1. 15 Poverty and Income Distribution SLIDES CREATED BY ERIC CHIANG
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2. CHAPTER OBJECTIVES
Describe the difference between wealth and income.
Analyze functional, personal, and family income distributions.
Use a Lorenz curve and Gini coefficient to measure and describe the distribution of wealth and income.
Describe the impact of income redistribution efforts. 
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3. CHAPTER OBJECTIVES Describe the causes of income inequality.
Describe how poverty thresholds are determined.
Describe the two measures for determining depth of poverty for families.
Discuss alternative methods of measuring poverty.
Describe the prevailing theories on how to deal with poverty and income inequality.
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4. DISTRIBUTION OF INCOME AND WEALTH
A FLOW MEASURE REFLECTING THE FUNDS RECEIVED BY INDIVIDUALS OR BUSINESSES OVER A SPECIFIC PERIOD
A MEASURE OF AN INDIVIDUAL’S OR FAMILY’S ASSETS, NET OF LIABILITIES, AT A GIVEN TIME
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5. LIFE CYCLE EFFECTS YOUNG PEOPLE TYPICALLY EARN MODEST INCOMES.
STEFANIE GREWEL/CORBIS
RANDY FARIS/CORBIS
BLEND IMAGES/ALAMY
YOUNG PEOPLE TYPICALLY EARN MODEST INCOMES.
INCOME PEAKS ROUGHLY BETWEEN AGES 45 AND 55.
INCOME DECLINES WITH RETIREMENT (AS DO COSTS).
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6. SPLITS INCOME AMONG THE FACTORS OF PRODUCTION. 2015 Distribution:
FUNCTIONAL DISTRIBUTION OF INCOME
SPLITS INCOME AMONG THE FACTORS OF PRODUCTION.
2015 Distribution:
Wages = 67.8%
Proprietor’s income = 9.8%
Rent = 4.6%
Corporate profits = 14.3%
Net interest = 3.5%
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7. PERSONAL OR FAMILY DISTRIBUTION OF INCOME
THE DISTRIBUTION OF INCOME TO INDIVIDUALS OR HOUSEHOLD GROUPS (TYPICALLY BY QUINTILES, OR FIFTHS, OF THE POPULATION)
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8. SHARE OF INCOME BY QUINTILE
U.S. distribution of income has grown more unequal over the past three decades. Every income quintile except the highest has declined in percentage of income.
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9. A GRAPHICAL MEASURE OF INCOME INEQUALITY:
LORENZ CURVE
A GRAPHICAL MEASURE OF INCOME INEQUALITY:
Cumulates households of various income levels on the horizontal axis.
Cumulates the share of total income on the vertical axis.
The more bowed the Lorenz curve, the greater the income inequality.
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10. PERCENTAGE OF HOUSEHOLDS
LORENZ CURVE
100
EQUAL DISTRIBUTION OF INCOME (50, 50)
This particular Lorenz curve assumes a simplified economy with just two persons. 75
PERCENTAGE OF INCOME 50
UNEQUAL SPLIT (25, 75) 25
WORST POSSIBLE SPLIT (0, 100) 50
100
PERCENTAGE OF HOUSEHOLDS
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11. PERCENTAGE OF HOUSEHOLDS
LORENZ CURVE FOR THE UNITED STATES
In the United States, wealth is distributed more unevenly than income.
100
EQUAL DISTRIBUTION 75
The poorest 20% earn 3.1% of total income, and the poorest 40% earn 11.3% of total income.
PERCENTAGE OF INCOME 50
INCOME 25
The richest 20% earn 51.2% of total income and own 88.9% of wealth.
WEALTH 20 40 60 80
100
PERCENTAGE OF HOUSEHOLDS
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12. PERCENTAGE OF HOUSEHOLDS
THE GINI COEFFICIENT
100
EQUAL DISTRIBUTION
The Gini coefficient is the ratio of area A to area A + B. 75
LORENZ CURVE
The more unequal the income distribution, the greater is area A and the greater the Gini coefficient.
