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