2. Income Inequality and Poverty

3. What do you see? A man or a woman? How old are they? Where do they live? What race are they? female a child from a rural area white Poverty in the US

4. % Population % Income 60 50 40 30 20 10 12 34 5 6 0 789 70 80 90 100

5. % Income % Population 60 50 40 30 20 10 12 34 5 6 0 789 70 80 90 100 Degree of income inequality

6. % Population % Income 60 50 40 30 20 10 12 34 5 6 0 789 70 80 90 100

7. % Population % Income 60 50 40 30 20 10 12 34 5 6 0 789 70 80 90 100 1970 2007

8. Resource Prices and Income Differences Individuals create income by supplying resources that are highly valued by others. This provides the incentive to develop skills, talents, and resources others value. The view that there is a fixed-size economic pie that can be sliced and divided among the citizenry is fallacious.

9. Lowest 20% of recipients 4.5 4.8 5.4 5.1 4.6 4.3 12.2 24.0 12.2 23.8 11.6 24.3 10.8 23.8 9.8 22.8 12.0 23.4 41.3 40.9 41.6 44.3 47.4 42.7 1950 1960 1970 1980 1990 2000 17.4 17.8 17.6 17.5 16.6 15.5 Second quintile Third quintile Fourth quintile Top 20% of recipients Family income before taxes Impact of taxes & transfers on 2006 household income 7.1 6.8 7.1 12.9 23.9 12.8 24.1 12.4 23.3 13.2 24.1 38.1 38.2 40.1 37.4 1961 1972 1980 1990 18.2 18.0 18.1 17.1 Household expenditures Income Inequality in the United States 7.4 12.9 23.438.8 1995 17.5 4.2 9.7 22.9 47.7 2001 15.4 4.0 9.6 23.0 2004 15.4 47.9 4.1 9.7 23.3 47.4 2007 15.6 3.5 4.3 9.7 22.7 8.5 22.5 48.3 50.5 Before After 15.0

10. Factors Influencing Income Distribution Differences in: age, education, family size, marital status, number of earners in the family, and, time worked. Young, inexperienced workers, students, single-parent families, and retirees are over-represented among those with low incomes.

11. Bottom 20% of income recipients 10.0 31.0 46.0 23.0 31.0 63.0 12.0 79.0 9.0 2.0 Percent with less than high school Percent with college degree or more under 35 35 - 64 65 and over Education of householder 52.0 48.0 7.0 93.0 Married-couple family (% of total) Single-parent family (% of total) 2.9 3.4 Source: http://www.census.gov and author calculations from the March 2008 Current Population Survey.http://www.census.gov Top 20% of income recipients Age of householder (percent distribution) Family status Persons per family 0.8 2.2 Earners per family 8.0 29.0 % of total hours worked supplied by group 12.064.0 % of married-couple families in which wife works full-time High and Low Income Families, 2007

12. Why Has Income Inequality Increased? greater share of single-parent families - More dual-earner families + Increased earnings differentials on the basis of skill and education the number of “winner-take-all” markets – top heavy pay structures. Tax changes require less “sheltering” of income for the high tax brackets

13. Top paid quintile 53.0 23.0 24.5 14.0 6.5 14.022.524.0 12.0 5.512.523.5 53.5 25.0 5.5 4.5 12.0 32.524.0 28.0 33.525.5 5.07.510.4 Next highest quintile Middle quintile Next lowest paid quintile Lowest paid quintile Highest quintile Next highest quintile Middle quintile Next lowest-paid quintile Lowest paid quintile Percentage Distribution by Income Status of Family in 2004 Income Status of Family in 1994 Income Mobility The table above allows us to see how families in each income bracket in the U.S. fared 10 years later. Does it appear to you that there is a significant amount of income mobility in the U.S. economy?