PERCENTAGE OF INCOME 50 A 25 B 20 40 60 80
100
PERCENTAGE OF HOUSEHOLDS
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13. PERCENTAGE OF HOUSEHOLDS
THE IMPACT OF REDISTRIBUTION
100
The distribution of income becomes more equal once the effect of progressive taxation and transfer payments are taken into account. 75
PERCENTAGE OF INCOME 50
LORENZ CURVE 25
LORENZ CURVE ADJUSTED FOR TAXES AND TRANSFERS 20 40 60 80
100
PERCENTAGE OF HOUSEHOLDS
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14. COMPARING GINI COEFFICIENTS
Among this list, Denmark and Sweden have the most equal distribution of income, and Brazil and South Africa have the most unequal distribution of income.
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15. CAUSES OF INCOME INEQUALITY
Differences in human capital, as high-paying jobs require much more education and skills than before
Discrimination that keeps wages low for certain groups of workers
The rise of two-earner households, which has increased overall household income significantly
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16. ERIC CHIANG
DIFFERENCES IN HUMAN CAPITAL ARE IMPORTANT: COLLEGE GRADUATES EARN MUCH MORE INCOME ON AVERAGE THAN HIGH SCHOOL GRADUATES.
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17. POVERTY IS A PROBLEM AFFECTING ABOUT 15% OF U.S. HOUSEHOLDS.
LUCIDWATERS/DREAMSTIME.COM
POVERTY IS A PROBLEM AFFECTING ABOUT 15% OF U.S. HOUSEHOLDS.
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18. POVERTY THRESHOLDS
Developed in the 1960s based on the USDA’s food plan.
In 2015, an American household of four earning less than $24,259 was in poverty.
HOUSEHOLD SIZE
POVERTY THRESHOLD (2015)
One person
$12,085
Two persons
15,397
Three persons
18,872
Four persons
24,259
Five persons
28,729
Six persons
32,512
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19. NATHAN BENN/ALAMY
U.S. POVERTY RATES DECLINED FROM 1959 TO 1975 AND HAVE REMAINED ROUGHLY STEADY SINCE.
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20. ANDREW LICHENSTEIN/CORBIS
U.S. POVERTY RATES ARE CORRELATED WITH RACE, THOUGH BLACK AND HISPANIC POVERTY HAS FALLEN.
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21. DEPTH OF POVERTY MEASURES
One measure of poverty debt is the income deficit, the difference between the poverty threshold and a family’s income.
A family of four living on one income at the national minimum wage ($7.25/hour, or $14,500 per year), would have an income deficit of:
$24,259 – $14,500 = $9,759
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22. DEPTH OF POVERTY MEASURES
A second measure of poverty depth is the ratio of income to poverty, which measures a household’s income as a percentage of the poverty threshold.
Households with ratios below 0.5 are “severely or desperately poor.”
Households with ratios between 0.5 and 1.0 are “poor.”
Households with ratios between 1.0 and 1.25 are “near poor.”
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23. ALTERNATIVE MEASURES OF POVERTY
The traditional method is flawed.
It counts gross income, including taxes paid.
It does not take into account varying family circumstances.
The U.S. Census Bureau’s new measurement:
uses after-tax income.
counts antipoverty program benefits such as food stamps and housing subsidies.
uses revised expenditure estimates.
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24.      TRADITIONAL CAUSES OF POVERTY Lack of human capital
Mental or physical disability
Drug addiction
Unwillingness to work or apathy toward work
Refusal to relocate for work    
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25.     NEW FACTORS CAUSING POVERTY
Wages have not kept up with rising costs.
Technological changes and globalization have changed employment opportunities.
Health costs are rising.
Family structures are changing.   
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26. POVERTY CAN BE A RELATIVE OR AN ABSOLUTE MEASURE.
YAOYU CHEN/DREAMSTIME.COM
POVERTY CAN BE A RELATIVE OR AN ABSOLUTE MEASURE.
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27. FABINUS08/DREAMSTIME.COM
ACCORDING TO THE WORLD BANK, “POOR” IS DEFINED AS LIVING ON LESS THAN $2/DAY.
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28. IN DENMARK, “POOR” IS EARNING LESS THAN $45,000, WITH FREE HEALTH CARE AND COLLEGE EDUCATION.
