Annual Earnings Distribution, 2005full time workers

•Mean (average): $43,281•Median: $33,042

•Median: one-half of workers above, one-half below this wage

0

2

4

6

8

10

12

Mil

lion

s of

Wor

kers

5 15 25 35 45 55 65 75 85 95

Thousands of Dollars

Distribution of Annual Earnings, 2005

05

1015202530354045

Per

cen

t of

All

Earn

ings

Bottom20%

Second20%

Third20%

Fourth20%

Highest20%

Income Quintile

• Division Into 5 Equal Groups• Effect of Government Redistribution

Quintile After TaxesAnd Transfers

Lowest 20%

Second 20%

Third 20%

Fourth 20%

Highest 20%

Total

Distribution by Quintiles, 2005

3.4

8.7

14.7

22.2

50.1

100.0Source: Bureau of the Census

UpperIncome Limit

$18,500

34,738

55,331

88,029

No Limit

Before TaxesAnd Transfers

.8

7.2

14.8

24.0

53.1

100.0

Percentage of Total Income

• Average Household Income $66,570 in 2006• Household: one or more people sharing a housing unit

Measures of Income Inequality:Lorenz Curve and Gini Ratio

20 40 60 80 100

20

40

60

80

100

0

Perfect Equality

Lorenz CurveUS income distribution before taxes/transfers

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

Lorenz CurveAfter Taxes and

TransfersGovernment Taxes and TransfersReduce Inequality

Gini coefficient: between 0 (perfect equality) and 1 (perfect inequality)

Gini Coefficient World Human Development Report 2007-2008

• Number of Workers. – 81% of families in the top quintile have two or more people

working, only 2.2% have no one working. – only 13% of families in the bottom quintile have two or more

people working; 40% have no one working.

• Amount of work– top quintile families supplied >30%of the total weeks worked

in the economy…– poorest fifth supplied <8%

• Age– Top income earners are in their prime earning age

Causes of Income Inequality

Causes of Income Inequality• Ability

• Education, Training• Family background

– parental occupation, connections• Household size• Discrimination• Diversity of preferences

– more leisure time– risk aversion vs risk-loving

• Random luck and misfortune• Connections

• Non-earnings income • rental, interest, dividend income, capital gains

– Government policies: Financial market deregulation• Higher income for top earners• Small shareholders lost in financial scandals

– Fringe benefits • Higher for high income earners

Causes of Income Inequality

• Lower socioeconomic status linked to chronic stress, heart disease, ulcers, type 2 diabetes, rheumatoid arthritis, cancer, premature aging.– Even when controlling for economic resources and access to

health care.

• top 1 %: with incomes >$348,000 • top 10%: incomes >$100,000

Sources: • U.S. Census Bureau, Historical Income Tables, Table F-3• Congressional Budget Office, Historical Effective Federal Tax Rates: 1979 to

2004, Table 1C, December 2006.

Source: Economic Policy Institute, The State of Working America 2006-07, table 3.4. For data, see "Hourly Wage Decile Cutoffs for All Workers, 1973-2005 (2005 dollars)"

Causes of Rising Income Inequality• Greater Demand for Highly Skilled Workers

• Higher compensations for top earners• Demographic changes

– Less-skilled baby boomers and female workers joined labor market in 1970-80s -higher share of low-wage workers

– One-parent households • International Trade

• Employment shifted to lower wage high variance service sector

• Immigration

• Decline in Unionism• Decline in Income Mobility

• movement from one income quintile to another

Female-HeadedAfrican-Americans

HispanicsNot US Citizens

Children Under 18Women

Total PopulationMen

WhitesAsian

Persons 65 or OlderMarried-Couple Families

Full-Time Workers

0 10 20 30

24.7

21.9

21.4

17.8

13.9

12.7

11.5

10.8

9.8

9.8

5.5

2.8

28.4

Poverty Rates Among Selected Population Groups,2005

• 21% of nation’s minority population lives in California, 12% in Texas

• Minorities are a majority in four states: Hawaii (75%), New Mexico (57%), California (57%) and Texas (52%).

