income inequality and poverty -...
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20
Income Inequality and Poverty
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
Facts About Income Inequality
(1)Personal
Income Category
(2)Percentage of All
Households in this CategoryUnder $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
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
3.48.6
14.522.950.5
100.0
Source: Bureau of the Census, http://www.census.gov
(3)Upper
Income Limit
$20,71239,00062,725
100,240No Limit
LO1 20-4
Facts about Income Inequality
Lorenz Curve and Gini Ratio
LO1 20-5
20 40 60 80 100
20
40
60
80
100
0Percentage of Households
Perc
enta
ge o
f Inc
ome
Perfect Equality
Complete Inequality
ab
c
d
e
f
Lorenz Curve(Actual Distribution)
A B
Gini Ratio =Area A
Area A + Area B
Facts about Income Inequality
Lorenz Curve and Gini Ratio
LO1 20-5
20 40 60 80 100
20
40
60
80
100
0Percentage of Households
Perc
enta
ge o
f Inc
ome
Perfect Equality
Complete Inequality
ab
c
d
e
f
Lorenz Curve(Actual Distribution)
A B
Gini Ratio =Area A
Area A + Area B
Facts about Income Inequality
Lorenz Curve and Gini Ratio
LO1 20-5
Perfect Equality
Complete Inequality
ab
c
d
e
20 40 60 80 100
20
40
60
80
100
0Percentage of Households
Perc
enta
ge o
f Inc
ome
Perfect Equality
Complete Inequality
ab
c
d
e
f
Lorenz Curve(Actual Distribution)
A B
Gini Ratio =Area A
Area A + Area B
Facts about Income Inequality
Lorenz Curve and Gini Ratio
LO1 20-5
Perfect Equality
Complete Inequality
ab
c
d
e
Perfect Equality
Lorenz Curve(Actual Distribution)
Complete Inequality
ab
c
d
20 40 60 80 100
20
40
60
80
100
0Percentage of Households
Perc
enta
ge o
f Inc
ome
Perfect Equality
Complete Inequality
ab
c
d
e
f
Lorenz Curve(Actual Distribution)
A B
Gini Ratio =Area A
Area A + Area B
Facts about Income Inequality
Lorenz Curve and Gini Ratio
LO1 20-5
Perfect Equality
Complete Inequality
ab
c
d
e
Perfect Equality
Lorenz Curve(Actual Distribution)
Complete Inequality
ab
c
d
Perfect Equality
Lorenz Curve(Actual Distribution)
Complete Inequality
A
ab
c
d
20 40 60 80 100
20
40
60
80
100
0Percentage of Households
Perc
enta
ge o
f Inc
ome
Perfect Equality
Complete Inequality
ab
c
d
e
f
Lorenz Curve(Actual Distribution)
A B
Gini Ratio =Area A
Area A + Area B
Facts About Income Inequality
LO1 20-6
20 40 60 80 100
20
40
60
80
100
0Percentage of Households
Perc
enta
ge o
f Inc
ome
Lorenz CurveBefore Taxes and
Transfers
Lorenz CurveAfter Taxes and
Transfers
Impact of government taxes and transfers
Facts About Income Inequality
LO1 20-6
20 40 60 80 100
20
40
60
80
100
0Percentage of Households
Perc
enta
ge o
f Inc
ome
Lorenz CurveBefore Taxes and
Transfers
Lorenz CurveAfter Taxes and
Transfers
Impact of government taxes and transfers
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
Income Inequality Over Time
LO3 20-8
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
Income Inequality Over Time
LO4 20-10
Equality Versus Efficiency
• The case for equality • Maximizing total utility
• The case for inequality• Incentives and efficiency
• The equality-efficiency tradeoff
LO4 20-11
The Utility-Maximizing Distribution of Income
Anderson’s MarginalUtility From Income
Brooks’ MarginalUtility From Income
0 0
Mar
gina
l Util
ity
Mar
gina
l Util
ity
Income Income
$5000 $5000$2500 $7500
MUBMUA
Equality Versus Efficiency
LO4 20-12
Utility Gain(Entire Blue Area)
bb’a’
a
The Utility-Maximizing Distribution of Income
Anderson’s MarginalUtility From Income
Brooks’ MarginalUtility From Income
0 0
Mar
gina
l Util
ity
Mar
gina
l Util
ity
Income Income
$5000 $5000$2500 $7500
MUBMUA
Equality Versus Efficiency
LO4 20-12
Utility Gain(Entire Blue Area)
bb’a’
a
The Utility-Maximizing Distribution of Income
Anderson’s MarginalUtility From Income
Brooks’ MarginalUtility From Income
0 0
Mar
gina
l Util
ity
Mar
gina
l Util
ity
Income Income
$5000 $5000$2500 $7500
MUBMUA
Equality Versus Efficiency
LO4 20-12
Utility Loss(Entire Red Area)
Utility Gain(Entire Blue Area)
bb’a’
a
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
Incidence of Poverty
LO5 20-14
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
Poverty Trends
LO5 20-16
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
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
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
Taste for Discrimination Model
Afr
ican
-Am
eric
an W
age
Rat
e(D
olla
rs)
African-American Employment (Millions)0
LO7 20-20
D1
S
8
16
MoreDiscriminationination
D2
6
12
S
n
LessDiscrimination
D3
$98
18
Taste for Discrimination Model
Afr
ican
-Am
eric
an W
age
Rat
e(D
olla
rs)
African-American Employment (Millions)0
LO7 20-20
LessDiscrimination
D1
S
8
16
MoreDiscriminationination
D2
6
12
S
n
LessDiscrimination
D3
$98
18
Discrimination
• Statistical discrimination• Judged on average group
characteristics• Labor market example• Profitable, undesirable, but not
malicious
LO7 20-21
• Occupational segregation• The crowding model• Crowd certain groups into less
desirable occupations• Effects of crowding• Elimination of crowding
LO7
Discrimination
20-22
Occupational SegregationW
age
Rat
e
3 4 3 4 64
Occupation X Occupation Y Occupation Z
Quantity of Labor(Millions)
Quantity of Labor(Millions)
Quantity of Labor(Millions)
000
LO7 20-23
Dx Dy Dz
B BBW
results in men enjoying higher wages in the other occupations (X and Y).
MM
Occupational SegregationW
age
Rat
e
3 4 3 4 64
Occupation X Occupation Y Occupation Z
Quantity of Labor(Millions)
Quantity of Labor(Millions)
Quantity of Labor(Millions)
000
LO7 20-23
Crowding women into one occupation (Z)…
Dx Dy Dz
B BBW
results in men enjoying higher wages in the other occupations (X and Y).
MM
Occupational SegregationW
age
Rat
e
3 4 3 4 64
Occupation X Occupation Y Occupation Z
Quantity of Labor(Millions)
Quantity of Labor(Millions)
Quantity of Labor(Millions)
000
LO7 20-23
Crowding women into one occupation (Z)…
Dx Dy Dz
B BBW
results in men enjoying higher wages in the other occupations (X and Y).
MM
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
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