Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 1 ECON Designed by Amy McGuire, B-books, Ltd. 18 CHAPTER Income Distribution and Poverty Micro McEachern

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 2 LO 1 Income Distribution by Quintiles  Distribution of Income  U.S. households  Ranked by income  Five groups of equal size (quintiles)  Percentage of income received in 1970  Poorest 20% of population  4.1% of income  Richest 20% of population  43.3% of income

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 3 Exhibit 1 LO 1 Share of Aggregate Household Income by Quintile: 1970, 1980, 1990, and 2005

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 4 LO 1 Income Distribution by Quintiles  Richest 20% of population  Increased share of income  Two-earner households  Poorest 20% of population  Decreased share of income  Single-parent household

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 5 LO 1 The Lorenz Curve  Lorenz curve  Percentage of total income  Received by any given % of households  When incomes are arrayed from smallest to largest  Equal distribution line

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 6 Exhibit 2 LO 1 Lorenz Curves Show That Income Was Less Evenly Distributed Across U.S. Households in 2005 than in 1970 Lorenz curve: convenient way of showing the % of total income received by any given % of households when households are arrayed from smallest to largest. Point a: in 1970, the bottom 80% of households received 56.7% of all income. Point b: in 2005, the share of all income going to the bottom 80% of households was lower than in If income were evenly distributed across households, the Lorenz curve would be a straight line.

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 7 LO 1 Why Incomes Differ  Number of household members working  Education, ability, job experience  Productivity  High-Income household  Well-educated couple; both spouses employed  Low-income household  One person living alone  Single-parent, female  Poorly educated

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 8 LO 1 A College Education Pays More  Median wage, past 20 years  Only high-school diploma: decreased 6%  Industry deregulation; declining unionization  Information technology  College degree: increased 12%  Information technology  Higher rewards for education

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 9 LO 1 Case Study Marital Sorting and Income Inequality  Marry by education levels  Women  54% of people enrolled in college, graduate school, or professional school  High paying jobs  Professional careers  Choose marriage partner based on income

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 10 LO 1 Problems with Distribution Benchmarks  No objective standard  Money income  Measured after cash transfers  Before taxes and in-kind transfers  Household size differs across quintiles  Reported income  Distributed of spending  More evenly distributed than income quintiles

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 11 Redistribution Programs LO 2  Official poverty level  Family of four: $19,971 in 2005  $13.70 per person per day  Pretax money income  Includes cash transfers  Excludes value of noncash transfers  Food stamps; Medicaid; Subsidized housing  Employer-provided health insurance  Recessions: Increase in poverty  International poverty line:  $1 per person per day

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 12 Exhibit 3 LO 2 Number and Percentage of U.S. Population in Poverty:

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 13 Programs to Help the Poor LO 2  Promote a healthy economy  Greater job opportunities  Lower unemployment rate  Antipoverty programs  Social insurance  Income Assistance

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 14 Exhibit 4 LO 2 U.S. Poverty Rates and Unemployment Rates

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 15 Social Insurance LO 2 1.Social Security 2.Medicare 3.Unemployment insurance 4.Workers’ compensation  Deducted from workers’ pay  Aimed at people with work history  Income redistribution  From rich to poor  From young to old

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 16 Income Assistance LO 2  Welfare programs  Means-tested program 1.Cash transfers programs  Temporary assistance for needy families  Supplemental security income  General assistance aid  Earned-income tax credit

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 17 Income Assistance LO 2 2.In-kind transfer programs  Medicaid  Food stamps  Housing assistance  Support for day care, school lunches  Energy assistance  Education and training

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 18 Exhibit 5 LO 2 Federal Redistribution Outlays Each Year by Category:

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 19 Who Are the Poor? LO 3  Poverty among the elderly declined  Growth in spending for Social Security and Medicare  The elderly  Powerful political force  Feminization of poverty  Status of the household head  Teen pregnancy

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 20 Exhibit 6 LO 3 U.S. Poverty Rates by Age:

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 21 Exhibit 7 LO 3 Poverty Rates Are Much Higher for Families Headed by Females But Have Declined in the Last Decade

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 22 Exhibit 8 LO 3 Percent of Population Living in Poverty by State

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 23 Who Are the Poor? LO 3  Discrimination  School funding  Housing  Employment  Training  Career advancement  Wage gap  Quality of schooling

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 24 Who Are the Poor? LO 3  Affirmative Action  Numerical hiring  Promotion and training goals  Higher black employment  Smaller wage gap

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 25 Who Are the Poor? LO 3  Unintended consequences of income assistance  High marginal tax rate  Welfare benefits > income from work  Long term dependency on welfare

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 26 Welfare Reform LO 4  Welfare-to-work programs  1997: Temporary assistance for needy families  States: more control  Time limits  Work participation rates  Benefit levels

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 27 LO 4 Case Study Welfare-to-Work Is Working?  Welfare recipients  Declined 71: below the peak  Increased employment among mothers  Higher income  Increased welfare spending per recipient  Earned-income tax credit  Higher price of going on welfare

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 28 Exhibit 9 LO 4 Welfare Recipients as a Percentage of the U.S. Population Declined Sharply After 1994