2. Income Inequality and Poverty Please listen to the audio as you work through the slides.

3. Income Inequality and Poverty Learning Objectives: 1.The factors that have contributed to increased income inequality since 1969. 2.The causes of growing income inequality 3.How this trend might be halted 4.How discrimination reduces domestic output and income, 5.How to demonstrate the loss in domestic output and income using production possibilities analysis. 6.Social Insurance Programs and Public Assistance Programs.

4. Income Inequality And Poverty The richest 1 percent of Americans now take home almost 24 percent of income, up from almost 9 percent in 1976

8. Income Inequality And Poverty Wealth The wealthiest 1 percent of families owns roughly 34.3% of the nation's net worth, The top 10% of families owns over 71%, and The bottom 40% of the population owns way less than 1%.

11. Income Inequality And Poverty Some Questions What are the causes of income inequality? Is income inequality rising or falling? Is the US making progress in the war on poverty? What are the major income maintenance programs in the US? Has welfare reform succeeded?

12. Distribution of U.S. Income by households, 2006 Personal Income Category Percentage of All Households are 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 and above 7.5 5.9 11.8 11.5 14.6 18.2 11.3 19.1 100.0 Facts about Income Inequality Average household income in the US for 2006 - $66,570

13. graphically... Distribution of household income by quintile 2006 Percentage of Total Income Upper Income Limit $20,035 37,774 60,000 97,032 No limit 3.4 8.6 14.5 22.9 50.5 100.0 Facts about Income Inequality Quintile Lowest 20% Second 20% Third 20% Fourth 20% Highest 20% Total Source; Bureau of Census, census.gov

14. 20 40 60 80 100 100 80 60 40 20 0 Percent of Families Percent of Income Perfect Equality Complete Inequality The Lorenz Curve – degree of income inequality

15. 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 – degree of income inequality

16. 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 Gini Ratio Numerical Measure of Overall Dispersion of Income Area Between Lorenz Curve and Diagonal Total Area Below the Diagonal Gini Ratio = The Lorenz Curve – degree of income inequality

17. 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 Limitations due to: Income Mobility The Time Dimension – Income churning over longer time periods is evident The Lorenz Curve – degree of income inequality

18. 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 Effect of government redistribution of cash and noncash transfers The Lorenz Curve – degree of income inequality

19. 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 Lorenz curve after taxes and transfers The Lorenz Curve – degree of income inequality

20. 1. Ability Differences Mental, physical, talents, Education and Training Elementary and secondary education differences In quality of education delivered In attitude toward minority students In funding levels College or no college Access to training on the job self acquired Causes of Income Inequality

21. 2. Discrimination and Institutional Racism in: Education – segregation, defacto segregation –The school to prison pipeline Hiring – illegal, but now more subtle Training – access, quality Promotion – pass over Housing – access to education and other services Criminal justice – profiling, sentencing, legal representation, license to kill Causes of Income Inequality

22. 3. Preferences and Risks Preference for market work vs. leisure Professions involving risk –Relationship between risk and financial reward 4. Unequal Distribution of Wealth Wealth is more unequally distributed than income which leads to unequal distribution of: Rent, interest, and dividends which lead to unequal distribution of income Older people typically have more wealth than young people Causes of Income Inequality

23. 5. Market Power Resource markets – –unions (diminishing power), –professional groups Insiders 6. Luck, Connections, and Misfortune Being in the right place at the right time The GOB / GOG (good ole boy / girl) network Misfortune – had to drop out of school for some reason. Health issues Causes of Income Inequality

24. Trends in Income Inequality 1929 – 1947 (The Great Depression thru WW2) Significant reduction in income inequality. What was going on? New deal Economic Recovery Efforts WW2 Presence of shortage of labor, Rising productivity and real wages

25. Trends in Income Inequality 1947 – 1969 (Post WW2 period) Less inequality but at a slower pace. What was going on? Labor Shortage Ending Productivity Increasing Technology Advancing

26. Trends in Income Inequality 1969 – Today (the gap widens) More unequal since 1969 What has been going on? Computerization replaces workers 90% of the income gains went to the top 1% Greater concentration of wealth Productivity increases Anti-union movement takes off Average wages stagnated Labor surplus

27. 1.Greater Demand for Highly Skilled Workers 1.Information technology 2.Financial Services 3.Health Care 4.Shortage of skilled workers 2.Demographic Changes 1.Baby boomer generation retirement (and or re-entry) 2.Two worker families 3.Single mom families 4.Greater population diversity 3.International Trade, Immigration, Decline in Unionism 1.Foreign competition reduces demand for low skill jobs 2.Transfer of jobs to other countries 3.Falling union membership 4.The Great Recession of 2007 5.The hollowing out of the American Economy (outsourcing) Causes of Growing Inequality

28. Income Equality versus efficiency The Case for Income Equality Maximizing Total Utility The Case for Income Inequality Incentives and Efficiency Tradeoff Between Equality and Efficiency Which one is winning?

