Transcript Document 7248191

Inequality and Poverty
CHAPTER
19
CHAPTER CHECKLIST
When you have completed your study of this
chapter, you will be able to
1
Describe the economic inequality and poverty in the
United States.
2
Explain how economic inequality and poverty arise.
3
Explain why governments redistribute income and
describe the effects of redistribution on economic
inequality and poverty.
19.1 ECONOMIC INEQUALITY
We measure economic inequality by looking at the
distributions of income and wealth.
A household’s income is the amount that it receives in a
given period.
A household’s wealth is the value of the things that it
owns at a point in time.
Table 19.1 on the next slide shows the distributions of
income and wealth in the United States in 2004.
19.1 ECONOMIC INEQUALITY
19.1 ECONOMIC INEQUALITY
Lorenz Curves
A Lorenz curve is a curve that graphs the cumulative
percentage of income (or wealth) against the cumulative
percentage of households.
Figure 19.1 on the next slide shows the Lorenz curves
for the United States in 2004. They are based on the
tables you’ve just seen.
19.1 ECONOMIC INEQUALITY
The cumulative percentages of income and wealth are
graphed against the cumulative percentage of households.
1. If each 20 percent of
households received
20 percent of total
income, there would
be no rich and poor—
there would be
equality as shown by
the Line of equality.
19.1 ECONOMIC INEQUALITY
2. The distribution of income shows that the poorest 20 percent
of households received 3.5 percent of total income, and the
richest 20 percent received 50.1 percent.
3. The distribution of
wealth shows that the
poorest 40 percent of
households owned
0.2 percent of total
wealth, and the
richest 1 percent
owned 38.1 percent.
19.1 ECONOMIC INEQUALITY
The farther the Lorenz curve is from the Line of equality,
the greater is the inequality.
The distribution of
wealth is much more
unequal than the
distribution of income.
19.1 ECONOMIC INEQUALITY
Inequality over Time
U.S. income and wealth have become more unequal
over the past few decades.
The highest incomes have increased much faster than
the lower incomes.
The gap between rich and poor has widened.
Figure 19.2(a) on the next slide shows how the
distribution of income has changed.
19.1 ECONOMIC INEQUALITY
The average income of
the lowest 20 percent
group increased from
$7,700 to $10,300—an
increase of 34 percent.
The average income of
three middle groups also
increased by 34 percent.
The average income of
highest 20 percent
increased by 77 percent.
19.1 ECONOMIC INEQUALITY
Economic Mobility
Economic mobility is the movement of a family up or
down the income ladder and through the income
quintiles (20 percent groups).
If there were no economic mobility, a family would be
stuck at a given point in the income distribution—
persistently rich to persistently poor.
How much economic mobility has there been?.
Figure 19.2(b) shows the percentage of families that
moved by one quintile or more over a ten-year period.
19.1 ECONOMIC INEQUALITY
The figure shows quite a
lot of economic mobility.
About 30 percent of families
move up a quintile or more in
a decade;
Slightly smaller percentage
move down by a quintile or
more;
Between 35 and 40 percent
remain in the same quintile.
19.1 ECONOMIC INEQUALITY
Who are the Rich and the Poor?
The lowest-income household in the United States
today is likely to be a black woman over 65 years of
age who lives alone somewhere in the South and has
fewer than nine years of elementary school education.
The highest-income household in the United States
today is likely to be a college-educated white married
couple between 45 and 54 years of age living together
with two children somewhere in the Northeast or the
West.
19.1 ECONOMIC INEQUALITY
The median income
in 2004 was
$44,389.
Education is the
single biggest
factor affecting
household income
distribution.
Size of household,
marital status, and
age of householder
are also important.
Race and region
are the least
important.
19.1 ECONOMIC INEQUALITY
Poverty
Poverty is a state in which a household’s income is too
low to be able to buy the quantities of food, shelter, and
clothing that are deemed necessary.
In 2004, the poverty level for a four-person household
was an income of $19,157.
In that year, 37 million or 12.7 percent of Americans
lived below the poverty level.
Figure 19.4 on the next slide shows the changing
poverty rate in the United States.
19.1 ECONOMIC INEQUALITY
The white poverty rate
fell during the 1960s
and has remained
constant since then.
The Hispanic poverty
rate increased during
the 1980s before falling
during the 1990s.
The black poverty rate
has fallen in two
waves: the late 1960s
and the late 1990s.
19.1 ECONOMIC INEQUALITY
Poverty Duration
Another measure of poverty is duration.
