1 Chapter 14 Income Distribution © 2003 South-Western College Publishing

2 Individual, Family, and Household Income  Family  A group of 2 or more persons living the same dwelling and related by birth, marriage, or adoption  Household  All persons, related or unrelated, who occupy a housing unit  A person living alone

3 Distribution of Income  The way in which income is divided up among households or families  Bureau of Census divides all households into five income classes or quintiles  Next slide presents this information for 2001

4 Distribution of Income Money Share of Income Aggregate Income Lowest Fifth Under $17, Second Fifth $17,901-33, Middle Fifth $33,315-53, Fourth Fifth $53,001-83, Highest Fifth $83,501 and over 50.1 Total Top 5% (over $150,499)

5 Lorenz Curve  Lorenz Curve  Lorenz Curve: a graph that traces the percentage relationship between the portion of total income received and the portion of all households or families in the economy  Next slide presents the Lorenz Curve for the United States for 2001

6 Lorenz Curve for Distribution of Income in the United States: Perfect Equality Lorenz Curve, 2001 Cumulative Percentage of Households Cumulative Percentage of Income Received A B

7 GINI Coefficient  An index that summarizes the inequality revealed by the Lorenz Curve in a single number  Computed by dividing the area between lines A and B (the shaded area in previous figure) by the total area under line A

8 Lorenz Curve for U.S., Brazil, and Sweden Line of Perfect Equality United States Cumulative Percentage of Households Cumulative Percentage of Income Received Sweden Brazil

9 Causes of Income Inequality  Education  In 2001, the median income of a high school dropout was $18,445, $24,645 for high school graduate, and $40,939 for bachelor’s degree  Technology  Increased demand for educated and highly skilled workers  Unions  Decline in union membership  Abilities  Wide variation in distribution of natural abilities which leads to variations in income

10 Household Wealth  Household wealth  Value of a household total assets minus its total liabilities  Also known as net worth  Bureau of Census estimates that 84% of the nation’s wealth is held by 20% of the households

11 Measured Net Worth: 1993 by Type of Household and Age Married couples Male Householders Female Householders – Age Group Thousands ($)

12 Discrimination  Labor market discrimination  Hiring, promotion, firing, or wage is based on factors unrelated to worker productivity - race, gender, age, national origin, etc.  Occupational Segregation  Channeling people into occupations according to gender and race

13 Women’s Earning as a Percentage of Men’s Earnings, Percent 73% 61%

14 Household Median Income Households Median Income (Dollars) All Households $38,885 White, not Hispanic40,912 Black25,351 Hispanic28,330 Asian and Pacific Islanders46,637 Type of Household Family Households47,469 Nonfamily Households23,441 Earnings of Year-Round Full-Time Workers Male35,249 Female26,029

15 Equal vs. Equitable Distribution of Income  Equal Distribution of Income  Income distribution in which all households receive the same income  Equitable Distribution of Income  Income distribution based on the application of some objective standard  Perceived contribution of the individual

16 Poverty  Relative measure of poverty  Defines poverty in terms of the average annual incomes earned by other households  Absolute measure of poverty  Defines poverty as an annual income below a specific level for a given-sized household  Poverty threshold line  Established annual income level that separates the poor from the nonpoor

17 Incidence of Poverty  The percentage of persons in a particular group who are officially classified as having income below the poverty threshold line  Major shortcoming inherent in the official poverty line measures is that only pretax income ix included  no consideration given to income received from cash transfers and in- kind benefits from government

18 Demographic Characteristics of the Poor by Persons Characteristics Millions Percentage Total White, not Hispanic Black Hispanic Asian and Pacific Islanders Under age years and over Female householder, no husband present

19 Demographic Characteristics of the Poor by Region RegionMillionsPercentage Northeast Midwest South West

20 Welfare  Disincentives to work  Implicit tax trap  Decrease in income  Legislation  Personal Responsibility and Work Opportunity Reconciliation Act of 1996  all able-bodied adults must work after 2 years on Welfare & 5 year lifetime limit  preliminary reports show 50%-70% find jobs, but are still in poverty