14. 53.2 25.8 23.6 12.9 6.5 12.627.520.7 10.9 4.311.025.7 53.3 23.2 5.7 3.0 14.9 31.123.7 28.3 36.322.6 4.36.412.4 Highest quintile Next-highest-quintile Middle-quintile Next-lowest-paid quintile Lowest-paid quintile 1988-1998 Top paid quintile 78.4 42.4 25.4 4.9 4.0 13.417.514.4 9.1 6.28.219.1 46.3 10.6 0.1 4.1 6.8 23.924.8 45.6 28.637.9 7.87.912.6 Next highest quintile Middle quintile Next lowest paid quintile Lowest paid quintile Top-paid quintile Next-highest-quintile Middle-quintile Next-lowest-paid quintile Lowest-paid quintile 1985 -1995 53.0 23.0 24.5 14.0 6.5 14.022.524.0 12.0 5.512.523.5 53.5 25.0 5.5 4.5 12.0 32.5 24.0 28.0 33.525.5 5.07.510.4 Highest quintile Next highest quintile Middle quintile Next lowest-paid quintile Lowest paid quintile 1994-2004

15. Household Expenditures and Inequality Differences in household expenditures may be a more accurate indicator of economic status than income. current expenditures reflect long-term economic status. In contrast with the annual income data, household expenditure data do not indicate that there has been a major change in U.S. economic inequality.

16. Poverty in the United States

17. 5.3 6.2 Female Black 8.3 1959 1976 2000 Number of poor families (millions) Sources: U.S. Dept. of Commerce, Characteristics of the Population Below the Poverty Line: 1982, Table 5; and Poverty in the United States: 2000, p. 60-214. 48 50 23 Percent of poor families headed by a: Person who worked at least some during the year Elderly person (aged 65+) 30 27 26 14 10 22 55 53 70 All families Married-couple families 10.1 8.6 18.5 Poverty rate (%) Whites Female-headed families 7.2 4.7 15.8 32.5 24.7 42.6 9.1 9.4 18.1 Children (under age 18) Blacks 31.1 22.0 55.1 16.0 16.1 27.3 Changing Composition of the Poor 7.6 2003 51 27 10 48 10.0 5.4 28.0 10.5 24.4 17.6 7.7 2005 53 27 9 61 9.9 5.1 28.7 10.6 24.9 17.6 All individuals 11.7 22.4 12.6 7.6 2007 53 27 9 48 9.8 4.9 28.3 10.5 24.5 18.0 12.5

18. Persons n.a. 22.2 12.6 13.0 11.3 1947 1960 1970 1980 1990 2000 Year Families 32.0 18.1 10.1 10.3 8.7 13.510.7 Poverty rate % Sources: Bureau of the Census, Current Population Reports, Series P60-210, Poverty in the United States, 2000; and Economic Report of the President, 1964, Table 7. Poverty Rate of Persons & Families in the United States 1947-2000 During the 1950s and 1960s, the poverty rate declined substantially. After rising slightly during the 1970s and 1980s, the official poverty rate has fallen modestly during the economic expansion of the 1990s. 20059.9

19. Transfer Payments and the Poverty Rate Income transfers expanded rapidly over the past several decades. largely ineffective at reducing the poverty rate. Though per capita income has increased substantially over time (109% since 1965), the poverty rate of working-age Americans has stayed about the same.

20. Sources: U.S. Dept. of Commerce, Characteristics of the Population Below the Poverty Level: 1982, Table 5; and http://www.census.gov. http://www.census.gov Poverty rate Poverty Rate, 1947-2007 32.0 18.5 13.9 10.0 9.7 10.3 10.7 8.7 9.9 The official poverty rate of families declined sharply during he 1950’s and 60’s … but has been relatively constant at about 10 percent since 1968. 194719591965196819751980199020002005 9.8 2007

21. 194719591965196819751980199020002005 Poverty rate Poverty Rate, 1947-2007 The orange shaded part of the bars indicate the drop in the poverty rate when non-cash benefits are counted as income. With non-cash benefits added, the poverty rate during most of the period since 1968 has ranged from 7% to 8%. 32.0 18.5 13.9 10.0 9.7 10.3 10.7 8.7 9.9 Sources: U.S. Dept. of Commerce, Characteristics of the Population Below the Poverty Level: 1982, Table 5; and http://www.census.gov. http://www.census.gov 9.8 2007

