1. 1 Income Distribution and Poverty Chapter 18 © 2006 Thomson/South-Western

2. 2 Distribution of Household Income  In a market economy, income depends primarily on the productivity of one’s resources  The problem with allocating income according to productivity is that some people have difficulty earning income  Some have mental and physical disabilities  Others may face limited job choices and reduced wages because of age, poor education, discrimination, bad luck, or the demands of caring for small children

3. 3 Exhibit 1: Share of Aggregate Household Income by Quintile

4. 4 Lorenz Curve  The Lorenz curve is another way to picture the distribution of income in an economy  The Lorenz curve shows the percentage of total income received by any given percentage of households when incomes are arrayed from smallest to largest

5. 5 Median Wage Median wage: the middle wage when wages of all workers are ranked from lowest to highest

6. 6 0 20 40 60 80 100 020406080100 Cumulative percent of households Cumulative percent of income Exhibit 2: Lorenz Curve Line of equal distribution  As distribution becomes more uneven, the Lorenz curve is pulled down and to the right, away from the line of equal distribution  Point a indicates that the bottom 80% of families received 56.7% of the income and the top 20% received 43.3% of the income  Point b shows that the bottom 80% received 50.3% and the top 20% received 49.7% of the income  Since the Lorenz Curve for 2002 is farther from the line of even distribution than it was for 1970, income has become more unevenly distributed.. a b. 1970 2002

7. 7 College Education Pays More  Trends such as industry deregulation, declining unionization, and freer international trade have reduced the demand for workers with less education  New computer-based information technologies have reduced the demand for low-skilled clerical workers  The supply of less-educated workers increased more than the supply of more-educated workers

8. 8 Problems with Distribution Benchmarks  There is no objective standard for evaluating income distributions  Most distributions measure money income after cash transfers but before taxes,  But omits the effects of taxes and in-kind transfers such as food stamps and free medical care  And understates the share of income going to lower income groups

9. 9 Problems with Distribution Benchmarks  Focus on the share of income going to each income quintile overlooks that household size differs across quintiles  only reported sources of income are included  A better measure of household welfare might be the distribution of expenditures, which are more evenly distributed

10. 10 Why Do Household Incomes Differ?  The median income of all households: the middle income when all incomes are ranked from smallest to largest  Household incomes differ because of the number of household members who are working differ

11. 11 Why Do Household Incomes Differ?  Incomes also differ for all the reasons labor incomes differ: differences in education, ability, job experience, etc.  Differences in earnings based on age and education reflect a normal life-cycle pattern of income

12. 12 Poverty and the Poor  Poverty is a relative concept  Benchmark for poverty analysis is based on taking a nutritionally adequate diet and multiplying it by three  Poverty definition is based on pretax money income, including cash transfers, excluding the value of non-cash transfers such as food stamps, Medicaid, subsidized housing, or employer provided health insurance

13. 13 Programs to Help the Poor  Since the mid-1960s, social welfare expenditures at all levels of government have increased significantly  These programs can be divided into two broad categories  Social insurance  Income assistance

14. 14 Social Insurance  Designed to make up for lost income of those who are retired, temporarily unemployed, or unable to work because of disability or work-related injury  Deducts insurance premiums from workers’ pay to provide benefits to others

15. 15 Income Assistance  Do not require the recipient to have a history of work or to have contributed to the program  Income assistance programs are normally means tested  Require that a household’s income and assets must fall below a certain level to qualify for benefits  Federal government funds two-thirds of welfare spending, and state and local governments the remaining one-third

16. 16 Income Assistance  Temporary Assistance for Needy Families (TANF) which provides cash to poor families with dependent children, replaced Aid for Families with Dependent Children (AFDC)  Controlled by each state and carries no federal entitlement  Each state given a fixed grant program to help fund TANF programs

17. 17 Income Assistance  Supplemental Security Income (SSI) provides cash to the elderly poor and the disabled  Is the fastest-growing cash transfer program, with outlays quadrupling from $8 billion in 1980 to nearly $31 billion in 2002  The federal portion of this program is uniform across states, but states can supplement federal aid  Most states also offer General Assistance aid to those who are poor but do not qualify for TANF or SSI

18. 18 Income Assistance  The federal government provides an earned-income tax credit to supplement wages of the working poor  Medicaid pays for medical care for those with incomes below a certain level  It has grown more than any other poverty program, quadrupling in the last decade and accounting for nearly a quarter of the typical state’s budget  Qualifying level of income set by each state  Proportion of poor covered varies by state

19. 19 Income Assistance  Food stamps are vouchers that can be redeemed for food  Funded by the federal government  Uniform across states  Aimed at reducing hunger and providing nutrition to poor families  Housing assistance programs include direct assistance for rental payments and subsidized low-income housing

