15 Poverty and Income Distribution SLIDES CREATED BY ERIC CHIANG Blend Images / Getty Images CHAPTER 15 SLIDE 1

CHAPTER OBJECTIVES Describe the difference between wealth and income. Analyze functional, personal, and family income distributions. Use a Lorenz curve and Gini coefficient to measure and describe the distribution of wealth and income. Describe the impact of income redistribution efforts.  CHAPTER 15 SLIDE 2

CHAPTER OBJECTIVES Describe the causes of income inequality. Describe how poverty thresholds are determined. Describe the two measures for determining depth of poverty for families. Discuss alternative methods of measuring poverty. Describe the prevailing theories on how to deal with poverty and income inequality. CHAPTER 15 SLIDE 3

DISTRIBUTION OF INCOME AND WEALTH A FLOW MEASURE REFLECTING THE FUNDS RECEIVED BY INDIVIDUALS OR BUSINESSES OVER A SPECIFIC PERIOD A MEASURE OF AN INDIVIDUAL’S OR FAMILY’S ASSETS, NET OF LIABILITIES, AT A GIVEN TIME CHAPTER 15 SLIDE 4

LIFE CYCLE EFFECTS YOUNG PEOPLE TYPICALLY EARN MODEST INCOMES. STEFANIE GREWEL/CORBIS RANDY FARIS/CORBIS BLEND IMAGES/ALAMY YOUNG PEOPLE TYPICALLY EARN MODEST INCOMES. INCOME PEAKS ROUGHLY BETWEEN AGES 45 AND 55. INCOME DECLINES WITH RETIREMENT (AS DO COSTS). CHAPTER 15 SLIDE 5

SPLITS INCOME AMONG THE FACTORS OF PRODUCTION. 2015 Distribution: FUNCTIONAL DISTRIBUTION OF INCOME SPLITS INCOME AMONG THE FACTORS OF PRODUCTION. 2015 Distribution: Wages = 67.8% Proprietor’s income = 9.8% Rent = 4.6% Corporate profits = 14.3% Net interest = 3.5% CHAPTER 15 SLIDE 6

PERSONAL OR FAMILY DISTRIBUTION OF INCOME THE DISTRIBUTION OF INCOME TO INDIVIDUALS OR HOUSEHOLD GROUPS (TYPICALLY BY QUINTILES, OR FIFTHS, OF THE POPULATION) CHAPTER 15 SLIDE 7

SHARE OF INCOME BY QUINTILE U.S. distribution of income has grown more unequal over the past three decades. Every income quintile except the highest has declined in percentage of income. CHAPTER 15 SLIDE 8

A GRAPHICAL MEASURE OF INCOME INEQUALITY: LORENZ CURVE A GRAPHICAL MEASURE OF INCOME INEQUALITY: Cumulates households of various income levels on the horizontal axis. Cumulates the share of total income on the vertical axis. The more bowed the Lorenz curve, the greater the income inequality. CHAPTER 15 SLIDE 9

PERCENTAGE OF HOUSEHOLDS LORENZ CURVE 100 EQUAL DISTRIBUTION OF INCOME (50, 50) This particular Lorenz curve assumes a simplified economy with just two persons. 75 PERCENTAGE OF INCOME 50 UNEQUAL SPLIT (25, 75) 25 WORST POSSIBLE SPLIT (0, 100) 50 100 PERCENTAGE OF HOUSEHOLDS CHAPTER 15 SLIDE 10

PERCENTAGE OF HOUSEHOLDS LORENZ CURVE FOR THE UNITED STATES In the United States, wealth is distributed more unevenly than income. 100 EQUAL DISTRIBUTION 75 The poorest 20% earn 3.1% of total income, and the poorest 40% earn 11.3% of total income. PERCENTAGE OF INCOME 50 INCOME 25 The richest 20% earn 51.2% of total income and own 88.9% of wealth. WEALTH 20 40 60 80 100 PERCENTAGE OF HOUSEHOLDS CHAPTER 15 SLIDE 11

PERCENTAGE OF HOUSEHOLDS THE GINI COEFFICIENT 100 EQUAL DISTRIBUTION The Gini coefficient is the ratio of area A to area A + B. 75 LORENZ CURVE The more unequal the income distribution, the greater is area A and the greater the Gini coefficient. PERCENTAGE OF INCOME 50 A 25 B 20 40 60 80 100 PERCENTAGE OF HOUSEHOLDS CHAPTER 15 SLIDE 12

