Salary

Increase

SUPPORTERS OPPONENTS

Claim that minimum wage

helps the poor by increasing

salary

Argue that demand for labor

is inelastic so not that many

jobs are lost when you

impose a minimum wage

Critics say that labor

demand is more elastic

especially in the long run so

more jobs are lost

Also most minimum wage

workers are teens who don’t

really need the money so

minimum wage doesn’t

really help the poor

Welfare refers to government programs that supplement the incomes of the needy

Welfare benefits have declined since 1970s and the law was revised in 1996 so people could not stay on welfare forever

You can’t qualify for welfare just because you have a low salary; you must have some other need such as small children or a disability

SUPPORTERS OPPONENTS

Welfare helps the people in

society living a difficult life

and are unable to rise up

such as working single

mothers

Anti-poverty measure that

reduces homelessness due

to supplemented income

Welfare drives people to

become “needy” which in

turn breaks up families

Encourages illegitimate

births because of the

welfare programs that exist

for single parents

Worsens the problem it was

meant to cure

High-income families

would pay a tax while

low-income families

would receive a

subsidy

Example:Taxes owed = (1/3 of income) –

$10,000

Poor family earning $21,000 a year

would receive subsidy of $3,000

Rich family earning $60,000 a year

would pay tax of $10,000

SUPPORTERS OPPONENTS

Does not encourage

illegitimate births or break

up families like welfare

programs

Proof of need is not

absolutely necessary to

receive a subsidy

Similar program is already in

place

Lazy people are being

rewarded

Does not alleviate poverty

due to a specific cause such

as illness, disability, or

unemployment

There are pros and cons to every solution

proposed by lawmakers to reduce poverty

Supporters of anti-poverty legislation are

concerned about equality

Opponents care about efficiency and claim

that anti-poverty measures reduce

incentive to work because they hurt the

rich and give to the poor