21 C H A P T E R INCOME INEQUALITY AND POVERTY

FACTS ABOUT INCOME INEQUALITY 2001 U.S. Average Family Income $66,863 Distribution of U.S. Personal Income by Families, 2001 Percentage of All Families in This Category Personal Income Category Under $10,000 $10,000 - $14,999 $15,000 - $24,999 $25,000 - $34,999 $35,000 - $49,999 $50,000 - $74,999 $75,000 - $99,999 $100,000-$199,999 $200,000 and over 5.3 4.3 11.3 11.9 15.7 20.8 13.1 14.6 3.0 100.0

FACTS ABOUT INCOME INEQUALITY Distribution of Personal Income by Quintiles, 2001 Percentage of Total Income Upper Income Limit Quintile Lowest 20% Second 20% Third 20% Fourth 20% Highest 20% Total 4.2 9.7 15.4 22.9 47.7 100.0 $24,000 41,127 62,500 94,150 The Lorenz Curve graphically...

THE LORENZ CURVE Perfect Equality Complete Inequality 100 80 60 40 20 Perfect Equality Percent of Income Complete Inequality 20 40 60 80 100 Percent of Families

THE LORENZ CURVE Lorenz Curve (actual distribution) Perfect Equality 100 80 60 40 20 Lorenz Curve (actual distribution) Perfect Equality Percent of Income Area between the lines shows the degree of income inequality Complete Inequality 20 40 60 80 100 Percent of Families

THE LORENZ CURVE Gini Ratio Numerical Measure of Overall 100 80 60 40 20 Lorenz Curve (actual distribution) Gini Ratio Numerical Measure of Overall Dispersion of Income Area Between Lorenz Curve and Diagonal Total Area Below the Diagonal Gini Ratio = Perfect Equality Percent of Income Area between the lines shows the degree of income inequality Complete Inequality 20 40 60 80 100 Percent of Families

Income churning over longer time periods is evident THE LORENZ CURVE 100 80 60 40 20 Lorenz Curve (actual distribution) Limitations due to Income Mobility: The Time Dimension – Income churning over longer time periods is evident Perfect Equality Percent of Income Area between the lines shows the degree of income inequality Complete Inequality 20 40 60 80 100 Percent of Families

redistribution of cash THE LORENZ CURVE 100 80 60 40 20 Lorenz Curve (actual distribution) Effect of government redistribution of cash and noncash transfers Perfect Equality Percent of Income Area between the lines shows the degree of income inequality Complete Inequality 20 40 60 80 100 Percent of Families

THE LORENZ CURVE Lorenz Curve (actual distribution) Perfect Equality 100 80 60 40 20 Lorenz Curve (actual distribution) Perfect Equality Percent of Income Lorenz curve after taxes and transfers Area between the lines shows the degree of income inequality Complete Inequality 20 40 60 80 100 Percent of Families

CAUSES OF INCOME INEQUALITY Ability Differences Education and Training Discrimination Preferences and Risks Unequal Distribution of Wealth Market Power Luck, Connections, and Misfortune

TRENDS IN INCOME INEQUALITY 1929 - 1947 Significant reduction in income inequality 1947 - 1969 Less inequality but at a slower pace 1969 - 2001 More unequal since 1969

GLOBAL PERSPECTIVE Brazil Guatemala South Africa Mexico United States Percentage of Total Income Received By Top One-Tenth of Income Receivers, Selected Nations 0 10 20 30 40 50 Brazil Guatemala South Africa Mexico United States France Italy Sweden Source: World Development Report, 2003

CAUSES OF GROWING INEQUALITY Greater Demand for Highly Skilled Workers Demographic Changes International Trade Immigration Decline in Unionism

EQUALITY VERSUS EFFICIENCY The Case for Equality Maximizing Total Utility The Case for Inequality Incentives and Efficiency Tradeoff Between Equality and Efficiency

THE ECONOMICS OF POVERTY Poverty Defined – 2001 Single $ 9,039 Family of 4 18,104 Family of 6 24,195 Poverty Rates in the U.S Blacks 22.7% Hispanics 21.4% Whites 9.9%

THE ECONOMICS OF POVERTY Incidence of Poverty Poverty Rate Poverty Trends The “Invisible” Poor Short-Periods of Time Geographic Isolation Politically Invisible – Are Easy to Ignore

PERCENTAGE IN POVERTY Married-couple families Persons 65 or over 0 10 20 30 Married-couple families Persons 65 or over Whites Total population Children under 18 Foreign born (not citizens) Hispanics Blacks Female-householders 2001 Data

THE INCOME-MAINTENANCE SYSTEM Entitlement Programs Social Insurance Programs, 2002 OASDHI $432 Billion ($386 Billion in 1999) Medicare $219 Billion ($210 Billion in 1999) Unemployment Compensation $32 Billion ($20 Billion in 1999)

THE INCOME-MAINTENANCE SYSTEM Entitlement Programs Public Assistance Programs, 2002 Supplemental Security Income (SSI) $35 Billion ($29 Billion in 1999) Temporary Assistance for Needy Families $14 Billion ($23 Billion in 1999) Food Stamps $20 Billion ($20 Billion in 1999) Medicaid $207 Billion ($124 Billion in 1999) Earned-Income Tax Credit (EITC) $55 Billion ($30 Billion in 1999)

WELFARE: GOALS AND CONFLICTS Common Features Minimum Annual Income Benefit-Reduction Rate Conflicts Among Goals Eliminating Poverty Maintaining Work Incentives Holding Down Costs

WELFARE: GOALS AND CONFLICTS Welfare Reform Growing Government Dependence Personal Responsibility Act 1996 Temporary Assistance to Needy Families 5-Year-Lifetime Limit Must Work After 2 Years Reduced Food Stamp Eligibility Tightened Some Definitions 5-Year Waiting Period on New Legal Immigrants

KEY TERMS income inequality Lorenz curve Gini Ratio income mobility noncash transfers equality-efficiency tradeoff poverty rate entitlement programs social insurance programs OASDHI Medicare unemployment compensation public assistance programs Supplemental Security Income (SSI) Temporary Assistance for Needy Families (TANF) food stamp program Medicaid earned-income tax credit (EITC) Copyright McGraw-Hill/Irwin, 2005 BACK END

Next: Labor Market Institutions and Issues: Unionism, Discrimination, Immigration Chapter 22