PERCENTAGE OF HOUSEHOLDS THE IMPACT OF REDISTRIBUTION 100 The distribution of income becomes more equal once the effect of progressive taxation and transfer payments are taken into account. 75 PERCENTAGE OF INCOME 50 LORENZ CURVE 25 LORENZ CURVE ADJUSTED FOR TAXES AND TRANSFERS 20 40 60 80 100 PERCENTAGE OF HOUSEHOLDS CHAPTER 15 SLIDE 13

COMPARING GINI COEFFICIENTS Among this list, Denmark and Sweden have the most equal distribution of income, and Brazil and South Africa have the most unequal distribution of income. CHAPTER 15 SLIDE 14

CAUSES OF INCOME INEQUALITY Differences in human capital, as high-paying jobs require much more education and skills than before Discrimination that keeps wages low for certain groups of workers The rise of two-earner households, which has increased overall household income significantly CHAPTER 15 SLIDE 15

ERIC CHIANG DIFFERENCES IN HUMAN CAPITAL ARE IMPORTANT: COLLEGE GRADUATES EARN MUCH MORE INCOME ON AVERAGE THAN HIGH SCHOOL GRADUATES. CHAPTER 15 SLIDE 16

POVERTY IS A PROBLEM AFFECTING ABOUT 15% OF U.S. HOUSEHOLDS. LUCIDWATERS/DREAMSTIME.COM POVERTY IS A PROBLEM AFFECTING ABOUT 15% OF U.S. HOUSEHOLDS. CHAPTER 15 SLIDE 17

POVERTY THRESHOLDS Developed in the 1960s based on the USDA’s food plan. In 2015, an American household of four earning less than $24,259 was in poverty. HOUSEHOLD SIZE POVERTY THRESHOLD (2015) One person $12,085 Two persons 15,397 Three persons 18,872 Four persons 24,259 Five persons 28,729 Six persons 32,512 CHAPTER 15 SLIDE 18

NATHAN BENN/ALAMY U.S. POVERTY RATES DECLINED FROM 1959 TO 1975 AND HAVE REMAINED ROUGHLY STEADY SINCE. CHAPTER 15 SLIDE 19

ANDREW LICHENSTEIN/CORBIS U.S. POVERTY RATES ARE CORRELATED WITH RACE, THOUGH BLACK AND HISPANIC POVERTY HAS FALLEN. CHAPTER 15 SLIDE 20

DEPTH OF POVERTY MEASURES One measure of poverty debt is the income deficit, the difference between the poverty threshold and a family’s income. A family of four living on one income at the national minimum wage ($7.25/hour, or $14,500 per year), would have an income deficit of: $24,259 – $14,500 = $9,759 CHAPTER 15 SLIDE 21

DEPTH OF POVERTY MEASURES A second measure of poverty depth is the ratio of income to poverty, which measures a household’s income as a percentage of the poverty threshold. Households with ratios below 0.5 are “severely or desperately poor.” Households with ratios between 0.5 and 1.0 are “poor.” Households with ratios between 1.0 and 1.25 are “near poor.” CHAPTER 15 SLIDE 22

ALTERNATIVE MEASURES OF POVERTY The traditional method is flawed. It counts gross income, including taxes paid. It does not take into account varying family circumstances. The U.S. Census Bureau’s new measurement: uses after-tax income. counts antipoverty program benefits such as food stamps and housing subsidies. uses revised expenditure estimates. CHAPTER 15 SLIDE 23

     TRADITIONAL CAUSES OF POVERTY Lack of human capital Mental or physical disability Drug addiction Unwillingness to work or apathy toward work Refusal to relocate for work     CHAPTER 15 SLIDE 24

    NEW FACTORS CAUSING POVERTY Wages have not kept up with rising costs. Technological changes and globalization have changed employment opportunities. Health costs are rising. Family structures are changing.    CHAPTER 15 SLIDE 25

POVERTY CAN BE A RELATIVE OR AN ABSOLUTE MEASURE. YAOYU CHEN/DREAMSTIME.COM POVERTY CAN BE A RELATIVE OR AN ABSOLUTE MEASURE. CHAPTER 15 SLIDE 26

FABINUS08/DREAMSTIME.COM ACCORDING TO THE WORLD BANK, “POOR” IS DEFINED AS LIVING ON LESS THAN $2/DAY. CHAPTER 15 SLIDE 27

IN DENMARK, “POOR” IS EARNING LESS THAN $45,000, WITH FREE HEALTH CARE AND COLLEGE EDUCATION. ERIC CHIANG CHAPTER 15 SLIDE 28

