Transcript Income inequality and poverty - Virginia Community College

Income Inequality
and Poverty
Poverty in the US
What do you see?
A man or a woman?
female
How old are they?
a child
Where do they live?
What race are they?
from a rural
area
white
Resource Prices
and Income Differences
• Individuals create income by supplying
resources that are highly valued by others.
• This provides the incentive to develop skills,
talents, and resources others value.
• The view that there is a fixed-size
economic pie that can be sliced and divided
among the citizenry is fallacious.
The poverty line
The U.S. 2011 poverty line:
- $17,916 annually for a family of three
- $16.37 per person per day
The World Bank poverty lines for low-income countries:
- $1.25/day per person
- $2/day per person
The U.S. Poverty Rate since 1960
-fell dramatically during the 1960s,
-rose in the early 1980s and early 1990s,
-declined in the 1990s through mid-2000s,
-rose to 15.9% in 2011, (close to the 1960 levels)
-In 2012, the poverty dropped slightly to 15.0%.
(Source: U.S. Census Bureau)
Poverty Rates by Group, 2011
Group
Poverty Rate
Females
16.3%
Males
13.6%
White
13.0%
Black
27.6%
Hispanic
25.3%
Under 18
21.9%
18-24
20.6%
25-34
15.9%
35-44
12.2%
45-54
10.9%
55-59
10.7%
60-64
10.8%
65 and older
8.7%
Poverty Lines for Low-Income Countries, mid-2000s
Country
Brazil (2009)
Share of Population below
$1.25 per day
6.1%
Share of Population
below $2.00 per day
10.8%
China (2009)
11.8%
27.2%
Egypt (2008)
1.7%
15.4%
India (2010)
32.7%
68.8%
Mexico (2010)
0.7%
4.5%
Nigeria (2010)
68.0%
84.5%
Source: http://data.worldbank.org/indicator/SI.POV.DDAY
The Poverty Trap
a. When people are provided with food, shelter, healthcare,
income, and other necessities, assistance may reduce their
incentive to work.
b. as the poor earn income to support themselves, the
government reduces the level of assistance it provides.
c. every time a poor person earns $100, the person loses $100
in government support.
d. the person experiences no net gain for working.
The Poverty Trap in Action
The original choice is 500 hours of leisure,
2,000 hours of work (at $8/hour) at point A,
and income of $16,000.
With a guaranteed income of $18,000, this
family would receive $18,000 whether
it provides zero hours of work or
2,000 hours of work.
Only after 2,300 hours of work does its
income rise above the guaranteed level of
$18,000—and even then, the marginal
gain to income from working many hours
is small.
Two Combinations of Work and Support
Hours Worked
0
Total Earnings
Government Support
Total Income
0
$18,000
$18,000
500
$4,000
$14,000
$18,000
1,000
$8,000
$10,000
$18,000
1,500
$12,000
$6,000
$18,000
2,000
$16,000
$2,000
$18,000
2,500
$20,000
0
$20,000
Hours Worked
0
Total Earnings
Government Support
Total Income
0
$18,000
$18,000
500
$4,000
$16,000
$20,000
1,000
$8,000
$14,000
$22,000
1,500
$12,000
$12,000
$24,000
2,000
$16,000
$10,000
$26,000
2,500
$20,000
$8,000
$28,000
Loosening the Poverty Trap: Reducing Government
Assistance by 50 Cents for Every $1 Earned
Point P - 2000 hours, no
assistance and income of
$16,000.
Point S – less work, more
leisure, with government
assistance and income of
$25,000.
Point R – same work/leisure,
with government assistance
and income of $26,000.
Safety Nets
1. Temporary Assistance for Needy Families (TANF)
a. Replaced Aid to Families with Dependent Children (AFDC),
1) aka welfare
2) provided cash payments to mothers with children who were
below the poverty line.
b. Personal Responsibility and Work Opportunity Reconciliation Act
1) aka “welfare reform act”
2) new law replaced AFDC with Temporary Assistance for Needy
Families (TANF).
c. the federal government gives a fixed amount of money to each state
1) the state can then use the money for almost any program with an
antipoverty component
2) they must impose work requirements so that most recipients are
working or attending school.
