19. Income Distribution and Poverty Income Inequality in the U.S. Poverty in the U.S. Income Inequality in the U.S. Poverty in the U.S.

Income distribution in the U.S. Median household income –$44,000 Top 20% –$100,000 and above Top 5% –$175,000 and above Median household income –$44,000 Top 20% –$100,000 and above Top 5% –$175,000 and above

Inequality in the U.S. income vs. wealth –income -- amount in a given period –wealth -- value of all assets at point in time income vs. wealth –income -- amount in a given period –wealth -- value of all assets at point in time

Lorenz Curve Picture of income distribution Compare –Percentage of population –Percentage of income earned by that population Picture of income distribution Compare –Percentage of population –Percentage of income earned by that population

A 45 degree line –Equal income/wealth dist. –“poorest 20% earn 20% of income” Our Lorenz curve –Sags outward due to inequality –“poorest 60% earn 30% of income” A 45 degree line –Equal income/wealth dist. –“poorest 20% earn 20% of income” Our Lorenz curve –Sags outward due to inequality –“poorest 60% earn 30% of income”

inequality over time income/wealth distribution more unequal since 1983 why? –increasing gains to skill/education –stock market gains 1980s/1990s -- wealthy own more stock income/wealth distribution more unequal since 1983 why? –increasing gains to skill/education –stock market gains 1980s/1990s -- wealthy own more stock

How does inequality arise? different wage rates different ability different choices –educated make better choices assortative mating –people marry people with similar education, status different wage rates different ability different choices –educated make better choices assortative mating –people marry people with similar education, status

Who is poor? Bureau of the Census 12.7% population is “poor” 2004 –official poverty rate where does that come from? Bureau of the Census 12.7% population is “poor” 2004 –official poverty rate where does that come from?

Poverty rate compare –Household’s “money income” to “poverty threshold” compare –Household’s “money income” to “poverty threshold”

Poverty threshold poverty threshold –cost nutritionally adequate diet x 3 –$15,700 for adult w/ 2 children in 2005 poverty threshold –cost nutritionally adequate diet x 3 –$15,700 for adult w/ 2 children in 2005

Problems: –Average HH spends only about 20% of income on food –Does not factor in rising costs Housing Medical care Energy Problems: –Average HH spends only about 20% of income on food –Does not factor in rising costs Housing Medical care Energy

money income –earned income, interest income –cash benefits –before taxes –does not include noncash benefits poverty rate is sensitive to the income measure AND threshhold money income –earned income, interest income –cash benefits –before taxes –does not include noncash benefits poverty rate is sensitive to the income measure AND threshhold

poverty varies household type education race sex age state household type education race sex age state

by state, average New Hampshire 5.7% New York 14.4% New Jersey 8.2% Pennsylvania 10.4% Mississippi 17.7% New Hampshire 5.7% New York 14.4% New Jersey 8.2% Pennsylvania 10.4% Mississippi 17.7%

Fighting poverty Minimum wage –Doesn’t keep up! –Distorts labor markets –Does really target the poor Minimum wage –Doesn’t keep up! –Distorts labor markets –Does really target the poor

Unemployment compensation –Must qualify through work history –Temporary –Lengthens job search Unemployment compensation –Must qualify through work history –Temporary –Lengthens job search

Earning income tax credit (EITC) –“negative tax” –Subsidize low wages of families with children Earning income tax credit (EITC) –“negative tax” –Subsidize low wages of families with children

Transfers/ “welfare” –Means-tested assistance –Cash (TANF, SSI) –Housing –Medicaid, medicare –Food stamps, WIC, school lunches –Childcare Transfers/ “welfare” –Means-tested assistance –Cash (TANF, SSI) –Housing –Medicaid, medicare –Food stamps, WIC, school lunches –Childcare

Welfare Myths people stay on welfare forever –70% cash recipients need assistance for < 2 yrs. (pre 1996) –10% get assistance > 5 yrs. too lazy to work? –Over 2/3 recipients are children –over 60% of HH have someone in labor force people stay on welfare forever –70% cash recipients need assistance for < 2 yrs. (pre 1996) –10% get assistance > 5 yrs. too lazy to work? –Over 2/3 recipients are children –over 60% of HH have someone in labor force

welfare encourages “kids 4 dollars” –NO EVIDENCE –families on welfare are smaller, on average welfare costs out of control? –2001, TANF, food stamps 2% of federal budget -- defense 16%, -- Social Security 23% welfare encourages “kids 4 dollars” –NO EVIDENCE –families on welfare are smaller, on average welfare costs out of control? –2001, TANF, food stamps 2% of federal budget -- defense 16%, -- Social Security 23%

Effects of Welfare: work incentive prior to 1996, –no time limit on benefits –benefits cut (earnings penalty) when recipients work prior to 1996, –no time limit on benefits –benefits cut (earnings penalty) when recipients work

nonearned income increase has only an income effect –increase consumption –increase leisure (decrease work) increase has only an income effect –increase consumption –increase leisure (decrease work)

earnings penalty cut off benefits as earned income rises –gradual (food stamps, housing) –abrupt (Medicaid) further reduces work incentive cut off benefits as earned income rises –gradual (food stamps, housing) –abrupt (Medicaid) further reduces work incentive

Effect:Effect: 10-50% reduction in work hours for recipients costly because –benefits –dependency –loss of skills, experience –loss of output in economy 10-50% reduction in work hours for recipients costly because –benefits –dependency –loss of skills, experience –loss of output in economy

Welfare Reform 1996 federal law time limit on benefits –2 years consecutive –5 years total job training/work requirements collecting child support 1996 federal law time limit on benefits –2 years consecutive –5 years total job training/work requirements collecting child support

unmarried teens w/ children –live w/parent and attend school individual states –reduce caseloads –reduce out-of-wedlock births –allowed to experiment w/ different plans unmarried teens w/ children –live w/parent and attend school individual states –reduce caseloads –reduce out-of-wedlock births –allowed to experiment w/ different plans

Results of reform caseloads have fallen over 50% nationally –evidence that time limits are a big motivator –big variation across states declines in births to teenagers –some evidence that stricter welfare rules played a role caseloads have fallen over 50% nationally –evidence that time limits are a big motivator –big variation across states declines in births to teenagers –some evidence that stricter welfare rules played a role

the big tradeoff equity vs. efficiency redistribution increases equity BUT reduces incentives to work, produce –loss of efficiency redistribution costly equity vs. efficiency redistribution increases equity BUT reduces incentives to work, produce –loss of efficiency redistribution costly