Duration of poverty is an important indicator of the
hardship poverty brings.
Figure 19.5 on the next slide shows the duration of
poverty in the United States from 1996 to 1999.
19.1 ECONOMIC INEQUALITY
More than 50
percent of poverty
last for between 2
and 4 months.
But almost 30
percent of poverty
lasts for more than 9
months. These
families experience
chronic poverty.
19.2 HOW INEQUALITY AND POVERTY ARISE
Economic inequality and poverty arise from five key
factors
•
•
•
•
•
Human capital
Discrimination
Financial and physical capital
Entrepreneurial ability
Personal and family characteristics
We look at each in turn.
19.2 HOW INEQUALITY AND POVERTY ARISE
Human Capital
High-skilled workers have a higher value of marginal
product than low-skilled workers.
Figure 19.6(a) on the next slide illustrates the demand
for high-skilled and low-skilled labor.
19.2 HOW INEQUALITY AND POVERTY ARISE
Demand for High-Skilled
and Low-Skilled Labor
High-skilled labor has a
higher VMP than low-skilled
labor and a greater demand.
The demand curve for highskilled labor, DH, lies above
the demand curve for lowskilled labor, DL, by the VMP
of skill.
19.2 HOW INEQUALITY AND POVERTY ARISE
The Supply of High-Skilled and Low-Skilled Labor
Skills are costly to acquire, and a worker pays the cost
of acquiring a skill before benefiting from a higher
wage.
Figure 19.6(b) on the next slide illustrates the supply of
high-skilled and low-skilled labor
19.2 HOW INEQUALITY AND POVERTY ARISE
High-skilled labor bears the
cost of acquiring skill.
The supply curve of highskilled labor, SH, lies above
the supply curve of low-skilled
labor, SL, by the
compensation for the cost of
acquiring skill.
19.2 HOW INEQUALITY AND POVERTY ARISE
Wage Rates of High-Skilled and Low-Skilled Labor
The combined effects of skill on the demand for and
supply of labor generate a higher wage for high-skilled
labor than for low-skilled labor.
Figure 19.6(c) on the next slide illustrates the skilled
wage differential.
19.2 HOW INEQUALITY AND POVERTY ARISE
The demand for low-skilled
labor, DL, and the supply of lowskilled labor, SL, determine the
wage rate of low-skilled labor—
in this example at $10 an hour.
The demand for high-skilled
labor, DH, and the supply of highskilled labor, SH, determine the
wage rate of high-skilled labor—
in this example at $20 an hour.
19.2 HOW INEQUALITY AND POVERTY ARISE
Discrimination
Human capital differences explain much of the income
inequality that exists.
Economists are not sure whether and by how much
discrimination adds to income inequality.
One line of argument is that competition prevents
discrimination. But race and sex income differences do
persist.
19.2 HOW INEQUALITY AND POVERTY ARISE
Financial and Physical Capital
People with high incomes are usually those who own
large amounts of financial capital and physical capital.
They receive income in form of interest, dividends, and
capital gains.
Families with a lot of capital tend to become even more
wealthy because
• They bequeath wealth to their children.
• Rich people marry rich people (on average).
19.2 HOW INEQUALITY AND POVERTY ARISE
Saving and wealth accumulation is not inevitably a
source of inequality.
When a family saves to redistribute an uneven income
over the life cycle, it enjoys more equal consumption.
If a lucky generation that has a high income saves and
makes a bequest to an unlucky generation, this saving
decreases economic inequality.
19.2 HOW INEQUALITY AND POVERTY ARISE
Entrepreneurial Ability
Some people become extremely rich through a
combination of hard work, good luck, and outstanding
entrepreneurial ability.
But others who borrow to create a business, work hard,
and have bad luck become extremely poor.
Personal Characteristics
Personal and family characteristics play a crucial role,
for good or evil, in influencing economic well-being.
19.3 INCOME REDISTRIBUTION
How Government Redistributes Income
Three main ways in which governments in the United
States redistribute income are
• Income taxes
• Income maintenance programs
• Subsidized services
19.3 INCOME REDISTRIBUTION
Income Taxes
Income taxes may be progressive, regressive, or
proportional.
• A progressive tax
– One that taxes income at an average rate that increases
with the level of income.
• A regressive tax
– One that taxes income at an average rate that decreases
with the level of income.
• A proportional tax
– One that taxes income at a constant rate, regardless of
income.