29. The Economics of Poverty Poverty Defined – 2006 A condition in which a person or family does not have the means to satisfy basic needs for food, clothing, shelter, and transportation. Means – current earned income, transfer payments, past savings, and property owned

30. 2011 HHS Poverty Guidelines Persons in Family 48 Contiguous States and D.C.AlaskaHawaii 1$10,890$13,600$12,540 214,710 18,38016,930 318,53023,16021,320 422,350 27,94025,710 526,17032,72030,100 629,99037,50034,490 733,81042,28038,880 837,63047,06043,270 For each additional person, add 3,8204,7804,390 SOURCE: Federal Register, Vol. 76, No. 13, January 20, 2011, pp. 3637-3638

31. Poverty By race/ethnicity and family status Among married families: 5.8% lived in poverty. This number varied by ethnicity with 5.4% of White persons, 8.3% of Black persons, and 14.9% of Hispanic persons (of any nationality) living in poverty.

32. Among single parent families: 26.6% lived in poverty. This number varied by ethnicity with 30% of White persons, 40% of Black persons, and 30% of Hispanic persons (of any nationality) living in poverty. Poverty By race/ethnicity and family status

33. Poverty by Race The US Census declared that in 2010 15.1% of the general population lived in poverty: 9.9% of all non-Hispanic white persons 12.1% of all Asian persons 26.6% of all Hispanic persons (of any nationality) 27.4% of all Black persons. About half of those living in poverty are non-Hispanic white (19.6 million in 2010), but poverty rates are much higher for blacks and Hispanics. Non-Hispanic white children comprised 57% of all poor rural children

34. The Economics of Poverty Incidence of Poverty Poverty Trends: R ise and fall but trend is upward Who are the “Invisible” Poor? Short-Periods of Time Geographic Isolation Politically Invisible – Are Easy to Ignore

35. Why the growth in the number of people in poverty? Education – Unequal distribution of quality education – Drop out rate The Great Recession of 2007 – Massive job losses – Jobs leaving the country The hollowing out of America – Composition of the job market More low wage jobs – fewer high wage jobs

36. Why the growth in the number of people in poverty? Decrease in Union Membership – Puts downward pressure on wages Lower median income – People falling out of the Middle Class Growth in single parent households Lack of preparation for retirement Rising health care costs

37. How can we reduce the number of people in poverty? Improve distribution of quality education National focus on creation of better paying jobs. National focus on creating sustainable growth. National focus on driving down health care costs. Better retirement planning. Support collective bargaining. What else?

38. The Income-Maintenance System 1.Social Insurance Programs OASDHI = social security $695 Billion in 2010 Medicare – added to OASDHI in 1965 $453 Billion in 2010 Unemployment Compensation $32 Billion Entitlement Programs

39. The Income-Maintenance System 2. Public Assistance Programs 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 ($290 Billion in 2010) Earned-Income Tax Credit (EITC) $55 Billion ($30 Billion in 1999) Entitlement Programs

40. Entitlement Programs Impact of decreasing funding Social Insurance Programs – Lower social security payments = lower incomes – Reduced Medicare / Medicaid spending = reduced access to health care, higher death rates Public Assistance Programs – Reduced incomes – Increased homelessness – Increased health care costs Higher Social Costs in general

41. Common Features Minimum Annual Income Benefit-Reduction Rate Conflicts Among Goals Eliminating Poverty Maintaining Work Incentives Holding Down Costs Welfare: Goals and Conflicts

42. Welfare Reform Problem - Growing Government Dependence Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (welfare reform) Temporary Assistance to Needy Families (new name) 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

43. Another good Information Source The State of Working America’s Wealth, 2011 Through volatility and turmoil, the gap widens B y S y l v i a A. A l l e g r e t t o Information sshttp://www.irle.berkeley.edu/cwed/wp/wealth_in_the_us.pdf

44. 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)