3) no one can receive TANF benefits with federal money for more
than a total of five years over his or her lifetime.
2. Earned income tax credit (EITC)
a. first passed in 1975
b. a method of assisting the working poor through the tax system.
c. one of the largest assistance program for low-income groups
d. the amount of the tax break increases with the amount of income
earned, up to a point.
Real Federal Spending on
CTC, EITC, and TANF,
1975-2013
3. Supplemental Nutrition Assistance Program (SNAP)
a. Aka “food stamps”
b. a federally funded program, started in 1964
c. each month poor people receive a card like a debit card that they can use
to buy food.
d. The amount of food aid for which a household is eligible varies by
income, number of children, and other factors
e. households are expected to spend about 30% of their own net income on
food,
f. if 30% of their net income is not enough to purchase a nutritionally
adequate diet, then those households are eligible for SNAP.
g. SNAP can contribute to the poverty trap.
1) For every $100 earned, the government assumes that a family can
spend $30 more for food, and thus reduces its eligibility for food aid
by $30.
Medicaid
1. created by Congress in 1965
2. a joint health insurance program entered into by both the states and
the federal government.
3. The federal government helps fund Medicaid
4. But each state is responsible for administering the program,
5. It provides medical insurance for certain low-income people
6. it ensures that a basic level of benefits is provided to Medicaid participants
- each state sets eligibility requirements, so the program differs from state to
state.
7. common problem
- many low-paying jobs pay enough to a breadwinner so that a
family could lose its eligibility for Medicaid,
- yet the job does not offer health insurance benefits
Income Inequality in the United States
Year Lowest
1967
4.0
1970
4.1
1975
4.3
1980
4.2
1985
3.9
1990
3.8
1995
3.7
2000
3.6
2005
3.4
2010
3.3
2011
3.2
Second
10.8
10.8
10.4
10.2
9.8
9.6
9.1
8.9
8.6
8.5
8.4
Third
17.3
17.4
17.0
16.8
16.2
15.9
15.2
14.8
14.6
14.6
14.3
Fourth
24.2
24.5
24.7
24.7
24.4
24.0
23.3
23.0
23.0
23.4
23.0
Highest Top 5%
43.6
17.2
43.3
16.6
43.6
16.5
44.1
16.5
45.6
17.6
46.6
18.5
48.7
21.0
49.8
22.1
50.4
22.2
50.3
21.3
51.1
22.3
Share of Aggregate Income Received by Each Fifth and Top 5% of
Households, 1967–2011
Income Inequality in the United States
Lowest
Fourth
Third
Second
20% of
quintile quintile
quintile
recipients
Family income before taxes
17.4
23.4
12.0
4.5
1950
17.8
12.2
24.0
4.8
1960
17.6
23.8
5.4
12.2
1970
11.6
17.5
24.3
5.1
1980
10.8
16.6
23.8
4.6
1990
22.8
4.3
9.8
15.5
2000
22.9
4.2
9.7
15.4
2001
23.0
4.0
9.6
15.4
2004
23.3
4.1
9.7
15.6
2007
Impact of taxes & transfers on 2006 household income
22.5
15.0
8.5
3.5
Before
9.7
15.0
22.7
4.3
After
Household expenditures
24.1
13.2
7.1
18.2
1961
23.9
7.1
12.9
18.0
1972
24.1
6.8
12.8
18.1
1980
23.3
7.1
12.4
17.1
1990
12.9
17.5
23.4
7.4
1995
Top
20% of
recipients
42.7
41.3
40.9
41.6
44.3
47.4