20. 20 Exhibit 3 Number and Percentage of U.S. Population in Poverty, 1959-2002

21. 21 Exhibit 4: Poverty Rates and Unemployment Rates in the United States

22. 22 Exhibit 5: Poverty Rates by Age

23. 23 Poverty and Public Choice  The decline in the poverty rate of the elderly stems from tremendous growth in spending for Social Security and Medicare  In a democracy, public policies depend very much on the political power of the interest groups involved  In recent years, the elderly have become a powerful political force

24. 24 Poverty and Public Choice  The elderly are actually represented by five constituencies  The elderly themselves  Those under 65 who are concerned about the current benefits to their parents & other elderly relatives  Those under 65 who are concerned about their benefits in the future  Those who earn a living by caring for the elderly  Those running for office who want the votes the elderly deliver

25. 25 Feminization of Poverty  Poverty rates among families headed by females are much higher than rates among other families  Poverty rates among female-headed families have declined in the last decade  Families headed by women increased 148% between 1965 and 2002  Percentage of births to unmarried mothers is five times greater today than in the 1960s  Children born outside of marriage are likely to be poorer than other children

26. 26 Exhibit 6: Poverty Rates Are Much Higher for Families Headed by Females

27. 27 Exhibit 7: Percent of Population Living in Poverty by State

28. 28 Poverty and Discrimination  Discrimination can occur in many ways  in school funding,  in housing,  in employment,  in career advancement  Discrimination in one area can affect opportunities in another, e.g, housing discrimination may reduce job opportunities  Research shows that whites earn more than blacks, but the gap between the two has narrowed  Some research suggests that black workers receive a lower quality of schooling than white workers

29. 29 Poverty and Discrimination  Direct evidence of discrimination comes from audit studies where otherwise similar white and minority candidates are sent to the same source to seek jobs, rent apartments, or apply for mortgages  These studies find that  employers are less likely to interview or offer a job to minority applicants  minority applicants tend to be treated less favorably by real estate agents and lenders

30. 30 Affirmative Action  The Equal Employment Opportunity Commission, established by the Civil Rights Act of 1964, monitors cases involving unequal pay for equal work and unequal access to promotion  Research suggests that civil-rights legislation has played a role in narrowing the black-white earnings gap  State and local governments have also introduced set-aside programs to guarantee minorities a share of contracts

31. 31 Affirmative Action  Since 1993 the median income of black families has risen faster than that of white families  The proportion of black families living below the poverty line has fallen to a record low  There is also a growing middle class among black householders

32. 32 Unintended Consequences  On the plus side, antipoverty programs increase the consumption possibilities of poor families, which is especially significant since children are the largest poverty group  But programs to assist the poor may have secondary effects that limit their ability to reduce poverty

33. 33 Disincentives  Income assistance consists of a combination of cash and in-kind transfer programs, the benefits of which vary inversely with income from other sources  transfers decline sharply as earned income increases  high marginal tax rate on earned income  Since holding even a part-time job involves additional expenses, the high marginal tax rate discourages employment and self-sufficiency

34. 34 Disincentives  The longer people are out of the labor force, the more their job skills deteriorate  When they do look for work, their productivity and pay are lower than when they were last employed  Some argue that in this way, welfare benefits can lead to long-term dependency

35. 35 Does Welfare Cause Dependency?  Will the children of the poor end up in poverty as well, e.g., is there a cycle of poverty? Why might we expect one?  Children in welfare households may learn the ropes about the welfare system and may come to view welfare as a normal way of life  Research indicates that daughters from welfare families are more likely than daughters in other families to participate in the welfare system themselves, and are more likely to give birth outside of marriage

36. 36 Welfare Reform  Some analysts believe one way to reduce poverty is to provide welfare recipients with job skills and make them find jobs  workfare programs  Where tried, these state programs indicate that they do save some money because those in welfare-to-work left welfare rolls sooner

37. 37 Welfare Reform  Reforms at the state level set the stage for federal reforms  Biggest reform came with the replacement of Aid to Families with Dependent Children with Temporary Assistance for Needy Families  AFDC set eligibility rules and left federal costs open-ended through matching grants to the stats  TANF offers a block grant to the states to run their welfare programs

38. 38 Welfare Reform  Under the new system, states have wide latitude to run their own welfare programs  Concerns about welfare dependency foster some special provisions  The act imposes a lifetime limit of five years that a recipient can be on welfare  All able-bodied recipients on welfare for two years must participate in welfare-to-work programs

39. 39 Exhibit 8: Welfare Recipients as a Percentage of the U.S. Population Declined Sharply After 1994