ch 18 income distribution and poverty micro econ4
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© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Chapter 18 ECON4 William A. McEachern
1
Income
Distribution
and Poverty
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Income Distribution by Quintiles
• Distribution of income
– U.S. households
– Ranked by income
– Five groups of equal size (quintiles)
• Percentage of income received in 1980
– Poorest 20% of population
• 4.3% of income
– Richest 20% of population
• 43.7% of income
2
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© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Income Distribution by Quintiles
• Measuring income
– After cash transfer payments are
received
– Before taxes are paid
– Before in-kind transfers are received
• Food vouchers
• Medicare, Medicaid
• Public housing
• Employer- provided benefits
3
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Exhibit 1
4
Share of Aggregate Household Income by Quintile
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Income Distribution by Quintiles
• Richest 20% of population
– Increased share of income
– 51.1% in 2012
– Growth of two-earner households
• Poorest 20% of population
– Decreased share of income
– Growth of single-parent households
5
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© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Lorenz Curve
• Lorenz curve
– Percentage of total income
– Received by any given percentage of
households
– When incomes are arrayed from smallest
to largest
• Equal distribution line
6
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Exhibit 2
7
Lorenz Curves Show That Income Was Less Evenly Distributed
Across U.S. Households in 2012 Than It Was in 1980The Lorenz curve is a
convenient way of showing the
percentage of total income
received by any given
percentage of households when
households are arrayed from
smallest to largest based on
income. For example, point a
shows that in 1980, the bottom
80 percent of households
received 56.3 percent of all
income. Point b shows that in
2012, the share of all income
going to the bottom 80 percent
of households was lower than in
1980. If income were evenly
distributed across households,
the Lorenz curve would be a
straight line.
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Why Incomes Differ
• Median income
– Middle income
– When all incomes are ranked from
smallest to largest
• Median wage
– Middle wage
– When all wages are ranked from smallest
to largest
8
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Why Incomes Differ
• Income differences
– Number of household members working
• Median income of households with two
earners
– 91% higher than for households with one earner
– Education, ability, job experience
– Productivity
9
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Why Incomes Differ
• High-income household
– Well-educated couple
– Both spouses employed
• Low-income household
– One person living alone
– Or a family headed by a single-parent
• Female, poorly educated, not working
10
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
A College Education Pays More
• Median wage, past 20 years
– Only high-school diploma: decreased 6%
– College degree: increased 12%
• Widening wage gap:
– Industry deregulation
– Declining unionization
– Freer international trade and migration
– New computer-based information
technologies11
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A College Education Pays More
• Widening wage gap:
– Supply of less-educated workers
increased more than the supply of more
educated workers
• Higher return to education
– Marriage trends
12
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Distribution Benchmarks
• Problems with income distributions
– No objective standard
– Money income
• Measured after cash transfers
• Before taxes and in-kind transfers
– Household size differs across quintiles
– Reported income
– Distribution of spending
• More evenly distributed than income quintiles
13
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Redistribution Programs
• Official poverty level
– Benchmark level of income
• Initially based on three times the cost of a
nutritionally adequate diet
• Pretax money income
– Includes cash transfers
– Excludes value of noncash transfers
• Food stamps; Medicaid; Subsidized housing
• Employer-provided health insurance
14
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Redistribution Programs
• Poverty levels, 2012
– Family of four: $23,050
• $15.83 per person per day
• Recessions
– Increase in poverty
• Internationally, 40 percent of world’s
population lives on $2 per person per
day
15
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 3
16
Number and Percentage of U.S. Population in Poverty
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Programs to Help the Poor
• Promote a healthy economy
– Greater job opportunities
– Lower unemployment rate
• Antipoverty programs
– Social insurance
– Income assistance
17
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Exhibit 4
18
U.S. Poverty Rates and Unemployment Rates Are Related Over Time
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Social Insurance
• Social insurance
– Government programs
– Help make up for lost income of people
who worked but are now
• Retired
• Unemployed
• Unable to work because of disability or
work-related injury
19
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© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Social Insurance
• Social security
– Supplements retirement income
• Record of contributing to the program during
their working years
