ECONOMICS What Does It Mean To Me? Part VII: Issues and Policies in Microeconomics

TOPICS: Income Inequality & Poverty Antitrust Policy & Regulation Agriculture Labor Market Issues Health Care

INCOME INEQUALITY AND POVERTY

Average Family income in U.S. = $66,863 (2001) One way to look at inequality in income is to look at the distribution by families: Personal Inc Category% of families Under $10, $10,000-14, $15,000-24, $25,000-34, $35,000-49, $50,000-74, $75,000-99, $100, , $200,000 and above data Source: McConnell & Brue, Economics

If you then take the categories and divide it into quintiles, you get: % of Total IncomeUpper Income Limit Lowest 20 percent 4.2$24,000 Second 20 percent ,127 Third 20 percent ,500 Fourth 20 percent ,150 Fifth 20 percent 47.7 no limit Source: McConnell & Brue, Economics Census Bureau

The Lorenz Curve Percentage of Income The Lorenz Curve is a graph of the percentage of total income obtained by a cumulative percentage of families Perfect Equality 1999 data Percentage of Income

The Lorenz Curve Percentage of Income The Lorenz Curve represents the degree of inequality in the U.S. distribution of total income. Perfect Equality 1999 data

The Gini Coefficient The Gini coefficient is a ratio of the areas on a Lorenz curve. It is also a measure of the inequality of a distribution.

If the area between the line of perfect equality and Lorenz curve is A, and the area under the Lorenz curve is B, then the Gini coefficient is A/(A + B). Since A + B = 0.5, the Gini coefficient is: G = A/(.5) = 2A = 1 − 2B. If the Lorenz curve is represented by the function Y = L(X), the value of B can be found with integration and: G = 1 − 2L(X)dX.

Some important properties of the Gini coefficient are: 1. 1.The Gini coefficient is a measure of inequality of a distribution. It is defined as a ratio with values between 0 and1: the numerator is the area between the Lorenz curve of the distribution and the uniform (perfect) distribution line; the denominator is the area under the uniform distribution line It is often used as a metric of inequality The higher the Gini coefficient, the greater the inequality

4. A value of zero corresponds to perfect income equality (everyone has the same income), while a value of 1corresponds to perfect income inequality (one person has all the income, and the rest of the population has none). 5. It is not affected by the shape of the Lorenz curve, only by the ratio of the areas used to compute it. 6. It does not indicate how the inequality is distributed, only the total amount of inequality. 7. The Gini coefficient can be used to indicate how a distribution changes over time and if this change shows thatequality is increasing or decreasing

The Lorenz Curve Percentage of Income The distribution of personal income is significantly more equal after taxes and transfers are taken into account than before. The Lorenz Curve after taxes and transfers 1999 data

The End Created by: Virginia Meachum, Economics Teacher, Coral Springs High School Sources: McConnell & Brue, Economics