2 In this chapter, you will learn to solve these economic puzzles: How can a negative income tax solve the “welfare mess”? What is the effect on labor markets of laws that protect women from jobs deemed “too strenuous” or “too dangerous”? Could the rich become richer in the 1980’s and other income groups also become better off?
3 What is the general trend of Income Distribution? Since 1970, the percentage of income received by families in the lowest 20% has fallen, while the percentage received by families in the 20% highest income groups have risen
4 Division of the Total Annual Money Income Among Families % of Families1980 Lowest 5th Second-lowest 5th 5.1% 19901997 11.5 17.5 24.3 41.6 15.3 4.6% 10.8 16.6 23.8 44.3 17.4 4.2% 9.9 15.7 23.0 47.2 20.7 Middle 5th Second-highest 5th Highest 5th Highest 5%
5 What is Median Income? 50% of families earn less than the median income and 50% earn more
6 Median Income of Families, 1994 Characteristic All families Headed by a male Median Income $44,568 $32,960 $21,023 $39,979 $30,660 $40,040 Headed by a female With head aged 25-34 With head aged 65 and over Headed by a high school grad Person with a bachelor’s degree $67,230
7 What are some arguments against income inequality? Wealthy can influence politics Wealthy have more opportunities Wealthy can afford better health care
8 What is an argument for income inequality? Income inequality gives people an incentive to become more productive
9 What is the Lorenz Curve? A graph of the actual cumulative distribution of income compared to a perfectly equal distribution of income
10 80% 60% 40% 20% 40%60%80% Hypothetical Lorenz Curve % of income % of families 100% Perfect Equality Actual Income 100%
11 80% 60% 40% 20% 40%60%80% Lorenz Curve 1929 & 1997 % of income % of families 100% Perfect Equality 1929 100% 1997
12 80% 60% 40% 20% 40%60%80% Lorenz Curve for Nations % of income 100% Perfect Equality U.S. 100% Russia Brazil % of families
13 What is the Poverty Line? The level of income below which a person or a family is considered to be poor
14 Does the Poverty Line consider Cash Transfer Income? Yes; Social Security, unemployment compensation, and Aid to Families of Dependent Children are considered
15 What are In-kind Transfers? Government payments in the form of goods and services, rather than cash
16 Does the Poverty Line consider In- kind transfers? Receipts from government programs such as food stamps, Medicaid, and housing are not included
18 % of U.S. Persons below Poverty Level Characteristic Headed by married couple Headed by a male, no wife % 5% 13% 32% 24% 10% 2% Headed by a female, no husband No high school diploma High school diploma, no college Bachelor’s degree or more
19 What are examples of Cash Transfer Programs? Social Security Unemployment Compensation Aid to Families with Dependent Children
20 What are examples of In- kind Transfer Programs? Food stamps Medicaid Housing Assistance
21 What are major criticisms of Welfare? Work disincentives Inefficiencies Inequities
22 What are examples of Reform Proposals? Negative income tax Workfare
23 What is a Negative Income Tax? A plan under which families below a certain break-even level of income would receive cash payments that decrease as their income increases
24 $5 0 $-5 $-20 $10$20$30$40 Family Income $50 Positive Tax Negative Tax $10 Negative Income Tax Tax Liability
25 What is Workfare? Recipients of government programs have to work to receive the benefits
26 Can Discrimination effect People’s wage rate? Certain groups can receive more or less income if there is discrimination in the labor market
27 How does Comparable Worth effect wages? Employees who work for the same employer must be paid the same wages when their jobs, even if different, require similar levels of education, etc.
29 Key Concepts What is Median Income? What are some arguments against income inequality? What is an argument for income inequality? What is the Lorenz Curve? What is the Poverty Line? What are In-kind Transfers? Does the Poverty Line consider In-kind transfers?
30 Key Concepts cont. What are examples of Cash Transfer Programs? What are examples of In-kind Transfer Programs? What is a Negative Income Tax? What is Workfare? Can Discrimination effect People’s wage rate? How does Comparable Worth effect wages?
32 The Lorenz curve is a measure of inequality of income. Since 1947, the share of money income for each fifth of families ranked according to their income has been stable. Also, the degree of income inequality among families in the United States has changed little since 1929. During the 1980’s, the richest families did become richer; however, the median income of all groups increased.
33 80% 60% 40% 20% 40%60%80% Hypothetical Lorenz Curve % of income % of families 100% Perfect Equality Actual Income 100%
34 The poverty line is a level of cash income below which a family is classified as poor. The poverty income threshold is three times the cost of a minimal diet for a family. Today, about 12 percent of the U.S. population is officially classified as poor.
35 In-kind transfers are payments to the poor in the form of goods and services, rather than cash. Calculation of the poverty line counts cash income. On the other hand, in-kind transfers, such as food stamps, Medicaid, and housing, do not count as income for families classified as officially poor.
36 Government cash transfers counted in the poverty line include payments from Social Security, unemployment compensation, and Aid to Families with Dependent Children.
