Income Inequality and Poverty

Income Mobility Income mobility –The ability to move up and down the economic ladder over time Higher levels of income mobility? –Give workers an incentive to improve human capital and work harder –Workers have increased change of rewards –Poverty may be only temporary

Income Mobility in United States

Income Mobility Marginal poor –Poor at a point in time, but have skills to move up the ladder –Low earnings are the exception –Willing to borrow to make a big purchase –Fit well into life-cycle theory model –Student straight out of college Long-term poor –People who lack the skills to advance to higher income levels

Poverty Policy Many policies (each with their costs and benefits) have been designed to address poverty Two conflicting motivations –We want to give generously –We want the poor to become self-sufficient Policies –Welfare –In-kind transfers –Earned income tax credit (EITC) –Minimum wage

Welfare Not a government program but a series of initiatives –Monetary payments –Subsidies and vouchers –Health services, housing –Examples: TANF, SSI, SNAP Who receives this? –Unemployed, disabled, veterans, dependent children –Eligibility is often limited by time and only if income is below a cutoff amount

In-Kind Transfers Direct assistance in the form of goods and services –Food banks, housing shelters, private charities, health care through Medicaid Why give goods and services rather than cash? –Mainly to prevent the misuse of funds –Possibility of cash transfers going to alcohol, gambling addictions, or expensive clothes –In-kind transfers can be targeted at essential services

Earned Income Tax Credit The EITC is a refundable tax credit designed to encourage low-income people to work more –Can lower taxes as much as $6,000 per year –Helps over 20 million families, making it the largest poverty-fighting policy –Benefits are phased out over higher incomes, so there is no sizeable work disincentive at a specific cutoff The EITC is a form of a negative income tax –This is a tax credit that is paid to poor households out of taxes collected from middle- and upper-income taxpayers

A Negative Income Tax

Minimum Wage Discussed previously—a price floor on wages in labor markets However, the same problems can be discussed –Low-skill people may be less productive –Firms may hire less low-skill workers –Minimum wage doesn’t guarantee employment