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Chapter 20 Income Inequality, Poverty, and Discrimination

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1 Chapter 20 Income Inequality, Poverty, and Discrimination
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2 Chapter Objectives Income inequality in the U.S.
Sources of income inequality Income inequality since 1970 Economic arguments regarding income inequality Poverty measurement and incidence The U.S. income-maintenance program Labor market discrimination 20-2

3 Facts About Income Inequality
Average household income $66,570 in 2006 Among highest in the world Distribution by quintiles Income mobility People change quintiles Government redistribution Taxes and transfers 20-3

4 Facts About Income Inequality
Distribution by Quintiles, 2006 (2) Percentage of Total Income (3) Upper Income Limit (1) Quintile Lowest 20% Second 20% Third 20% Fourth 20% Highest 20% Total 3.4 8.6 14.5 22.9 50.5 100.0 $20,035 37,774 60,000 97,032 No Limit Source: Bureau of the Census 20-4

5 Income Inequality Lorenz Curve and Gini Ratio Area A Gini Ratio =
20 40 60 80 100 e Lorenz Curve (Actual Distribution) Percentage of Households Percentage of Income Perfect Equality d A B c Complete Inequality b a f Gini Ratio = Area A Area A + Area B 20-5

6 Government Redistribution
20 40 60 80 100 Percentage of Households Percentage of Income Lorenz Curve After Taxes and Transfers Lorenz Curve Before Taxes and Transfers Impact of Government Taxes and Transfers 20-6

7 Causes of Income Inequality
Ability Education and training Discrimination Preferences and risks Unequal distribution of wealth Market power Luck, connections, and misfortune 20-7

8 Income Inequality Over Time
Rising income inequality since 1970 Causes of growing inequality Greater demand for highly skilled workers Demographic changes International trade, immigration, and decline in unionism 20-8

9 Income Inequality Percentage Total Income Received by Top One-Tenth of Receivers, Selected Nations 2007 Columbia Brazil South Africa Guatemala Mexico United States Italy Japan Sweden Germany Source: United Nations, Human Development Report, 2007/2008 20-9

10 The Economics of Poverty
Definition of poverty 2006 Single person < $9,800 Family of 4 < $20,000 Family of 6 < $26,800 36.5 million Americans Poverty rate 12.3% 20-10

11 Incidence of Poverty Poverty Rates Among Selected Population Groups, 2006 Female Householders African Americans Hispanics Foreign-Born (Not Citizens) Children Under 18 Women Total Population Asians Whites Men Persons 65 or Over Married-Couple Families Full-Time Workers 20-11 Source: Bureau of the Census,


13 The Economics of Poverty
Poverty rate trends Significant decline Why? Stable in 11-13% range since Rises with recession Recent increase 20-13

14 Poverty: A Historical Look

15 2008: United States Poverty Map Darker Shades = Higher Poverty Rate

16 World Poverty Rates 0-10% 10-20% 20-30% 30-40% 40-50% 50-60% >60%

Old Age, Survivors, Disability and Health Insurance Act (Social Security Act): Federal social insurance program that provides monthly benefits to qualified retirees, their dependents, their survivors, and, in some cases, disabled workers. Medicare: Assists senior citizens with medical payments. Unemployment Compensation: Pays people who have lost their jobs and are looking for new employment.

Supplemental Security Income (SSI) SSI makes monthly payments to people who have low income and few resources and are: Age 65 or older; Blind; or Disabled. Temporary Assistance for Needy Families: This is what is typically referred to as “welfare.” Food-stamp program Medicaid: This programs provides assistance with medical payments to families that fall beneath the poverty threshold. Earned-income Tax Credit (EITC): This program provides a tax credit for earned income, as an incentive to go to work.

19 Conflicts Among Goals Eliminating Poverty Maintaining Work Incentives
Could we totally eliminate poverty? How? If so, what might happen to our economy? Maintaining Work Incentives Being on welfare should not be pleasant. You should want to return to work a.s.a.p. Holding Down Costs The money you use to fund welfare is coming out of the pockets of the taxpayers.

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