1 © ©1999 South-Western College Publishing Chapter 18 Income Distribution & Poverty PowerPoint Slides prepared by Ken Long Principles of Economics 2nd edition by Fred M Gottheil

2 What are the different ways of making income? Wages Interest Rent Profit © ©1999 South-Western College Publishing

3 What makes rich people rich? Interest, rent, and profit © ©1999 South-Western College Publishing

4 What are some techniques used to measure income distribution? Quintiles The Lorenz Curve © ©1999 South-Western College Publishing

The Distribution of Money Income of U.S. Families by Quintiles HH Bottom 5th Second 5th Third 5th Fourth 5th Top 5th Top 5% (Percentages )

6 Changes in the income distribution Distribution got somewhat more equal during the depression, stayed pretty much the same from the 40’s to the 80’s, and has gotten more unequal since then

7 What is the Lorenz Curve? Shows the percentage of total income received by a given percentage of recipients whose incomes are arranged from smallest to largest © ©1999 South-Western College Publishing

8 Cumulative % of families Cumulative % of Income 0100 The Lorenz Curve Line of Perfect Equality

9 Lorenz Curve Cumulative % of families Perfect Income Equality Cumulative Percent of Income © ©1999 South-Western College Publishing

10 The Bureau of the Census provides income & poverty information © ©1999 South-Western College Publishing

11 What is the Gini Coefficient? A numerical measure of the degree on income inequality in an economy © ©1999 South-Western College Publishing

12 What does the Gini Coefficient have to do with the Lorenze Curve? The coefficient transforms the Lorenze Curve into a numerical value © ©1999 South-Western College Publishing

13 Cumulative % of families Cumulative Percent of Income A B Areas produced by the Lorenze Curve G = A/(A+ B) © ©1999 South-Western College Publishing

14 With the Gini Coefficient, what do the #’s mean? A number of 0 is perfect income equality A number of 1 is perfect income inequality © ©1999 South-Western College Publishing

15 Gini Coefficients, US

16 How unequal is the income distribution in the U.S.? It is more uneven than in some countries and less uneven than others © ©1999 South-Western College Publishing

17 What is Wealth? The accumulated assets owned by individuals © ©1999 South-Western College Publishing

18 What is Life Cycle Wealth? Wealth in the form of nonmonetary assets, such as a house, automobiles, and clothing © ©1999 South-Western College Publishing

19 Some problems in measuring income distribution  Life cycle income  Family size and effort  Underground economy  Taxes and in-kind income

Income Distribution at One Point & Over Time a YearJohn's Age John's Income Stephanie's Age Stephanie's Income Total 18 yrs $ 10,000 35,000 52,000 64,000 75,000 $236, yrs $ 30,000 45,000 60,000 75,000 26,000 $236,000 Point here is that people can have the same lifetime income yet at any moment in time, there will be income differences.

21 What are some reasons to justify Income Equality? The randomness of personal misfortune is a misfortune Rawls’s Theory of Justice There’s nothing random about inequality Equality and maximum utility © ©1999 South-Western College Publishing

22 What does the “Randomness Theory” have to say about Income Inequality? Good fortune is distributed randomly so income inequality has no justification © ©1999 South-Western College Publishing

23 What is “Rawl’s Theory of Justice” argument? Because income is meted out randomly, income equality is justified © ©1999 South-Western College Publishing

24 What is the “There’s nothing Random about Inequality” argument? Because people own property from theft, and property determines income, incomes should be equal © ©1999 South-Western College Publishing

25 What is the “Equality and Maximum Utility” argument? Because equality produces the greatest welfare for the greatest number of people, it should be equalized © ©1999 South-Western College Publishing

26 For more information about income equality: © ©1999 South-Western College Publishing docs/erp/ /rawls.html on_debate.html

27 What are the cases for Income Inequality? Efficiency Economic Growth © ©1999 South-Western College Publishing

28 What is the “Efficiency” argument? There has to be inequality so that people will have an incentive to be productive © ©1999 South-Western College Publishing

29 What is the “Economic Growth” argument? Because the wealthy can afford to save, a high savings rate makes possible money for investments © ©1999 South-Western College Publishing

Factors Contributing to Income Inequality Innate abilities and attributes Work and leisure preferences Education and other training (human capital) Risk taking Luck Wage discrimination

31 Labor market discrimination Employer discrimination Employee discrimination Customer discrimination

32 Male-female wage gap: median salary of women about 75% that of men Part-time work more common among women At one time, less human capital accumulation by women Job choice and mobility issues Career interruptions Role differentiation, sexual division of labor

33 Issue of Comparable Worth Comparable worth--jobs that are judged comparable in terms of skills needed, etc, should be paid the same Very controversial, can different jobs in different industries be judged comparable?

34 Measuring poverty: relative or absolute measures? Problem with relative measures: there will always be a bottom 10 or 20%, or whatever % is chosen—that does not mean all those people are poor

35 What is the Poverty threshold? The level of income below which families are considered to be poor © ©1999 South-Western College Publishing

36 How do we define Poverty? Different approaches As a % of median income Meeting basic needs standard © ©1999 South-Western College Publishing

37 Basic needs standard of Poverty threshold Developed in the 1960’s based on findings by department of agriculture For a family of 4, current poverty line is around $16,000 of income

Poverty in Different Groups, 1994 Group % of Group in Poverty TOTAL POPULATION BY RACE/ETHNIC GROUP White11.7 African American30.6 Hispanic30.7 BY REGION OF COUNTRY Northeast12.9 Midwest13.0 South16.1 West15.3

Poverty in Different Groups, 1994 Group % of Group in Poverty BY AGE Under 18 years old years old years old years old years old years old years old years old and older11.7 BY EDUCATION No high school diploma24.8 High school diploma, no college10.9 Some college, but less than bachelor’s degree7.8 Bachelor’s degree or more2.6

40 Our welfare “system” Combination of federal and state programs AFDC, food stamps, public housing, supplemental income programs, medicaid, etc. Criticized for high implicit tax rates

41 What is the Negative Income Tax? Based on a sliding scale, below a certain income level the government pays money to people © ©1999 South-Western College Publishing

42 Negative income tax proposal, alternative to current welfare system Let I G = Guaranteed income t = negative income tax rate W= cash payment under NIT EI= family’s eared income W = I G - t (EI)

43 Example Let I G = 5,000 t =.5 (50%) Then if EI = 0, W = 5, (0) or W = 5,000 Continue in this manner for other income levels

44 For EI = 1,000, W = 5, (1000) = 4500 EI = 2,000, W = 5, (2000) = 4000 At EI = 10,000, W = 5, (10,000) = 0 Thus EI equals the break-even (B) level of income, no more welfare payment Note that B = I G /t

Hypothetical Negative Income Tax

46 What is Median Income? The midpoint of a society’s income distribution © ©1999 South-Western College Publishing

47 How many people in the U.S. live in poverty? Poor families make up a little more than 10% of the population © ©1999 South-Western College Publishing

48 How does the Government help the Poor? Cash assistance In-kind assistance © ©1999 South-Western College Publishing

49 What is the Lorenze Curve? What is the Gini Coefficient? What are some reasons to justify Income Equality?What are some reasons to justify Income Equality? What are the cases for Income Inequality?What are the cases for Income Inequality? What is Median Income? How do we define Poverty? What is a Negative Income Tax?

50 ENDEND © ©1999 South-Western College Publishing