2. 34 - 1 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show INCOME INEQUALITY AND POVERTY 34 C H A P T E R

3. 34 - 2 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show Distribution of U.S. Personal Income by Families, 2001 Personal Income Category Percentage of All Families in This Category Under $10,000 $10,000 - $14,999 $15,000 - $24,999 $25,000 - $34,999 $35,000 - $49,999 $50,000 - $74,999 $75,000 - $99,999 $100,000-$199,999 $200,000 and over 5.3 4.3 11.3 11.9 15.7 20.8 13.1 14.6 3.0 100.0 FACTS ABOUT INCOME INEQUALITY 2001 U.S. Average Family Income $66,863

4. 34 - 3 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show The Lorenz Curve graphically... Distribution of Personal Income by Quintiles, 2001 Percentage of Total Income Upper Income Limit $24,000 41,127 62,500 94,150 4.2 9.7 15.4 22.9 47.7 100.0 FACTS ABOUT INCOME INEQUALITY Quintile Lowest 20% Second 20% Third 20% Fourth 20% Highest 20% Total

5. 34 - 4 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show 20 40 60 80 100 100 80 60 40 20 0 Percent of Families Percent of Income Perfect Equality Complete Inequality THE LORENZ CURVE

6. 34 - 5 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show 20 40 60 80 100 100 80 60 40 20 0 Percent of Families Percent of Income Perfect Equality Complete Inequality Lorenz Curve (actual distribution) Area between the lines shows the degree of income inequality THE LORENZ CURVE

7. 34 - 6 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show 20 40 60 80 100 100 80 60 40 20 0 Percent of Families Percent of Income Perfect Equality Complete Inequality Lorenz Curve (actual distribution) Area between the lines shows the degree of income inequality THE LORENZ CURVE Gini Ratio Numerical Measure of Overall Dispersion of Income Area Between Lorenz Curve and Diagonal Total Area Below the Diagonal Gini Ratio =

8. 34 - 7 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show 20 40 60 80 100 100 80 60 40 20 0 Percent of Families Percent of Income Perfect Equality Complete Inequality Lorenz Curve (actual distribution) Area between the lines shows the degree of income inequality THE LORENZ CURVE Limitations due to Income Mobility: The Time Dimension – Income churning over longer time periods is evident

9. 34 - 8 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show 20 40 60 80 100 100 80 60 40 20 0 Percent of Families Percent of Income Perfect Equality Complete Inequality Lorenz Curve (actual distribution) Area between the lines shows the degree of income inequality THE LORENZ CURVE Effect of government redistribution of cash and noncash transfers

10. 34 - 9 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show 20 40 60 80 100 100 80 60 40 20 0 Percent of Families Percent of Income Perfect Equality Complete Inequality Lorenz Curve (actual distribution) Area between the lines shows the degree of income inequality THE LORENZ CURVE Lorenz curve after taxes and transfers

11. 34 - 10 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show Ability Differences Education and Training Discrimination Preferences and Risks Unequal Distribution of Wealth Market Power Luck, Connections, and Misfortune CAUSES OF INCOME INEQUALITY

12. 34 - 11 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show TRENDS IN INCOME INEQUALITY 1929 - 1947 Significant reduction in income inequality 1947 - 1969 Less inequality but at a slower pace 1969 - 2001 More unequal since 1969

13. 34 - 12 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show Brazil Guatemala South Africa Mexico United States France Italy Sweden 0 10 20 30 40 50 GLOBAL PERSPECTIVE Percentage of Total Income Received By Top One-Tenth of Income Receivers, Selected Nations Source: World Development Report, 2003

14. 34 - 13 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show Greater Demand for Highly Skilled Workers Demographic Changes International Trade Immigration Decline in Unionism CAUSES OF GROWING INEQUALITY

15. 34 - 14 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show EQUALITY VERSUS EFFICIENCY The Case for Equality Maximizing Total Utility The Case for Inequality Incentives and Efficiency Tradeoff Between Equality and Efficiency

16. 34 - 15 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show THE ECONOMICS OF POVERTY Poverty Defined – 2001 Single $ 9,039 Family of 418,104 Family of 624,195 Poverty Rates in the U.S Blacks22.7% Hispanics21.4% Whites 9.9%

17. 34 - 16 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show THE ECONOMICS OF POVERTY Incidence of Poverty Poverty Rate Poverty Trends The “Invisible” Poor Short-Periods of Time Geographic Isolation Politically Invisible – Are Easy to Ignore

18. 34 - 17 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show 0 10 20 30 Married-couple families Persons 65 or over Whites Total population Children under 18 Foreign born (not citizens) Hispanics Blacks Female householders PERCENTAGE IN POVERTY 2001 Data

19. 34 - 18 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show THE INCOME-MAINTENANCE SYSTEM Social Insurance Programs, 2002 OASDHI $432 Billion ($386 Billion in 1999) Medicare $219 Billion ($210 Billion in 1999) Unemployment Compensation $32 Billion ($20 Billion in 1999) Entitlement Programs

20. 34 - 19 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show THE INCOME-MAINTENANCE SYSTEM Public Assistance Programs, 2002 Supplemental Security Income (SSI) $35 Billion ($29 Billion in 1999) Temporary Assistance for Needy Families $14 Billion ($23 Billion in 1999) Food stamps $20 Billion ($20 Billion in 1999) Medicaid $207 Billion ($124 Billion in 1999) Earned-Income Tax Credit (EITC) $55 Billion ($30 Billion in 1999) Entitlement Programs

21. 34 - 20 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show Common Features Minimum Annual Income Benefit-Reduction Rate Conflicts Among Goals Eliminating Poverty Maintaining Work Incentives Holding Down Costs WELFARE: GOALS AND CONFLICTS

22. 34 - 21 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show Welfare Reform Growing Government Dependence Personal Responsibility Act 1996 Temporary Assistance to Needy Families 5-Year Lifetime Limit Must Work After 2 Years Reduced Food-Stamp Eligibility Tightened Some Definitions 5-Year Waiting Period on New Legal Immigrants WELFARE: GOALS AND CONFLICTS

23. income inequality Lorenz curve Gini Ratio income mobility noncash transfers equality-efficiency tradeoff poverty rate entitlement programs social insurance programs OASDHI Medicare unemployment compensation public assistance programs Supplemental Security Income (SSI) Temporary Assistance for Needy Families (TANF) food stamp program Medicaid earned-income tax credit (EITC) ENDBACK Copyright McGraw-Hill/Irwin, 2005

24. 34 - 23 Copyright McGraw-Hill/Irwin, 2005 Facts About Income Inequality The Lorenz Curve Causes of Income Inequality Trends in Income Inequality Equality versus Efficiency The Economics of Poverty The Income Maintenance System Welfare: Goals and Conflicts Key Terms Previous Slide Next Slide End Show Next: Labor Market Institutions and Issues: Unionism, Discrimination, Immigration Chapter 35