32 Income Inequality and Poverty

Chapter Objectives How Income Inequality in the United States is Measured and Described The Extent and Sources of Income Inequality How Income Inequality Has Changed Since 1970 The Economic Arguments For and Against Income Inequality How Poverty is Measured and its Incidence by Age, Gender, Ethnicity, and Other Characteristics The Major Components of the Income-Maintenance Program in the United States

Facts About Income Inequality Average Household Income $60,258 in 2004 - Among the Highest in the World Distribution of U.S. Income by Households, 2004 (1) Personal Income Category (2) Percentage of All Households in this 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 and Above 8.7 6.7 12.9 11.9 14.8 18.3 11.0 15.7 100.0 Source: Bureau of the Census

Facts About Income Inequality Division Into 5 Equal Groups Distribution by Quintiles, 2004 (2) Percentage of Total Income (3) Upper Income Limit (1) Quintile Lowest 20% Second 20% Third 20% Fourth 20% Highest 20% Total 3.4 8.7 14.7 22.2 50.1 100.0 $18,500 34,738 55,331 88,029 No Limit Source: Bureau of the Census Income Mobility: The Time Dimension

Facts About Income Inequality Lorenz Curve and Gini Ratio The Lorenz Curve W 32.1 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 G 32.1

Facts About Income Inequality Effect of 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

Facts About Income Inequality Effect of Government Redistribution Noncash Transfers Percentage of Total Income Received, 2003 (2) Before Taxes And Transfers (3) After Taxes And Transfers (1) Quintile Lowest 20% Second 20% Third 20% Fourth 20% Highest 20% .8 7.2 14.8 24.0 53.1 4.5 10.7 16.4 24.0 44.4 Source: Bureau of the Census

Causes of Income Inequality Ability Education and Training Discrimination Preferences and Risks Unequal Distribution of Wealth Market Power Luck, Connections, and Misfortune

Causes of Income Inequality 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

Causes of Income Inequality Percentage of Total Income Received by the Top One-Tenth of Income Receivers, Selected Nations GLOBAL PERSPECTIVE 0 10 20 30 40 50 Guatemala Brazil South Africa Mexico United States Italy Sweden Germany 48.3 46.9 44.7 43.1 29.9 26.8 22.2 22.1 Source: World Bank, World Development Indicators, 2005

Equality Versus Efficiency The Case for Equality: Maximizing Total Utility The Case for Inequality: Incentives and Efficiency The Equality-Efficiency Tradeoff

Equality Versus Efficiency The Utility-Maximizing Distribution of Income Anderson’s Marginal Utility From Income Brooks’ Marginal Utility From Income Marginal Utility Income Utility Gain (Entire Blue Area) Utility Loss (Entire Red Area) a b’ a’ b MUA MUB $2500 $5000 $5000 $7500

The Economics of Poverty Definition of Poverty Single in 2004 was $9,645 Family of 4 was $19,307 Family of 6 was $25,785 37 Million Americans Poverty Rate 12.7% Disproportionate Sharing Incidence of Poverty

The Economics of Poverty Poverty Rates Among Selected Population Groups,2004 0 10 20 30 Female-Householders African-Americans Hispanics Foreign-Born (Not Citizens) Children Under 18 Women Total Population Men Whites Asian Persons 65 or Older Married-Couple Families Full-Time Workers 28.4 24.7 21.9 21.4 17.8 13.9 12.7 11.5 10.8 9.8 9.8 5.5 2.8

The Economics of Poverty Poverty Trends Fell Between 1959 and 1969 Stable in 1970s Rose in the Early 1980s Up and Down Late 1990s and 2000s Rose with Recession 2001 - 2004 Measurement Issues

U.S. Income-Maintenance System Entitlement Programs Social Insurance Programs Social Security Medicare Unemployment Compensation Public Assistance “Welfare” Supplemental Security Income (SSI) Program Temporary Assistance for Needy Families (TANF) Food-Stamp Program

U.S. Income-Maintenance System Medicaid Earned-Income Tax Credit (EITC) Welfare: Goals and Conflicts Common Features Conflicts Between Goals Welfare Reform W 32.2

U.S. Family Wealth and Its Distribution Last Word Family Wealth Rose Rapidly and Became More Unequal Between 1995 and 2004 Median and Average Family Wealth, 1995-2004 In 2004 Dollars Year Median Average 1995 1998 2001 2004 $70,800 83,100 91,700 93,100 $260,800 327,500 421,500 448,200

U.S. Family Wealth and Its Distribution Last Word Family Wealth Rose Rapidly and Became More Unequal Between 1995 and 2004 Percentage of Total Family Wealth Held by Different Percentile Groups, 1995-2004 Year Bottom 90% Top 1% Bottom 10% Percentile of Wealth Distribution 1995 1998 2001 2004 32.2% 31.4 30.2 30.5 67.8% 68.6 69.8 30.5 34.6% 33.9 32.7 33.4

Key Terms income inequality Lorenz curve Gini ratio income mobility noncash transfers equality-efficiency tradeoff poverty rate entitlement programs social insurance programs Social Security 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)

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