Income Distribution and Poverty The Lorenz curve The Gini coefficient Distribution of income and wealth in the U.S. Poverty threshold (level) Questions: What explains income inequality? What can (should) be done, if anything?

Income Distribution and Poverty Person’s income related to primary source of income. If property income: profits(entrepreneurship) interest (capital) rent (land) tendency to be at the top of the distribution If labor income: wages tendency to be at the bottom of the distribution

Measuring Income Distribution Two ways to measure an economy’s income distribution: The Lorenz curve. The Gini coefficient.

CURVES FOR THE LORENZ COMMUNITIES OF WASHTENAU, SPRINGFIELD, AND HOLMES

Lorenz curve Perfect income equality (diagonal) Shows the percentage of total income that a specific part of the population -- typically represented by quintiles, ranging from the poorest to the richest -- receives. The percentage of population is measured along the horizontal axis and the percentage of total income is measured along the vertical axis. Perfect income equality (diagonal) When each percent of the population receives an equal percent of the economy’s total income. Perfect income inequality (2 sides of right angle) One person receives all of the income.

LORENZ CURVES SWEDEN, FRANCE, BRAZIL, AND THE UNITED STATES

Gini coefficient 0: perfect equality 1: perfect inequality A numerical measure of the degree of income inequality in an economy. The ratio of the two areas produced by the Lorenz curve. G = A/(A+B) Area A lies between the diagonal and the economy’s Lorenz curve. Area B lies below the economy’s Lorenz curve. 0: perfect equality 1: perfect inequality

THE GINI COEFFICIENT G = A/(A+B)

0: perfect equality 1: perfect inequality EXHIBIT 4 SHARE OF AGGREGATE INCOME RECEIVED BY HOUSEHOLDS, BY QUINTILE AND TOP 5 PERCENT, AND GINI COEFFICIENT: 1970–99 Source: U.S. Bureau of the Census, Money Income in the United States: 1995, Current Population Reports, P60-193 (Washington, D.C.: U.S. Government Printing Office, 1996); and U.S. Bureau of the Census, Money Income in the United States: 1999, Current Population Reports, P60-220 (Washington, D.C.: U.S. Government Printing Office, 1999). 0: perfect equality 1: perfect inequality

EXHIBIT 5 PERCENTAGE CHANGE IN HOUSEHOLD GINI COEFFICIENT: 1967–99 Source: U.S. Bureau of the Census, Current Population Survey, March 1999.

Possible Causes of Growing Income Inequality Decrease in minimum wage (in real value). Decrease in union membership. Changes in tax laws favoring the wealth. Declining resources to public education. “Deindustrialization” (closing down manufacturing plants) “Globalization.” Stock market “boom” (1980-2000) [Related to unequal distribution of wealth]

Wealth Accumulated assets owned (financial and physical) by individuals, including inherited assets. Net wealth (net worth) tends to be far more unevenly distributed than income.

EXHIBIT 8 DISTRIBUTION OF NET WEALTH OF U.S. FAMILIES (1774 AND 1973) Source: Jones, A. H., Wealth of a Nation to Be—The American Colonies on the Eve of Revolution (New York: Columbia University Press, 1980); and Greenwood, D., “An Estimation of U.S. Family Wealth and Its Distribution from Macro Data, 1973,” The Review of Income and Wealth, Series 29, I, March 1983, pp. 23–44.

Is There an Optimal Income Distribution? The Case for Equality Good fortune and disaster--distributed randomly. Income inequality, then, has no more justification than a lottery result.

Is There an Optimal Income Distribution? The Case for Equality Economist A.P. Lerner, made the case for equality based on the argument that equality produces the greatest welfare for the greatest number of people.

The Case for Inequality Other economists argue for income inequality: productive contribution= economic reward Without the link between reward (income) and labor, productive people would lack the incentive to work.

Supply-Side Economics: “Trickle-Down Theory” Income inequality economic growth. Because….The rich tend to do the country’s saving + investing. The richer the rich the greater the saving and investment higher the rate of growth. “A rising tide lifts all boats.”

TAXES Problems in using taxes to redistribute incomes economic costs of redistribution distortionary effects of taxes deadweight welfare loss of taxes disincentives 7

A Laffer curve Total tax revenue 100 fig Average tax rate (%)

A Laffer curve R max. t1 Total tax revenue 100 Average tax rate (%) 100 fig Average tax rate (%)

Percentage shares of income before and after tax by decile group of households: 2000/1 % of income fig Source: Economic Trends (ONS, April 2002)

EXHIBIT 6. INCOME DISTRIBUTION IN THE MID-1980s, EXHIBIT 6 INCOME DISTRIBUTION IN THE MID-1980s, SELECTED COUNTRIES, BY QUINTILE Source: European Economy: 1996 Broad Economic Policy Guidelines, no. 62 (Brussels, 1996), and World Development Report, 1996 (Washington, D.C.: World Bank, 1996).

EXHIBIT 7 INCOME DISTRIBUTION IN LESS-DEVELOPED ECONOMIES, BY QUINTILE Source: World Development Report, 1996 (Washington, D.C.: World Bank, 1996). The footnote to the table in the report reads: “These estimates should be treated with caution.”

Average gross weekly earnings of UK full-time adult employees: 2001 fig

INEQUALITY AND POVERTY The causes of inequality inequality of wealth differences in workers’ ability; qualifications attitudes hours worked economic power qualifications differences in demand for goods differences in household composition discrimination degree of government support unemployment Government/societal attitudes towards inequality 4

Benefits to reduce inequality/poverty “safety-net” temporary support means-tested vs universal benefits Cash assistance Transfer payments: Government assistance in the form of direct income. In-kind assistance Government assistance in the form of goods and services, such as healthcare, education, food stamps.

Social protection benefits in various European countries: (a) €per head Euro per head fig Source: Eurostat, 2002

CASH AND NONCASH BENEFITS FOR PERSONS WITH LIMITED INCOME: USA 1996 Source: Statistical Abstract of the United States, 1999 (Washington, D.C.: Department of Commerce, 1999), p. 389.

EXHIBIT 15. POPULATION BELOW 50 PERCENT OF EXHIBIT 15 POPULATION BELOW 50 PERCENT OF MEDIAN INCOME (LATEST OECD DATA) Source: OECD Economic Surveys, Germany, 1996 (Paris: OECD, 1996), P. 90.

Exh. 15: Population Below 50 Percent of Median Income (Latest OECD Data) Has government spending to assist the poor been effective at raising families out of poverty? In the U.S. the effects of low-income assistance programs seem barely perceptible. While some countries have seen the numbers of poor drop by half, the US number have dropped by less than 1 percent.

The problem of the poverty trap TAXES AND BENEFITS The problem of the poverty trap an argument for universal benefits problems with universal benefits The negative income tax system 9