STEPHEN FINN/ALAMY POLICIES TO REDUCE INCOME INEQUALITY AND POVERTY ARE POLITICALLY CONTROVERSIAL. CHAPTER 15 SLIDE 29

POLITICAL THEORIES ON POVERTY POLITICAL LEFT: FOCUS ON EQUITY The goal should be to make income and wealth more equitable through policies such as expanding public education, housing subsidies, and health care (i.e., making the pie slices more equal). POLITICAL RIGHT: FOCUS ON GROWTH The goal should be to provide incentives to work and reduce government welfare programs. The best way to cure poverty is to increase growth and make the overall pie bigger. CHAPTER 15 SLIDE 30

THE RAWLS VS. NOZICK ARGUMENT RAWLS MAXIMIN PRINCIPLE A society should maximize the welfare of the least well-off individual. Suggests that some people are born unlucky into poor households, and therefore income redistribution would make society more equitable. NOZICK’S ARGUMENT It would be unjust to redistribute wealth when it is earned through hard work and innovation. Justice requires protecting property rights to ensure people are rewarded for their hard work. CHAPTER 15 SLIDE 31

ARE SOME PEOPLE POOR FOREVER? A U.S. Census Bureau study tracked over 42,000 households to measure mobility in income and poverty. It found that of all households living in poverty in 2009, 35% were no longer in poverty in 2011. However, other households fell into poverty, and some of the population is stuck in poverty for various reasons. CHAPTER 15 SLIDE 32

HONQI ZHANG (AKA MICHAEL ZHANG)/DREAMSTIME.COM IN SUM, PEOPLE MOVE IN AND OUT OF POVERTY, BUT POLICIES CAN BE USED TO KEEP THE OVERALL RATE OF POVERTY LOW. CHAPTER 15 SLIDE 33

KEY CONCEPTS Income Wealth Functional distribution of income Personal or family distribution of income Lorenz curve Gini coefficient Poverty thresholds Poverty rate Income deficit Ratio of income to poverty KEY CONCEPTS CHAPTER 15 SLIDE 34

AT WHAT POINT IN THE LIFE CYCLE DOES INCOME PEAK FOR MOST PEOPLE? UPON ENTERING THE WORKFORCE AFTER COLLEGE A BETWEEN AGES 25 AND 35 B BETWEEN AGES 35 AND 45 C Answer: D BETWEEN AGES 45 AND 55 D UPON RETIREMENT, USUALLY AROUND AGE 65 E CHAPTER 15 SLIDE 35

JEFF GREENBERG/ALAMY PRACTICE QUESTION Answer: The poverty threshold for a family of three is approximately $19,000 a year. Working full time (2,000 hours per year), a single parent would need to earn at least $9.50 per hour. ABOUT HOW MUCH PER HOUR WOULD A SINGLE PARENT WITH TWO KIDS WORKING FULL-TIME NEED TO EARN TO STAY OUT OF POVERTY? CHAPTER 15 SLIDE 36

A GINI COEFFICIENT OF 0.15 WOULD INDICATE THAT A SOCIETY’S DISTRIBUTION OF INCOME IS: PERFECTLY EQUAL A RELATIVELY EQUAL B RELATIVELY UNEQUAL C Answer: B AS UNEQUAL AS POSSIBLE D CHAPTER 15 SLIDE 37

HONQI ZHANG (AKA MICHAEL ZHANG)/DREAMSTIME.COM PRACTICE QUESTION Answer: Countries with the smallest levels of inequality tend to have very strong educational systems (human capital), along with access to health care and other antipoverty programs. One effective policy would be to increase spending in education. WHAT ARE SOME POLICIES THAT A GOVERNMENT CAN IMPLEMENT TO REDUCE INCOME INEQUALITY? CHAPTER 15 SLIDE 38

ACCORDING TO RAWL’S MAXIMIN PRINCIPLE, A SOCIETY SHOULD STRIVE TO: MAXIMIZE ITS TOTAL OUTPUT. A MAXIMIZE THE INCOME FLOWING TO THE TOP QUINTILE. B MAXIMIZE THE AVERAGE INCOME DEFICIT. C Answer: E MAXIMIZE ITS ECONOMIC GROWTH RATE. D MAXIMIZE THE WELFARE OF ITS POOREST INDIVIDUALS. E CHAPTER 15 SLIDE 39

15 END OF CHAPTER SLIDES CREATED BY ERIC CHIANG CHAPTER 15 SLIDE 40 Tshooter/Shutterstock; Anton Balazh/Shutterstock CHAPTER 15 SLIDE 40