Chapter 12 Income Distribution, Poverty, and Discrimination Lecture Slides Economics for Today Irvin B. Tucker © 2011 South-Western, a part of Cengage Learning

What is the purpose of this chapter? To analyze the distribution of income, poverty, and wage discrimination. © 2011 South-Western, a part of Cengage Learning

What has happened to the distribution of income recently? The richest families have become a little richer and others a little poorer © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning Exhibit 1 Division of Total Annual Money Income Among Families, 2008 Percentage of Families Highest 5% 21% Highest fifth 48 Second-highest fifth 23 15 Middle fifth 10 Second-lowest fifth 4 Lowest fifth © 2011 South-Western, a part of Cengage Learning

Exhibit 2 Median Income of Families 2008 Characteristics Median Income All Families $61,521 Families headed by male 43,571 30,129 Families headed by female Families with head aged 25-34 years 52,845 Families headed by high school graduate 49,414 100,000 Families headed by at least bachelors degree 5 © 2011 South-Western, a part of Cengage Learning

Exhibit 3 Real Median Family Income, 1980-2008 63 61 Real Median 59 Family Income (thousands of 2008 dollars per year) 57 55 53 2000 1980 1985 1990 1995 2005 2010 Year © 2011 South-Western, a part of Cengage Learning

Exhibit 4 A Hypothetical Lorenz Curve 40 60 80 100 20 Perfect Equality Line 80 E 60 Cumulative Percentage of Money Income D C 40 Lorenz Curve (actual income distribution) 20 B A 40 60 80 100 20 Cumulative Percentage of Families © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning What is a Lorenz Curve? A graph of the actual cumulative distribution of income compared to a perfectly equal cumulative distribution of income © 2011 South-Western, a part of Cengage Learning

What does the Lorenz Curve show? It has shifted only slightly inward, and therefore closer to the perfect equality line between 1929 and 2007 © 2011 South-Western, a part of Cengage Learning

Cumulative Percentage of Money Income Exhibit 5 Lorenz Curves for Family Income Distribution in the U.S., 1929 and 2008 100 Perfect Equality Line 80 60 Cumulative Percentage of Money Income 2008 40 1929 20 40 60 80 100 20 Cumulative Percentage of Families © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning Exhibit 5 Lorenz Curves for Family Income Distribution in the U.S., 1929 and 2008 1929 2008 Percentage of Families Percentage Share Cumulative Share Percentage Share Cumulative Share Lowest fifth 4% 4% 4% 4% Second-lowest fifth 9 13 10 14 Middle fifth 14 27 15 29 Second-lowest fifth 19 46 23 52 Highest fifth 54 100 48 100 © 2011 South-Western, a part of Cengage Learning

Exhibit 6 Lorenz Curve for Selected Countries 100 Perfect Equality Line 80 60 Cumulative Percentage of Money Income Czech Republic 40 Brazil 20 United States 40 60 80 100 20 Cumulative Percentage of Families © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning What is poverty? Poverty can be defined in absolute terms or relative terms © 2011 South-Western, a part of Cengage Learning

What is poverty in absolute terms? A dollar figure that represents some level of income per year required to purchase some minimum amount of goods and services to meet basic needs © 2011 South-Western, a part of Cengage Learning

What is poverty in relative terms? A level of income that places a person or family in the lowest, say, 20 percent of all persons or families receiving income © 2011 South-Western, a part of Cengage Learning

What is the poverty line? The level of income below which a person or family is considered to be poor. It is based on the cost of a minimal diet multiplied by three because low-income families spend about one-third of their income on food. © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning Exhibit 7(a) Official Poverty Rates for all Persons 14% 14% 14% 13% 13% 13% 12% 11% 1970 1975 1980 1985 1990 1995 2000 2008 © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning Exhibit 7(b) Official Poverty Rates for African Americans 34% 33% 32% 31% 31% 29% 25% 22% 1970 1975 1980 1985 1990 1995 2000 2008 © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning Exhibit 7(c) Official Poverty Rates for Whites 10% 10% 10% 11% 11% 11% 9% 11% 1970 1975 1980 1985 1990 1995 2000 2008 © 2011 South-Western, a part of Cengage Learning

Percentage below the Poverty Line Exhibit 8 Characteristics of U.S. Persons and Families Below the 2008 Poverty Level Percentage below the Poverty Line Characteristics Region South 14% West 14 Northeast 12 Midwest 12 Type of Family Headed by married couple 6 Headed by male, no wife 14 Headed by female, no husband 29 Education of Household Head No high school diploma 24 High school diploma, no college 13 Bachelor’s degrees or more 4 © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning Federal antipoverty programs are classified into two broad types of entitlements: Cash assistance In-kind transfers © 2011 South-Western, a part of Cengage Learning

What are examples of cash transfer programs? Social Security Unemployment compensation Temporary assistance to needy families (TANF) © 2011 South-Western, a part of Cengage Learning

What are in-kind transfers? Government payments in the form of goods and services, rather than cash © 2011 South-Western, a part of Cengage Learning

What are some examples of in-kind transfers? Medicare Medicaid Food stamps Housing assistance © 2011 South-Western, a part of Cengage Learning

What are some criticisms of welfare? Work disincentives Inefficiencies Inequities © 2011 South-Western, a part of Cengage Learning

What are some reform proposals? Negative income tax Workfare © 2011 South-Western, a part of Cengage Learning

What is a negative income tax (NIT)? A plan under which families below a certain break-even level of income would receive cash payments that decrease as their incomes increase © 2011 South-Western, a part of Cengage Learning

Exhibit 9 A Negative Income Tax Plan 10 5 Positive Tax Tax Liability (thousands of dollars per year) Negative Tax - 5 -10 0 5 10 15 20 25 30 35 Family Income (thousands of dollars per year) © 2011 South-Western, a part of Cengage Learning

© 2011 South-Western, a part of Cengage Learning What is workfare? To keep their benefits, welfare recipients must perform some work activities within two years of receiving welfare or risk losing benefits © 2011 South-Western, a part of Cengage Learning

How does discrimination affect wages? Discrimination in the workplace can cause the equilibrium wage to be lower for the group that is being discriminated against © 2011 South-Western, a part of Cengage Learning

Exhibit 10(a) Market without discrimination Market Supply 420 350 Wage Rate per day 280 245 210 140 70 Market Demand 4 8 12 14 20 24 28 16 Quantity of Labor © 2011 South-Western, a part of Cengage Learning (Thousands of workers per day)

© 2011 South-Western, a part of Cengage Learning Exhibit 10(b) Market with discrimination 420 White Supply 350 Black supply White Wage 280 . Wage Rate per day 210 White demand Black Wage 140 Black Demand 70 2 4 6 8 10 12 Quantity of Labor © 2011 South-Western, a part of Cengage Learning 32 (thousands of workers per day)

What is comparable worth? The principle that employees who work for the same employer must be paid the same wage when their jobs, even if different, require similar levels of education, training, experience, and responsibility © 2011 South-Western, a part of Cengage Learning

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