Visit UMT online at Page 1 of 22 Chapter 14, ECON125 Version © 2007 Thomson South-Western © 2009 UMT Economics for Managers University of Management and Technology 1901 North Fort Myer Drive Arlington, VA USA Phone: (703) Fax: (703) Website:

Visit UMT online at Page 2 of 22 Chapter 14, ECON125 Version © 2007 Thomson South-Western © 2009 UMT Chapter 14 Income Distribution Mastrianna, F.V. Basic Economics (14th ed.) © 2007 Thomson South-Western. ISBN

Page 3 of 22 Chapter 14, ECON125 Visit UMT online at Version © 2007 Thomson South-Western © 2009 UMT Copyright Warning Copyright Warning This presentation is the intellectual property of the textbook publisher Thomson South-Western Students are hereby advised that they may not copy or distribute this work to any third party

Page 4 of 22 Chapter 14, ECON125 Visit UMT online at Version © 2007 Thomson South-Western © 2009 UMT Learning Objectives Upon successfully completing this module, the student should be able to: Describe the distribution of income in the United States Understand the use of the Lorenze curve and the Gini coefficient as measures of income inequality Analyze the causes of income inequality Compare equal and equitable distributions of income Define poverty and indicate the incidence of poverty in the United States Describe the current status and future challenges facing the welfare system

Page 5 of 22 Chapter 14, ECON125 Visit UMT online at Version © 2007 Thomson South-Western © 2009 UMT Individual, Family, and Household Income Family A group of two or more persons who live in the same dwelling and are related by birth, marriage, or adoption Household Includes all persons, related or unrelated, who occupy a housing unit Includes individuals living alone

Page 6 of 22 Chapter 14, ECON125 Visit UMT online at Version © 2007 Thomson South-Western © 2009 UMT Distribution of Income The way in which income is divided up among households or families The Bureau of Census presents the distribution of income by dividing all households into five income classes or quintiles, low to high, and indicating the percentage of total or aggregate income received by households in each quintile

Page 7 of 22 Chapter 14, ECON125 Visit UMT online at Version © 2007 Thomson South-Western © 2009 UMT Money Income of Households 2004 Money Income Share of Aggregate Income Lowest fifth Under $22, Second fifth $22,670–45, Middle fifth $45,259–67, Fourth fifth $67,888–90, Highest fifth $90,517–and over50.1 TOTAL Source: U.S. Census Bureau, Current Population Reports: Income, Poverty, and Health Insurance: 2004 (August 2005).

Page 8 of 22 Chapter 14, ECON125 Visit UMT online at Version © 2007 Thomson South-Western © 2009 UMT 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

Page 9 of 22 Chapter 14, ECON125 Visit UMT online at Version © 2007 Thomson South-Western © 2009 UMT Lorenz Curve for the 2004 Distribution of Income in the United States Perfect Equality Lorenz Curve 2004 Cumulative Percentage of Households Cumulative Percentage of Income Received A B

Page 10 of 22 Chapter 14, ECON125 Visit UMT online at Version © 2007 Thomson South-Western © 2009 UMT 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 by the total triangular area under line A

Page 11 of 22 Chapter 14, ECON125 Visit UMT online at Version © 2007 Thomson South-Western © 2009 UMT Lorenz Curves for United States, Brazil, and Sweden Line of Perfect Equality United States Cumulative Percentage of Households Cumulative Percentage of Income Received Sweden Brazil

Page 12 of 22 Chapter 14, ECON125 Visit UMT online at Version © 2007 Thomson South-Western © 2009 UMT Causes of Income Inequality Education In 2004, the median income of a high school dropout was $18,874, compared to $26,104 for a high school graduate, and $42,087 for an individual with a bachelor’s degree Technology Increased demand for educated and highly skilled workers Unions The decline in union membership Abilities A wide variation in distribution of natural abilities which leads to variations in income

