Chapter 21 Income Inequality, Poverty, and Discrimination Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

21-2 Facts About Income Inequality Average household income $69,821 in 2011 Among the highest in the world Distribution by quintiles Income mobility People change quintiles Government redistribution Taxes and transfers LO1

21-3 Facts About Income Inequality (1) Personal Income Category (2) Percentage of All Households in this Category Under $15, $15,000-$24, $25,000-$34, $35,000-$49, $50,000-$74, $75,000-$99, $100,000 and above Source: Bureau of the Census, Numbers do not add up to 100 percent due to rounding. LO1

21-4 Facts About Income Inequality (1) Quintile (2) Percentage of Total Income Lowest 20% Second 20% Third 20% Fourth 20% Highest 20% Total Distribution by Quintiles, Source: Bureau of the Census, (3) Upper Income Limit $20,262 38,520 62, ,582 No Limit LO1

21-5 Facts About Income Inequality Lorenz curve and Gini ratio Perfect Equality Lorenz Curve (Actual Distribution ) Complete Inequality A B a b c d e f Gini Ratio = Area A Area A + Area B Percentage of Households Percentage of Income LO1

21-6 Facts About Income Inequality Lorenz Curve Before Taxes and Transfers Percentage of Households Percentage of Income Lorenz Curve After Taxes and Transfers Impact of government taxes and transfers LO1

21-7 Causes of Income Inequality Ability Education and training Discrimination Preferences and risks Unequal distribution of wealth Market power Luck, connections, and misfortune LO2

21-8 Income Inequality Over Time LO3

21-9 Income Inequality Over Time Rising income inequality since 1975 Causes of growing inequality Greater demand for highly skilled workers Demographic changes International trade, immigration, and decline in unionism LO3

21-10 Income Inequality Over Time LO3

21-11 Equality Versus Efficiency The case for equality Maximizing total utility The case for inequality Incentives and efficiency The equality-efficiency trade-off LO4

21-12 The Utility-Maximizing Distribution of Income Anderson’s Marginal Utility From Income Brooks’ Marginal Utility From Income 00 Marginal Utility Income $5000 $2500 $7500 MU B MU A a a’ b’ b Utility Gain (Entire Blue Area) Utility Loss (Entire Red Area) Equality Versus Efficiency LO4

21-13 The Economics of Poverty Definition of poverty in 2011 Single person < $11,702 Family of 4 < $22,891 Family of 6 < $29, million Americans Poverty rate 15% LO5

21-14 Incidence of Poverty LO5

21-15 Poverty Trends Poverty rate trends Significant decline Stable in 11-13% range since Rises with recession Measurement issues Arbitrary income threshold Consumption vs. income LO5

21-16 Poverty Trends LO5

21-17 The U.S. Income-Maintenance System Entitlement programs All those eligible receive aid Social insurance programs Social security and Medicare Unemployment compensation Public assistance programs Welfare LO6

21-18 Public Assistance Programs Supplemental Security Income (SSI) Temporary Assistance for Needy Families (TANF) Supplemental Nutrition Assistance Program (SNAP) Medicaid Earned Income Tax Credit LO6

21-19 Discrimination Inferior treatment Taste-for-discrimination model Prejudiced people receive disutility Willing to pay to avoid Discrimination coefficient Prejudice and the market African- American—White wage ratio Competition and discrimination LO7

21-20 Taste for Discrimination Model African-American Wage Rate (Dollars) African-American Employment (Millions) 0 D3D3 D2D2 D1D1 S $9 8 More Discrimination Less Discrimination LO7

21-21 Discrimination Statistical discrimination Judged on average group characteristics Labor market example Profitable, undesirable, but not malicious LO7

21-22 Discrimination Occupational segregation The crowding model Crowd certain groups into less desirable occupations Effects of crowding Eliminating occupational segregation Cost to Society as well as to individuals LO7

21-23 Occupational Segregation Wage Rate BBB M M W DxDx DyDy DzDz Occupation X Occupation Y Occupation Z Quantity of Labor (Millions) Quantity of Labor (Millions) Quantity of Labor (Millions) Crowding women into one occupation (Z)… results in men enjoying higher wages in the other occupations (X and Y). 000 LO7

21-24 U.S. Family Wealth Median and Average Family Wealth, Survey Years (In 2010 Dollars) $84,000 98, , , ,400 77,300 $307, , , , , ,800 Family wealth rose rapidly between 1995 and 2010 Year Median Average* *The average greatly exceeds the medians because the averages are boosted by the multibillion dollar wealth of a relatively few families.

21-25 U.S. Family Wealth Family wealth became more unequal between 1995 and 2010 Percentage of Total Family Wealth Held by Different Groups, Survey Years % % % YearBottom 90%Top 1%Top 10% Percentage of Total Wealth by Group