The Distribution of Income and Poverty

During The Following Presentation... Copy the table and sort out a series of comments into the following sections based around poverty... CausesEffectsSolutions

SOURCE: U.S. Bureau of the Census. Who Are the Rich And How Rich Are They? The lowest fifth (lowest quintile) of households is considered poor, the top fifth is considered rich, and the three-fifths in between are considered middle income. The income distribution in the United States was less equal (more unequal) in 1998 than in 1967.

SOURCE: U.S. Bureau of the Census. Income Distribution, 1967 and 1998

Income Distribution and Computers Some people think that computers explain the increasing income inequity. Problems with this theory are: 1.The increasing income inequality precedes the use of personal computers. 2.Just because income inequality and the use of computers occur at about the same time, it does not follow that one causes the other. 3.Some economists have found that wages and income inequality increased with the use of pencils, but no one is willing to make the case that pencils can shift the income distribution.

Can All People Become Better Off as the Income Distribution Becomes More Equal? An increasingly unequal income distribution is not necessarily a sign of an income group being worse off. It is possible for everyone to be better off at the same time that the income distribution becomes more unequal.

The Income Distribution Adjusted For Taxes And In-Kind Transfer Payments Government can change the distribution of income through the use of taxes and transfer payments. Ex ante distribution of income is the before tax and/or transfer payment distribution of income. Ex post distribution of income is the after-tax-and- transfer-payment distribution of income. Transfer payments are payments to persons that are not made in return for goods and services currently provided.

The Effect of Age on the Income Distribution It is possible that a person in her late twenties, thirties, or forties will have a higher income than another person in her early twenties or sixties, even though their total lifetime income will be identical.

A Simple Equation Individual Income = Labor income + Asset income + Transfer payments – Taxes Labor income is equal to the wage rate an individual receives times the number of hours he or she works. Asset income consists of such things as the return to saving, the return to capital investment, and the return to land.

Why Does Income Inequality Exist? Because people do not receive the same labor income, asset income, and transfer payments, or pay the same taxes.

Factors Contributing to Income Inequality Innate Abilities and Attributes: Individuals are not all born with the same abilities and qualities. Work and Leisure: There is a tradeoff between work and leisure: More work means less leisure, less work means more leisure. Education and Other Training: Generally, this is human capital – the education, the development of skills, and anything else that is particular to the individual and increases his or her productivity.

Factors Contributing to Income Inequality, Part II Risk Taking: Individuals have different attitude towards risk. Luck: When individuals can’t explain why something has happened to them, they often say it was the result of good or bad luck. In the long run, such factors as innate ability and attributes, education, and personal decisions are more likely to have a larger sustained effect on income than good or bad luck. Wage Discrimination: This exists when individuals of equal ability and productivity, as measured by their marginal revenue products, are paid different wage rates by the same employer.

Poverty Poverty exists when the income of a family of four is less than $10,000 per year. In relative terms, poverty exists when the income of a family of four places it in the lowest 10 percent of income recipients. The US Government defines poverty in absolute terms: $16,600 per year for a family of four; $8,480 per year for an individual under the age of 65; $7,818 per year for an individual over the age of 65. This is called the Poverty Income Threshold, commonly known as the Poverty Line.

Limitations of the Official Poverty Income Statistics The poverty figures are based solely on money incomes. Many money-poor persons receive in- kind benefits. Poverty figures are not adjusted for unreported income, leading to an overestimation of poverty. Poverty figures are not adjusted for regional differences in the cost of living, leading to both overestimates and underestimates of poverty. Government counters are unable to find some poor persons: illegal aliens and some of the homeless which leads to an underestimation of poverty.

SOURCE: U.S. Bureau of the Census. Poverty in Different Groups of the Population. All data are for 1998

Who Are The Poor? Although the poor are persons of all religions, colors, genders, ages, and ethnic backgrounds, some groups are represented in greater number than others. A greater percentage of families headed by females are impoverished, when compared to percentages of families headed by males. Families with seven or more persons are more likely to be impoverished than families with fewer than seven members.

What is the Justification for Government Redistributing Income? Some say a government should not play “Robin Hood”. These people are against a government using its powers to take from some and give to others. Proponents of the Public Good – Free Rider justification say: Most individuals in society would feel better if there were little or no poverty; therefore, there is a demand to reduce poverty.

Government Redistributing Income? (Cont.) The reduction or elimination of poverty is a nonexcludable public good, a good that if consumed by one person can be consumed by other persons to the same degree and the consumption of which cannot be denied to anyone. If no one can be excluded from experiencing the benefits of poverty reduction, then individuals will not have any incentive to pay for what they can get for free.

Social Insurance? The Social Insurance justification is a different type of justification for government welfare assistance. Individuals currently not receiving welfare think they might one day need welfare assistance and thus are willing to take out a form of insurance for themselves by supporting welfare programs.