22. 19591965196819751980198519902000 Poverty rate Poverty Rates for Elderly Families 30.0 22.8 17.0 8.9 9.1 7.0 6.3 5.4 The official poverty rate for elderly families has declined sharply since 1959. Sources: Derived from Dept. of Commerce, Money Income in the United States: 2000; Poverty in the United States: 1990; and Measuring the Effects of Benefits and Taxes on Income and Poverty, 1990 and 1992. See also James Gwartney and Thomas S. McCaleb, “Have Antipoverty Programs Increased Poverty?” The Cato Journal (spring/summer, 1985).

23. 19591965196819751980198519902000 Poverty rate Poverty Rates for Non-Elderly Families 16.6 10.9 9.0 9.8 10.5 12.2 11.5 9.2 In contrast, the official poverty rate for non-elderly families was been higher in the 1990’s that it was in the late 1960’s. Sources: Derived from Dept. of Commerce, Money Income in the United States: 2000; Poverty in the United States: 1990; and Measuring the Effects of Benefits and Taxes on Income and Poverty, 1990 and 1992. See also James Gwartney and Thomas S. McCaleb, “Have Antipoverty Programs Increased Poverty?” The Cato Journal (spring/summer, 1985).

24. Income Transfer Effects Income supplements large enough to significantly increase the economic status of poor people will: encourage behavior that increases the risk of poverty Provides a safety net? create high implicit marginal tax rates that reduce the recipient’s incentive to earn. As income goes up, benefits drop off.

25. 1.In 2000, high-income families (the top 20 percent) in the United States earned approximately _________ percent of the total before-tax income. a.34 b.47.c.62d.79 2.Imagine two cities, Engelgrad and Legreeville, where the rich, middle, and poor income recipients in one city have annual incomes identical to their counterparts’ incomes in the other city. In Engelgrad, the poorest families one year almost always end up as the richest families the next year and become middle-income families the year after that. In Legreeville, however, the poor remain poor and the rich remain rich. Which of the following is true about the two cities? a.Annual data on the distribution of income will indicate that the degree of income inequality in the two cities is identical. b.The degree of lifetime income inequality in the two cities is identical c.The income mobility of people in the two cities is identical d.The distribution of annual income is more unequal in Legreeville

26. 3. Compared to low-income families, a larger proportion of high-income families a.is headed by a person with a college degree b.has both a husband and a wife who work full time c.is headed by a person between the ages of 35 and 64 d.is all of the above. 4.During 1970 – 2000, the official poverty rate of non-elderly families a.fell modestly b.fell substantially c.steadily rose. d.rose until 1985 and fell modestly since then.

27. 5.When a person who receives welfare benefits earns income, those benefits are reduced as earned income rises. This is referred to as a.an implicit marginal tax. b.the opportunity cost of income c.the work-leisure trade-off d.reverse discrimination 6.According to the official measure of poverty, in 2000 the poverty rate of families in the US was a.4.2% b.8.6%. c.18.5% d.22%

28. 7.The poverty threshold level defines poverty by finding the cost of feeding a family and multiplying by a.two b.three. c.four d.five 8.Which of the following would cause the poverty threshold income level for a given family to increase by 20 percent from one year to another? a.a 20 percent increase in the family’s income b.a 20 percent decrease in the family’s income c.a 20 percent increase in the general level of prices. d.a 20 percent increase in real national income

29. 9.Which of the following best explains why so many persons with incomes below the poverty threshold income level work very little or not at all? a.They confront high implicit marginal tax rates. b.They do not enjoy income as much as other people. c.There are no jobs for low-skill workers. d.They often face very low explicit marginal tax rates. 10.(I) Positive economics cannot determine how much income inequality should be present in a country. (II) Critics of government action to reduce income inequality argue that modifying the market process of income determination may create perverse incentives and hurt wealth creation. a.Both I and II are true.b.Both I and II are false. c.I is true; II is false.d.I is false; II is true.