37 Welfare criticisms include three major arguments: (1) Welfare reduces the incentive to work for the poor and taxpayers. (2) Welfare is inefficient because much of the money covers administrative costs, rather than providing benefits for the poor. (3) Because many antipoverty programs are controlled by the state, welfare benefits vary widely.
38 The negative income tax is a plan to set an income guarantee for all families. As a low-income family earns income, government payments (negative income tax) are phased out. After reaching a break-even income, families become taxpayers instead of being on the welfare rolls.
39 $5 0 $-5 $-20 $10$20$30$40 Family Income $50 Positive Tax Negative Tax $10 Negative Income Tax Tax Liability
40 Comparable worth is the theory that workers in jobs determined to be of equal value by means of point totals should be paid equally. Instead of allowing labor markets to set wages, independent consultants award points to different jobs on the basis of such criteria as knowledge, experience, and working conditions
42 1. In 1997, the wealthiest 5 percent of all U.S. families earned what percentage of total annual money income among families? a. More than 20 percent. b. Less than 10 percent. c. More than 25 percent. d. More than 50 percent. A.
43 Division of the Total Annual Money Income Among Families % of Families1980 Lowest 5th Second-lowest 5th 5.1% 19901997 11.5 17.5 24.3 41.6 15.3 4.6% 10.8 16.6 23.8 44.3 17.4 4.2% 9.9 15.7 23.0 47.2 20.7 Middle 5th Second-highest 5th Highest 5th Highest 5%
44 2. A figure that measures the relationship between the cumulative percentage of money income on the vertical axis and the cumulative percentage of families on the horizontal axis is called the a. family-income curve. b. Washington curve. c. Lorenz curve. d. Gini curve. C.
45 80% 60% 40% 20% 40%60%80% The Lorenz Curve % of income % of families 100% Perfect Equality 100% I nequality
46 80% 60% 40% 20% 40%60%80% Exhibit 11 Lorenz Curve % of income 100% Perfect Equality 100% Y X Z W Cumulative % of families
47 3. As shown in Exhibit 11, the perfect equality line is drawn between points a. W and Y along the curve. b. X and Z. c. W and Y along the straight line. d. W and X. C.
48 4. As shown in Exhibit 11, 20 percent of families earned a cumulative share of about _______ percent of income. a. 5. b. 10. c. 30. d. 50. A.
49 5. As shown in Exhibit 11, 40 percent of families earned a cumulative share of about _______ percent of income. a. 5. b. 15. c. 30. d. 40. B.
50 6. Since 1929, the overall income distribution in the United States has become a. much more unequal. b. much less unequal. c. slightly more unequal. d. slightly more equal. D.
51 80% 60% 40% 20% 40%60%80% Lorenz Curve 1929 & 1997 % of income % of families 100% Perfect Equality 1929 100% 1997
52 7. Comparing the family income distributions of the United States, Russia, and Brazil, the conclusion is that income is distributed a. most equally in Brazil. b. most equally in the United States. c. about the same in all three countries. d. most equally in Russia. D.
53 80% 60% 40% 20% 40%60%80% Lorenz Curve for Nations % of income 100% Perfect Equality U.S. 100% Russia Brazil % of families
54 8. In order to establish the poverty line that divides poor and nonpoor families, the government a. multiplies the cost of a minimal diet by 3. b. multiplies the cost of a minimal diet by 5. c. adds 50 percent to cost of a minimal diet. d. adds 100 percent to cost of a minimal diet. A. Absolute poverty can be defined in dollars to purchase some minimum amount of goods and services essential to meeting a person or family’s basic needs.
55 9. The poverty line a. is defined as one-half average family income. b. includes in-kind transfers. c. includes Medicaid benefits. d. has been attacked for overstating poverty. D. The poverty line does not include noncash transfers, such as food stamps and Medicaid.
56 10. Which of the following is an in-kind transfer? a. Social Security payments. b. Unemployment compensation. c. Food stamps. d. Welfare payments. C. Social Security payments, unemployment compensation and welfare payments are cash transfer payments included in the poverty line.
57 11. Which of the following is a cash assistance (not an in-kind transfer) program? a. Aid to Families with Dependent Children. b. Medicare. c. Medicaid. d. Food stamps. A. Medicare and Medicaid provide medical care services and food stamps are used for food. AFDC provides cash that can be used to purchase goods and services chosen by recipient.
58 12. The negative income tax (NIT) is a plan under which families a. above a level of income pay no tax. b. pay the same tax rate except for the poor. c. below a level of income pay no tax. d. below a level of income receive a cash payment. D.
59 $5 0 $-5 $-20 $10$20$30$40 Family Income $50 Positive Tax Negative Tax $10 Negative Income Tax Tax Liability
60 13. Which of the following might decrease the supply curve of labor? a. Discrimination against blacks. b. Discrimination against women. c. Difficult licensing requirements. d. All of the above. D. Discrimination against blacks and women and different licensing requirements reduce the number of workers who are willing to work at various possible wage rates.
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