1. Poverty and Economic Inequality
Chapter 14

2. Chapter Outline Poverty Line Poverty Trap Safety Net Income Inequality
Government Policies to reduce income inequality

3. Occupy Wall Street
On September 17, 2011, Occupy Wall Street began in New York City’s Wall Street financial district. (Credit: modification of work by David Shankbone/Flickr Creative Commons)

4. Occupy Wall Street
Argued that the concentration of wealth among the richest 1% in the United States was both economically unsustainable and inequitable, and needed to be changed. The protest then spread to other major cities, and the Occupy movement was born.
Top 0.1 percent of households (160,000 families with total net assets of more than $20 million in 2012) own 22 percent of wealth in US, up from 7 percent in the late 1970s.

5. Figure 14.2
The poverty rate fell dramatically during the 1960s, rose in the early 1980s and early 1990s, and, after declining in the 1990s through mid-2000s, rose to 15.9% in 2011, which is close to the levels. In 2012, the poverty dropped slightly to 15.0%, and was 14.8% in 2014., and 14.9% in (Source: U.S. Census Bureau)

6. Poverty and Inequality
Poverty - the number of people who fall below a certain level of income—called the poverty line—that defines the income needed for a basic standard of living.
Income inequality- the share of the total income (or wealth) in society that is received by different groups; for example, comparing the share of income received by the top 10% to the share of income received by the bottom 10%.
Mollie Orhansky - the average family spent one-third of its income on food. Proposed that the poverty line be the amount needed to buy a nutritionally adequate diet, given the size of the family, multiplied by three.

7. Poverty Trap
Poverty Trap: Incentive to work reduced when provided with income and necessities.
Provided assistance reduces with earnings. No net gain from working. So rather not work.
E.g. $18,000 guaranteed; $8/hr

8. Poverty Trap
The original choice is 500 hours of leisure, 2,000 hours of work at point A, and income of $16,000. With a guaranteed income of $18,000, this family would receive $18,000 whether it provides zero hours of work or 2,000 hours of work. Only if the family provides, say, 2,300 hours of work does its income rise above the guaranteed level of $18,000—and even then, the marginal gain to income from working many hours is small.

9. Resolving the Poverty Trap
Instead, reduce benefits by 50 cents/ $1 earning. - $8/hr
Might choose R or S (less or same work, more income)
Program might cost more

10. Safety Net
Section 14.3

11. Temporary Assistance for Needy Families (TANF)
1930s “Welfare”
1990s (Clinton) – welfare reform act (TANF)
Work requirement; time limit (for federal funds, supporting state funds)
Funds vary across states
CalWorks – required to work 20 – 35 hrs/wk; EBT card

12. Earned Income Tax Credit (EITC)
Costs $50 B; assists 26 M households
Get tax back from federal government, based on income limits
As income increases, tax break increases, up to a limit
Effectively increases payment received for work
$6,242 with 3+ children
$5,548 with 2 children
$3,359 with 1 child
$503 with 0 children

13. Supplemental Nutritional Assistance Program (SNAP)
“Food stamps”
Eligibility based on income, household size;
Expected to spend no more than 30% of income on food
‘Credit cards’ provided to be spent on food; to supplement current expenditure on food
Earnings reduce aid received (30 cents for every $1)
2012: 46.6 M people; average $287/person/month
Increased by 70% due to recession, and rising food prices

14. Figure 14.5 – Program Costs

15. Figure 14.6 – Program Costs

16. Medicaid
Health insurance program administered by state and federal government
Those below poverty line, focused on families with children; elderly; and disabled
Program differs between states (determine eligibility)
Affordable Care Act (2010) expanded eligibility

17. Income Inequality
Measurement and causes

18. Income inequality and poverty
Poverty levels:
subjective; based on the overall income levels of a country;
Typically measured as percentage of the median income.
Income inequality:
the distribution of that income, in terms of which group receives the most or the least income.
involves comparing those with high incomes, middle incomes, and low incomes—not just looking at those below or near the poverty line

19. Figure 14.8 – Lorenz Curve
The Lorenz curve shows the cumulative share of population on the horizontal axis and the cumulative percentage of total income received on the vertical axis.
A Lorenz curve graphs the cumulative shares of income received by everyone up to a certain quintile. The income distribution in 1980 was closer to the perfect equality line than the income distribution in 2011—that is, the U.S. income distribution became more unequal over time.

20. Inequality around the world

21. Causes of growing inequality
Changing composition of American households
More households have two earners (more women entering the labor force)
Common for one high-earner to marry another high-earner
Shift in distribution of wages
Gap in earnings of low-skilled vs high-skilled workers increased
Four year degree/HS degree earnings  1.67 (2010) vs (1995)
Between 1990 – 2011  90% increase in Bachelor’s degrees
Market for high-skilled labor also increased

22. Figure 14.9 – Market for labor

23. Policies to reduce income inequality

24. Main tools to reduce income inequality
Redistribution
Progressive tax system – tax those at the upper end a higher percentage than those at the lower end
Top 1% ($1.2M +) – average federal tax rate 28.9%
Ladder of opportunity
Enriched programs for preschoolers; after school programs; financial aid to attend higher education; no discrimination in the workplace
Tax on inheritance
Estate tax - $5.25M +

25. Figure Tradeoff
Society faces a trade-off where any attempt to move toward greater equality, like moving from choice A to B, involves a reduction in economic output.
Situations can arise like point C, where it is possible both to increase equality and also to increase economic output, to a choice like D. It may also be possible to increase equality with little impact on economic output, like the movement from choice D to E. However, at some point, too aggressive a push for equality will tend to reduce economic output, as in the shift from E to F.

26. Questions?

27. Review Questions
Q 16. What is the difference between poverty and income inequality?
Answer : Poverty is an absolute measure of the standard of living of individuals, whereas inequality is a relative measure of the differences between individuals.
Q 17. How does the poverty trap discourage people from working?
Answer : The poverty trap occurs when welfare payments are more generous than the payment a person would receive at an entry level or part-time job. In such a case, it is more financially rewarding not to work than to find and take a job.
Q 18. How can the effect of the poverty trap be reduced?
Answer : Welfare payments must be designed in such a way that they reduce gradually with income, so that there is still an incentive to take even a low- paying job.

28. Review Questions cont.
Q 21. Briefly explain the differences between TANF, the earned income tax credit, SNAP, and Medicaid.
Answer: TANF provides temporary financial assistance for people who work, earned income tax provides a tax credit that increases with hours works, SNAP provides food stamps that can be exchanged for food, and Medicaid provides medical care to the poor.
Q 23. What is measured on the two axes of a Lorenz curve?
Answer : The cumulative share of the population is on the horizontal axis, and the cumulative share of income is on the vertical axis.
Q 26. What are some reasons why a certain degree of inequality of income would be expected in a market economy?
Answer : Some goods and services are more valued than others, and therefore command a higher price. The people providing these goods and services will therefore earn a higher level of income than others, and there will be inequality.

29. Review Question cont.
Q 27. What are the main reasons economists give for the increase in inequality of incomes?
Answer : Changing family demographics, with more single- parents and households with two high-earners, as well as shifts in the distribution of wages.
Q 28. Identify some public policies that can reduce the level of economic inequality.
Answer: Simple wealth redistribution is one policy that would reduce income inequality. A reduction in the quantity of unskilled immigrants would also reduce inequality as fewer low-skilled, low-wage workers enter the country. Whether or not these policies are desirable is another question.