19.3 INCOME REDISTRIBUTION
Income Maintenance Programs
Three main types of program are
• Social Security programs
• Unemployment compensation
• Welfare programs
19.3 INCOME REDISTRIBUTION
Social Security Programs
OASDHI or Old age, Survivors, Disability, and Health
Insurance
Medicare, which provides hospital and health insurance
for the elderly and disabled.
19.3 INCOME REDISTRIBUTION
Unemployment Compensation
To provide an income to unemployed workers.
A tax is paid based on the income of each covered
worker.
Each worker receives a benefit when he or she
becomes unemployed.
19.3 INCOME REDISTRIBUTION
Welfare Programs
1. Supplementary Security Income (SSI), designed to
help the neediest elderly, disabled, and blind people.
2. Temporary Assistance for Needy Families (TANF)
program, designed to help households that have
inadequate income.
3. Food Stamp program, designed to help the poorest
households obtain a basic diet.
4. Medicaid, designed to cover the costs of medical
care for households receiving help under the SSI and
TANF programs.
19.3 INCOME REDISTRIBUTION
Subsidized Services
Services provided by the government at prices far
below the cost of production. The most important of
these are
• Education
• Health care
19.3 INCOME REDISTRIBUTION
 The Scale of Income Redistribution
Market income is the income that a household earns
in factor markets with no redistribution.
Money income is market income plus money benefits
paid by the government.
We can measure the scale of income redistribution by
calculating the percentage of market income paid in
taxes minus the percentage received in benefits at each
income level.
19.3 INCOME REDISTRIBUTION
Figure 19.7 shows income
redistribution.
In part (a), the Lorenz curve for
the distribution of income after
taxes and benefits is closer to
the line of equality than the
money income distribution and
the market income distribution.
In part (b), the three lowest
income groups gain and the two
highest income groups lose.
19.3 INCOME REDISTRIBUTION
Why We Redistribute Income
Two approaches:
• Normative approach
Discusses why we should compel everyone to help
the poor and looks for principles to guide in the
appropriate scale of redistribution.
• Positive approach
Seeks reasons why we do compel everyone to
help the poor and tries to explain the actual scale
of redistribution.
19.3 INCOME REDISTRIBUTION
Normative Theories of Income Redistribution
Utilitarianism points to the ideal distribution being one of
equality. But efficiency is also desirable.
Greater equality can be achieved only at the cost of
inefficiency—the big tradeoff.
John Rawls proposed the principle that income should
be redistributed to the point at which the poorest
person’s share is maximized.
19.3 INCOME REDISTRIBUTION
Libertarian philosophers, such as Robert Nozick, say
that any redistribution is wrong because it violates the
sanctity of private property and voluntary exchange.
Modern political parties stand in the center of these
extremes—some favor a bit more redistribution than
others, but the major parties are basically happy with
the current scale of redistribution.
19.3 INCOME REDISTRIBUTION
Positive Theories of Income Redistribution
There is no good positive theory, but economists have a
promising idea called the median voter theory.
Median voter theory is a theory that government
pursues policies that make the median voter as well off
as possible.
In the majority voting system, the voter whose views
carry most weight is the one in the middle—the median
voter.
Political parties will deliver the scale of redistribution
that the median voter prefers.
19.3 INCOME REDISTRIBUTION
The Major Welfare Challenge
The poorest people in the United States are young
women who have not completed high school, have a
child (or children), live without a partner, and are more
likely to be black or Hispanic than white.
These young women and their children present the
major welfare challenge:
• The long-term solution involves education and job
training.
• The short-term solution is welfare.
19.3 INCOME REDISTRIBUTION
Welfare must be designed to strengthen the incentive to
pursue the long-term solution while giving support in the
short term.
The Current Approach: TANF
TANF is a block grant paid to the states to administer
payments to individuals.
An adult member of a household receiving assistance
must work or perform community service. Assistance is
limited to 5 years.
Some economists suggest a negative income tax.
19.3 INCOME REDISTRIBUTION
Negative Income Tax
A negative income tax is a tax and redistribution
scheme that provides every household with a
guaranteed minimum annual income and taxes all
earned income above the guaranteed minimum at a
fixed rate.
A negative income tax does not remove the burden of
the tax but it does improve the incentives to work and
save at all levels of income.
Redistribution in YOUR Life
 You are in both sides of the redistribution equation. But
what is your bottom line?
 Are you a net receiver or a net payer?
 First work out how much tax you are paying–sum the
income tax you pay, the sales taxes, and taxes on
gasoline, tobacco, alcohol.
 Now work out the benefits you receive–including the
value of government services and cash payments you
receive from the government.
 So what is your bottom line?