47.7
47.9
47.4
50.5
48.3
37.4
38.1
38.2
40.1
38.8
Lorenz Curve
100
90
80
70
% Income
60
50
40
30
20
10
0
1
2
3
4
5
6
% Population
7
8
9
10
Lorenz Curve
100
90
80
70
% Income
60
50
40
30
20
10
0
1
2
3
4
5
6
7
8
% Population
9
10
Quintile
Lowest
Second
Third
Fourth
Highest
1975 by
Quintile
4.3
10.4
17.0
24.7
43.6
1975
Cumulative
4.3
14.7
31.0
56.4
100.0
2010 by
Quintile
3.3
8.5
14.6
23.4
50.3
2010
Cumulative
3.3
11.8
26.4
49.8
100.1
% Income
100
Lorenz Curve
1975 Cumulative
2010 Cumulative
90
4.3
3.3
80
14.7
11.8
31.0
26.4
70
56.4
49.8
100.0
100.1
60
50
1975
40
2010
30
20
10
0
1
2
3
4
5
6
7
% Population
8
9
10
International Income Distribution
Country Year Lowest
US
2011
3.2
Germany 2000
8.5
Second
8.4
13.7
Third
14.3
17.8
Fourth
23.0
23.1
Highest
51.1
36.9
Brazil
Mexico
China
2009
2010
2009
2.9
4.9
4.7
7.1
8.8
9.7
12.4
13.3
15.3
19.0
20.2
23.2
58.6
52.8
47.1
India
Russia
Nigeria
2010
2009
2010
8.5
6.1
4.4
12.1
10.4
8.3
15.7
14.8
13.0
20.8
21.3
20.3
42.8
47.1
54.0
Source: U.S. data from U.S. Census Bureau Table H-2. Other data from The World Bank Poverty and Inequality
Data Base, http://databank.worldbank.org/data/views/reports/tableview.aspx#)
International Income Distribution
Country Year Lowest
US
Germany
Brazil
Mexico
China
India
Russia
Nigeria
2010
2000
2009
2010
2009
2010
2009
2010
Second
Third
Fourth
Highest
3.3
8.5
14.6
23.4
50.3
3.3
11.8
26.4
49.8
100.1
8.5
13.7
17.8
23.1
36.9
8.5
22.2
40
63.1
100
2.9
7.1
12.4
19.0
58.6
2.9
10
22.4
41.4
100
4.9
8.8
13.3
20.2
52.8
4.9
13.7
27.0
47.2
100
4.7
9.7
15.3
23.2
47.1
4.7
14.4
29.7
52.9
100
8.5
12.1
15.7
20.8
42.8
8.5
20.6
36.3
57.1
99.9
6.1
10.4
14.8
21.3
47.1
6.1
16.5
31.3
52.6
99.7
4.4
8.3
13.0
20.3
54.0
4.4
12.7
25.7
46
100
Lorenz Curve
100
90
80
70
% Income
60
50
40
30
20
10
0
1
2
3
4
5
6
% Population
7
8
9
10
Factors Influencing Income Distribution
• Differences in:
•
•
•
•
•
•
age,
education,
family size,
marital status,
number of earners in the family, and,
time worked.
• Young, inexperienced workers,
students, single-parent families, and
retirees are over-represented among
those with low incomes.
High and Low Income Families, 2007
Education of householder
Percent with less than high school
Percent with college degree or more
Age of householder (percent distribution)
under 35
35 - 64
65 and over
Family status
Married-couple family (% of total)
Single-parent family (% of total)
Persons per family
Earners per family
% of married-couple families
in which wife works full-time
% of total hours worked
supplied by group
Bottom 20%
of income
recipients
31.0
10.0
31.0
46.0
23.0
Top 20%
of income
recipients
2.0
63.0
12.0
79.0
9.0
48.0
52.0
93.0
7.0
2.9
3.4
0.8
2.2
12.0
64.0
8.0
Source: http://www.census.gov and author calculations from the March 2008 Current Population Survey.
29.0
Why Has
Income Inequality Increased?
•
•
•
•
•
greater share of single-parent families More dual-earner families +
Increased earnings differentials on the basis of
skill and education
the number of “winner-take-all” markets – top
heavy pay structures.