Poverty rates in selected countries

Is inequality bad?• Free markets philosophy:

– inequality is normal in a free market– "trickle down effect" moves wealth from the rich to

the poor as the rich hire the poor

Should government fight economic inequality?

• Possible government approaches to reducing economic inequality :– Mass education: increases supply of skilled labor– Subsidize "essential" goods and services - food, healthcare,

education, and housing– Spend taxpayers’ money on schools, not on the war– Tax wealth (inheritance, capital gains, dividends, land), not

labor earnings • “Good” tax, does not discourage labor supply• “Bad” tax on labor earnings discourages work

– Minimum wage legislation - to raise the income of the poorest working group

– Progressive taxation: tax the rich at higher % rate than the poor

– Welfare transfers to the poor

D for labor by firms

S of labor by workers

Legal min wage

W*

SURPLUS

Q* QsQd# workers

Minimum Wages

Market for low-skill labor

Criticism of min wages:

Creates excess supply of labor =

unemployment

Wage

• Benefits following groups more than others:– Single mothers with children under 18

• In total work force 5.3%• Among min wage workers 10.5%

– Minorities: • In total labor force 11.1% are African Americans, 13.1% are Hispanic • Among min wage workers 14.8% are African Americans, 18.9% are

Hispanics

• Help reverse the trend of declining real wages for low-wage workers and reduce poverty.– inflation-adjusted value of min wage 26% lower in 2005 than it

was in 1979• There is no evidence of job loss from the last minimum

wage increase

Increase Minimum Wages? Proponents’ View

• Losers – workers who can’t find jobs at the higher wage– firms who must pay higher wages.– new (young) workers who are less likely to be hired

• Higher min wage- employers make working conditions harder, decrease non-wage compensation

• Entry-level jobs are not lifelong dead-end jobs – 2/3 of minimum wage workers move above the minimum wage

within one year, with median raise 10% Out of all min wage workers…• 53% are under the age of 23

– average family income about $50,500 – 82% live in families with incomes above the poverty line – Not the primary earners

• 47% are workers ages 23 and up– 29% live in poor families – average family income is over $38,100 – 30% did not graduate from high school– 57% work part-time voluntarily

Increase Minimum Wages? Opponents’ View

U.S. Income-Maintenance SystemProgram Eligibility Source of funds Aid

People, million

Social Security http://www.ssa.gov

Old-Age,Survivors, and Disability Insurance (OASDI, Social Security)

Age 62-67, death of parent or spouse, no reduction in benefits for earnings up to $32,000, reduction in benefits $1 for each $3 of earnings above $32,000

Tax on employed and employee 6.2% + 6.2% on first $97,500 earned, 2007

Cash, avg $1000/mo for retired, $2000 widow with 2 kids

48

Unemployment compensation for several weeks

UnemployedPayroll tax on employers, varies by state, firm size

Cash avg $262/week

8

Medicare Age 65, disabilityTax on employed and employee 1.45% + 1.45%

Health insurance 42

Public assistance (welfare)Supplemental Security income (SSI)

Age, disability, income Tax revenuesCash, avg $580/month

7

Temporary Assistance for Needy Families (TANF) for max 5 years in lifetime

Poor with children, requires to work after 2 years, none to immigrants for 5 years

Tax revenues Cash, services, avg $400/month

5

Food stampsPoor with children, working poor

Tax revenues Vouchers 24

Medicaid Poor Tax revenues Med services 50

Earned Income Tax Credit (EITC)

Low wage workers Tax revenues Tax refund 26

Head start, Pell grants, Low income home energy assistance, veteran’s assistance

Welfare reform of 1996• Personal Responsibility and Work Opportunity

Reconciliation Act– Replaced Aid to Families with Dependent Children with

Temporary Assistance to Needy Families– Cut Food Stamps and SSI– Est. lifetime limit 5 years for TANF assistance– States must show that 50% of single mothers on welfare are

working at least 30 hours if youngest child >age 6, 20 hours if < age 6

• Pushes women into low wage labor market, away from education– Welfare caseload fell 60% since 1996– Employment among single mothers increased– Income poverty rate among single mothers declined but

well-being did not improve• Extra childcare and transportation expenses