ERIC CHIANG
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29. STEPHEN FINN/ALAMY
POLICIES TO REDUCE INCOME INEQUALITY AND POVERTY ARE POLITICALLY CONTROVERSIAL.
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30. POLITICAL THEORIES ON POVERTY
POLITICAL LEFT: FOCUS ON EQUITY
The goal should be to make income and wealth more equitable through policies such as expanding public education, housing subsidies, and health care (i.e., making the pie slices more equal).
POLITICAL RIGHT: FOCUS ON GROWTH
The goal should be to provide incentives to work and reduce government welfare programs. The best way to cure poverty is to increase growth and make the overall pie bigger.
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31. THE RAWLS VS. NOZICK ARGUMENT
RAWLS MAXIMIN PRINCIPLE
A society should maximize the welfare of the least well-off individual. Suggests that some people are born unlucky into poor households, and therefore income redistribution would make society more equitable.
NOZICK’S ARGUMENT
It would be unjust to redistribute wealth when it is earned through hard work and innovation. Justice requires protecting property rights to ensure people are rewarded for their hard work.
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32. ARE SOME PEOPLE POOR FOREVER?
A U.S. Census Bureau study tracked over 42,000 households to measure mobility in income and poverty.
It found that of all households living in poverty in 2009, 35% were no longer in poverty in 2011.
However, other households fell into poverty, and some of the population is stuck in poverty for various reasons.
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33. HONQI ZHANG (AKA MICHAEL ZHANG)/DREAMSTIME.COM
IN SUM, PEOPLE MOVE IN AND OUT OF POVERTY, BUT POLICIES CAN BE USED TO KEEP THE OVERALL RATE OF POVERTY LOW.
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34. KEY CONCEPTS Income Wealth Functional distribution of income
Personal or family distribution of income
Lorenz curve
Gini coefficient
Poverty thresholds
Poverty rate
Income deficit
Ratio of income to poverty
KEY CONCEPTS
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35. AT WHAT POINT IN THE LIFE CYCLE DOES INCOME PEAK FOR MOST PEOPLE?
UPON ENTERING THE WORKFORCE AFTER COLLEGE A
BETWEEN AGES 25 AND 35 B
BETWEEN AGES 35 AND 45 C
Answer: D
BETWEEN AGES 45 AND 55 D
UPON RETIREMENT, USUALLY AROUND AGE 65 E
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36. JEFF GREENBERG/ALAMY
PRACTICE QUESTION
Answer: The poverty threshold for a family of three is approximately $19,000 a year. Working full time (2,000 hours per year), a single parent would need to earn at least $9.50 per hour.
ABOUT HOW MUCH PER HOUR WOULD A SINGLE PARENT WITH TWO KIDS WORKING FULL-TIME NEED TO EARN TO STAY OUT OF POVERTY?
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37. A GINI COEFFICIENT OF 0.15 WOULD INDICATE THAT A SOCIETY’S DISTRIBUTION OF INCOME IS:
PERFECTLY EQUAL A
RELATIVELY EQUAL B
RELATIVELY UNEQUAL C
Answer: B
AS UNEQUAL AS POSSIBLE D
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38. HONQI ZHANG (AKA MICHAEL ZHANG)/DREAMSTIME.COM
PRACTICE QUESTION
Answer: Countries with the smallest levels of inequality tend to have very strong educational systems (human capital), along with access to health care and other antipoverty programs. One effective policy would be to increase spending in education.
WHAT ARE SOME POLICIES THAT A GOVERNMENT CAN IMPLEMENT TO REDUCE INCOME INEQUALITY?
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39. ACCORDING TO RAWL’S MAXIMIN PRINCIPLE, A SOCIETY SHOULD STRIVE TO:
MAXIMIZE ITS TOTAL OUTPUT. A
MAXIMIZE THE INCOME FLOWING TO THE TOP QUINTILE. B
MAXIMIZE THE AVERAGE INCOME DEFICIT. C
Answer: E
MAXIMIZE ITS ECONOMIC GROWTH RATE. D
MAXIMIZE THE WELFARE OF ITS POOREST INDIVIDUALS. E
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40. 15 END OF CHAPTER SLIDES CREATED BY ERIC CHIANG CHAPTER 15 SLIDE 40
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