Tax changes require less “sheltering” of income
for the high tax brackets
Income Mobility
Percentage Distribution by Income Status of Family in 2004
Income Status of
Family in 1994
Highest quintile
Next highest quintile
Middle quintile
Next lowest-paid quintile
Lowest paid quintile
Top paid
quintile
Next highest
quintile
53.0
23.0
14.0
5.5
5.0
25.0
32.5
22.5
12.5
7.5
Middle Next lowest Lowest paid
quintile
quintile paid quintile
12.0
24.0
28.0
25.5
10.4
5.5
14.0
24.0
33.5
24.5
4.5
6.5
12.0
23.5
53.5
The table above allows us to see how families
in each income bracket in the U.S. fared 10 years later.
Does it appear to you that there is a significant amount
of income mobility in the U.S. economy?
1985 -1995
Top-paid quintile
Next-highest-quintile
Middle-quintile
Next-lowest-paid quintile
Lowest-paid quintile
1988-1998
Highest quintile
Next-highest-quintile
Middle-quintile
Next-lowest-paid quintile
Lowest-paid quintile
1994-2004
Highest quintile
Next highest quintile
Middle quintile
Next lowest-paid quintile
Lowest paid quintile
Top paid
quintile
Next highest
quintile
78.4
42.4
13.4
6.2
7.8
10.6
23.9
17.5
8.2
7.9
Middle Next lowest Lowest paid
quintile
quintile paid quintile
6.8
24.8
45.6
37.9
12.6
53.2
25.8
12.6
4.3
4.3
23.2
31.1
27.5
11.0
6.4
14.9
23.7
28.3
22.6
12.4
53.0
23.0
14.0
5.5
5.0
25.0
32.5
12.0
24.0
28.0
22.5
12.5
7.5
25.5
10.4
0.1
4.9
14.4
28.6
25.4
5.7
12.9
20.7
36.3
23.6
5.5
14.0
24.0
33.5
24.5
4.1
4.0
9.1
19.1
46.3
3.0
6.5
10.9
25.7
53.3
4.5
6.5
12.0
23.5
53.5
Household Expenditures
and Inequality
• Differences in household expenditures may be a
more accurate indicator of economic status than
income.
• current expenditures reflect long-term economic
status.
• In contrast with the annual income data,
household expenditure data do not indicate that
there has been a major change in U.S. economic
inequality.
Changing Composition of the Poor
Number of poor families (millions)
1959
1976
2000
8.3
5.3
6.2
Percent of poor families headed by a:
23
Female
Black
26
22
Elderly person (aged 65+)
Person who worked at least
70
some during the year
Poverty rate (%)
All families
Married-couple families
Female-headed families
All individuals
Whites
Blacks
Children (under age 18)
18.5
15.8
42.6
22.4
18.1
55.1
27.3
2003 2005
2007
7.6
7.7
7.6
53
27
9
61
53
27
9
48
48
30
14
55
50
27
10
53
51
27
10
48
10.1
7.2
32.5
11.7
9.1
31.1
16.0
8.6
4.7
24.7
10.0 9.9
5.4
5.1
28.0 28.7
12.6
10.5 10.6
24.4 24.9
17.6 17.6
9.4
22.0
16.1
Sources: U.S. Dept. of Commerce, Characteristics of the Population Below the Poverty Line: 1982, Table 5; and Poverty in the
United States: 2000, p. 60-214.
9.8
4.9
28.3
12.5
10.5
24.5
18.0
Poverty Rate of Persons & Families
in the United States 1947-2000
Year
1947
1960
1970
1980
1990
2000
2005
Poverty rate %
Persons Families
n.a.
22.2
12.6
13.0
13.5
11.3
32.0
18.1
10.1
10.3
10.7
8.7
9.9
Sources: Bureau of the Census, Current Population Reports, Series P60-210,
Poverty in the United States, 2000; and Economic Report of the President,
1964, Table 7.
• During the 1950s and 1960s, the poverty rate declined
substantially.
• After rising slightly during the 1970s and 1980s, the
official poverty rate has fallen modestly during the
economic expansion of the 1990s.