Page 13 of 22 Chapter 14, ECON125 Visit UMT online at Version © 2007 Thomson South-Western © 2009 UMT Causes of Income Inequality Wealth Household wealth The value of a household’s total assets minus its liabilities Also known as net worth The Bureau of the Census estimates that 84% of the nation’s wealth is held by 20% of the households

Page 14 of 22 Chapter 14, ECON125 Visit UMT online at Version © 2007 Thomson South-Western © 2009 UMT Household Median Income, 2004 Households Median income (Dollars) All Households $44,369 White, not Hispanic 48,977 Black 30,134 Hispanic 34,241 Asian & Pacific Islander 57,518 Type of Household Family households 55,327 Nonfamily households 44,923 Earnings of Year-Round, Full-Time Workers Men 40,798 Women 31,223 Source: U.S. Census Bureau, Current Population Reports: Income, Poverty, and Health Insurance: 2004 (August 2005).

Page 15 of 22 Chapter 14, ECON125 Visit UMT online at Version © 2007 Thomson South-Western © 2009 UMT Causes of Income Inequality Discrimination Labor market discrimination Discrimination that occurs if the employment and earnings practices are based on factors unrelated to worker productivity, such as race, sex, age, or national origin of the worker Occupational segregation Channeling people into occupations according to sex or race

Page 16 of 22 Chapter 14, ECON125 Visit UMT online at Version © 2007 Thomson South-Western © 2009 UMT Female to Male Earnings Ratio and Median Earnings of Full- Time, Year Round Workers 15 Years Old and Older by Sex: 1960–2004 Earnings in thousands, ratio in percent :100 $40,798 Female-to-male earnings ratio Earnings of men $31,223 Earnings of women Source: U.S. Census Bureau, Current Population Reports: Income, Poverty, and Health Insurance in the United States: 2004 (August 2005).

Page 17 of 22 Chapter 14, ECON125 Visit UMT online at Version © 2007 Thomson South-Western © 2009 UMT Equal versus Equitable Income Distribution Equal distribution of income All income distribution in which all households receive the same income Equitable Distribution of Income An income distribution based on the application of some objective standard Perceived contribution of the individual

Page 18 of 22 Chapter 14, ECON125 Visit UMT online at Version © 2007 Thomson South-Western © 2009 UMTPoverty Relative measure of poverty A definition of poverty based on the average annual incomes earned by other households Absolute measure of poverty A definition of poverty based on a specific level of annual income for a given-sized household Poverty threshold line The established annual income level that separates the poor from the nonpoor

Page 19 of 22 Chapter 14, ECON125 Visit UMT online at Version © 2007 Thomson South-Western © 2009 UMT Incidence of Poverty The percentage of persons in a particular group who are officially classified as having income below the poverty line A major shortcoming inherent in the official poverty line measures is that only pretax income is included No consideration is given to income received from cash transfers and in-kind benefits from government

Page 20 of 22 Chapter 14, ECON125 Visit UMT online at Version © 2007 Thomson South-Western © 2009 UMT Demographic Characteristics of the Poor, 2004 Characteristics Millions Percentage Persons White, not Hispanic Black Hispanic Asian & Pacific Islanders Under age years and over Female householder, no husband present By Region Northeast Midwest South West Source: U.S. Census Bureau, Current Population Reports: Income, Poverty, and Health Insurance: 2004 (August 2005).

Page 21 of 22 Chapter 14, ECON125 Visit UMT online at Version © 2007 Thomson South-Western © 2009 UMTWelfare-to-Work Disincentives to work Implicit tax trap Decrease in income Legislation Personal Responsibility and Work Opportunity Reconciliation Act of 1996 A lifetime limit of 5 years of welfare for each family All able-bodied adults must work after two years on welfare

Page 22 of 22 Chapter 14, ECON125 Visit UMT online at Version © 2007 Thomson South-Western © 2009 UMTResults The number and percentage of people on welfare has decreased Most recipients who leave welfare find jobs However, many of these jobs pay a rate equal to or higher than minimum wage but not high enough to raise a family out of poverty