• Largest government redistribution program
• Medicare
– Provides health insurance for short-term
medical care
• Older Americans, regardless of income
20
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Social Insurance
• Unemployment insurance
– Supports those who have lost jobs
• Workers’ compensation
– Supports workers injured on the job
• Social insurance system
– Deducted from workers’ pay
• Aimed at people with work history
– Protect some families from poverty
• Particularly the elderly
21
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Social Insurance
• Social insurance system
– Aimed at those with a work history
– Income redistribution
• From rich to poor
• From young to old
– Current beneficiaries
• Receive far more in benefits than they ever
paid into the program
22
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© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Income Assistance
• Income assistance programs
– Welfare programs
– Provide money and in-kind assistance to
the poor
– Benefits do not depend on prior
contributions
• Means-tested program
– An individual’s income and assets must not
exceed specified levels
23
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Income Assistance
• Cash transfers programs
– Temporary Assistance for Needy Families
(TANF)
• Cash for poor families with dependent
children
• Funded by federal government, run by the
states
24
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Income Assistance
• Cash transfers programs
– Supplemental Security Income (SSI)
• Cash to the elderly poor and the disabled
• Includes people addicted to drugs and
alcohol, children with learning disabilities, and
the homeless
• Funded by federal and state governments
25
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Income Assistance
• Cash transfers programs
– General assistance aid
• Poor, but don’t qualify for TANF or SSI
– Earned-income tax credit
• Supplements the wages of the working poor
26
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Income Assistance
• In-kind transfer programs
– Medicaid
• Provides medical care for poor people
• The most costly welfare program
– Supplemental Nutrition Assistance
Program (SNAP)
• Offers low-income households vouchers
redeemable for food
27
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© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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Income Assistance
• In-kind transfer programs
– Housing assistance
• Direct assistance for rental payments and
subsidized low-income housing
– Support for day care
– School lunches
– Extra food for pregnant women
– Energy assistance
– Education and training (Head Start)
28
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Exhibit 5
29
Federal Redistribution Outlays Each Year by Category
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Who Are the Poor?
• Poverty among the elderly declined
– Growth in spending for Social Security
and Medicare
• The elderly
– Powerful political force
30
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 6
31
U.S. Poverty Rates by Age
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Who Are the Poor?
• Feminization of poverty
– Poverty rates among families headed by
females
• Much higher than rates among other families
• Trended down
– Percentage of births to unmarried
mothers
• Is five times greater today than in the 1960s
• 87% of teenagers who gave birth were
unmarried
32
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Exhibit 7
33
Poverty Rates Are Much Higher for Families Headed by
Females but Have Declined Since 1990
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Exhibit 8
34
Percent of Population Living in Poverty by State
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Who Are the Poor?
• Discrimination
– School funding
– Housing
– Employment
– Training
– Career advancement
– Wage gap
• Quality of schooling
35
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© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Who Are the Poor?
• Equal Employment Opportunity
Commission
– Civil Rights Act of 1964
– Monitors cases involving
• Unequal pay for equal work
• Unequal access to promotion
• Affirmative action plans
– Numerical hiring, promotion, training
goals
36
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© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Who Are the Poor?
• Unintended consequences of income
assistance
– High marginal tax rate on earned income
• Discourages employment and self-sufficiency
• Welfare benefits > income from work
– Long term dependency on welfare
• Deteriorating labor skills
– Parents
• Encouraged poor performance in school
– Children could qualify for SSI37
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© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Welfare Reform
• Welfare-to-work programs
– Increased employment
• 1996: TANF
– Replaced Aid to Families with Dependent
Children (AFDC)
– States: more control
• Time limits
• Work participation rates
• Benefit levels
38
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Welfare Rolls Have Declined
• Welfare reforms
– Increased employment among mothers
who head families
– Increased welfare spending per recipient
– Investment in work-related services
• Job placement, transportation, child care
– Earned-income tax credit
• Welfare recipients
– Declined 69% below the peak by 2010
39
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Exhibit 9
40
Welfare Recipients as a Percentage of the U.S. Population
Declined Sharply after Welfare Reform
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