Transfer Payments
and the Poverty Rate
• Income transfers expanded rapidly over the past
several decades.
• largely ineffective at reducing the poverty rate.
• Though per capita income has increased
substantially over time (109% since 1965), the
poverty rate of working-age Americans has stayed
about the same.
Government Policies to Reduce Income Inequality
1. Redistribution
- taking income from those with higher incomes and
providing income to those with lower incomes
- progressive tax system
designed so the rich pay a higher percent in income
taxes
2. The Ladder of Opportunity
- even though all children will never come from identical
families and attend identical schools,
- each child has a reasonable opportunity to attain an
economic niche in society based on their interests, desires,
talents, and efforts
3. Inheritance Taxes
a. why should people who have worked hard
all their lives and saved up a substantial nest
egg not be able to give their money and
possessions to their children and
grandchildren?
b. many Americans are far more comfortable
with inequality resulting from high-income
people who earned their money by starting
innovative new companies than they are with
inequality resulting from high-income people
who have inherited money from rich parents.
Income Transfer Effects
• Income supplements large enough to significantly
increase the economic status of poor people will:
• encourage behavior that increases the risk of
poverty
• Provides a safety net?
• create high implicit marginal tax rates that reduce
the recipient’s incentive to earn.
• As income goes up, benefits drop off.
1. In 2000, high-income families (the top 20 percent) in the United States
earned approximately _________ percent of the total before-tax income.
a. 34 b.
47.
c.
62
d.
79
2. Imagine two cities, Engelgrad and Legreeville, where the rich, middle,
and poor income recipients in one city have annual incomes identical to
their counterparts’ incomes in the other city. In Engelgrad, the poorest
families one year almost always end up as the richest families the next
year and become middle-income families the year after that. In
Legreeville, however, the poor remain poor and the rich remain rich.
Which of the following is true about the two cities?
a. Annual data on the distribution of income will indicate that the degree
of income inequality in the two cities is identical.
b. The degree of lifetime income inequality in the two cities is identical
c. The income mobility of people in the two cities is identical
d. The distribution of annual income is more unequal in Legreeville
3. Compared to low-income families, a larger proportion of high-income
families
a. is headed by a person with a college degree
b. has both a husband and a wife who work full time
c. is headed by a person between the ages of 35 and 64
d. is all of the above.
4.
a.
b.
c.
d.
During 1970 – 2000, the official poverty rate of non-elderly families
fell modestly
fell substantially
steadily rose.
rose until 1985 and fell modestly since then.
5. When a person who receives welfare benefits earns income, those
benefits are reduced as earned income rises. This is referred to as
a. an implicit marginal tax.
b. the opportunity cost of income
c. the work-leisure trade-off
d. reverse discrimination
6. According to the official measure of poverty, in 2000 the poverty rate
of families in the US was
a. 4.2%
b. 8.6%.
c. 18.5%
d. 22%
7. The poverty threshold level defines poverty by finding the cost of
feeding a family and multiplying by
a. two
b. three.
c. four
d. five
8. Which of the following would cause the poverty threshold income level
for a given family to increase by 20 percent from one year to another?
a. a 20 percent increase in the family’s income
b. a 20 percent decrease in the family’s income
c. a 20 percent increase in the general level of prices.
d. a 20 percent increase in real national income
9. Which of the following best explains why so many persons with incomes
below the poverty threshold income level work very little or not at all?
a. They confront high implicit marginal tax rates.
b. They do not enjoy income as much as other people.
c. There are no jobs for low-skill workers.
d. They often face very low explicit marginal tax rates.
10. (I) Positive economics cannot determine how much income inequality
should be present in a country.
(II) Critics of government action to reduce income inequality argue that
modifying the market process of income determination may create perverse
incentives and hurt wealth creation.
a. Both I and II are true.
b.
Both I and II are false.
c. I is true; II is false.
d.
I is false; II is true.
100
90
80
% Population
70
60
50
40
30
20
10
0
1
2
3
4
5
6
7
8
9
% Income
10