1. 21
C H A P T E R
INCOME INEQUALITY
AND POVERTY

2. FACTS ABOUT INCOME INEQUALITY
2001 U.S. Average Family Income $66,863
Distribution of U.S. Personal Income by Families, 2001
Percentage of All Families in This Category
Personal
Income Category
Under $10,000
$10,000 - $14,999
$15,000 - $24,999
$25,000 - $34,999
$35,000 - $49,999
$50,000 - $74,999
$75,000 - $99,999
$100,000-$199,999
$200,000 and over
5.3
4.3
11.3
11.9
15.7
20.8
13.1
14.6
3.0
100.0

3. FACTS ABOUT INCOME INEQUALITY
Distribution of Personal Income by Quintiles, 2001
Percentage of
Total Income
Upper
Income Limit
Quintile
Lowest 20%
Second 20%
Third 20%
Fourth 20%
Highest 20%
Total
4.2
9.7
15.4
22.9
47.7
100.0
$24,000
41,127
62,500
94,150
The Lorenz Curve
graphically...

4. THE LORENZ CURVE Perfect Equality Complete Inequality
100 80 60 40 20
Perfect Equality
Percent of Income
Complete
Inequality
Percent of Families

5. THE LORENZ CURVE Lorenz Curve (actual distribution) Perfect Equality
100 80 60 40 20
Lorenz Curve
(actual distribution)
Perfect Equality
Percent of Income
Area between
the lines shows
the degree of
income inequality
Complete
Inequality
Percent of Families

6. THE LORENZ CURVE Gini Ratio Numerical Measure of Overall
100 80 60 40 20
Lorenz Curve
(actual distribution)
Gini Ratio
Numerical Measure of Overall
Dispersion of Income
Area Between Lorenz Curve and Diagonal
Total Area Below the Diagonal
Gini
Ratio =
Perfect Equality
Percent of Income
Area between
the lines shows
the degree of
income inequality
Complete
Inequality
Percent of Families

7. Income churning over longer time periods is evident
THE LORENZ CURVE
100 80 60 40 20
Lorenz Curve
(actual distribution)
Limitations due to
Income Mobility:
The Time Dimension –
Income churning over longer
time periods is evident
Perfect Equality
Percent of Income
Area between
the lines shows
the degree of
income inequality
Complete
Inequality
Percent of Families

8. redistribution of cash
THE LORENZ CURVE
100 80 60 40 20
Lorenz Curve
(actual distribution)
Effect of government
redistribution of cash
and noncash transfers
Perfect Equality
Percent of Income
Area between
the lines shows
the degree of
income inequality
Complete
Inequality
Percent of Families

9. THE LORENZ CURVE Lorenz Curve (actual distribution) Perfect Equality
100 80 60 40 20
Lorenz Curve
(actual distribution)
Perfect Equality
Percent of Income
Lorenz curve
after taxes and
transfers
Area between
the lines shows
the degree of
income inequality
Complete
Inequality
Percent of Families

10. CAUSES OF INCOME INEQUALITY
Ability Differences
Education and Training
Discrimination
Preferences and Risks
Unequal Distribution of Wealth
Market Power
Luck, Connections, and Misfortune

11. TRENDS IN INCOME INEQUALITY
Significant reduction in income inequality
Less inequality but at a slower pace
More unequal since 1969

12. GLOBAL PERSPECTIVE Brazil Guatemala South Africa Mexico United States
Percentage of Total Income Received
By Top One-Tenth of Income Receivers,
Selected Nations
Brazil
Guatemala
South Africa
Mexico
United States
France
Italy
Sweden
Source: World Development Report, 2003

13. CAUSES OF GROWING INEQUALITY
Greater Demand for Highly Skilled Workers
Demographic Changes
International Trade
Immigration
Decline in Unionism

14. EQUALITY VERSUS EFFICIENCY
The Case for Equality
Maximizing Total Utility
The Case for Inequality
Incentives and Efficiency
Tradeoff Between Equality and Efficiency

15. THE ECONOMICS OF POVERTY
Poverty Defined – 2001
Single $ 9,039
Family of 4 18,104
Family of 6 24,195
Poverty Rates in the U.S
Blacks %
Hispanics %
Whites %

16. THE ECONOMICS OF POVERTY
Incidence of Poverty
Poverty Rate
Poverty Trends
The “Invisible” Poor
Short-Periods of Time
Geographic Isolation
Politically Invisible – Are Easy to Ignore

17. PERCENTAGE IN POVERTY Married-couple families Persons 65 or over
Married-couple families
Persons 65 or over
Whites
Total population
Children under 18
Foreign born (not citizens)
Hispanics
Blacks
Female-householders
2001 Data

18. THE INCOME-MAINTENANCE SYSTEM
Entitlement Programs
Social Insurance Programs, 2002
OASDHI
$432 Billion ($386 Billion in 1999)
Medicare
$219 Billion ($210 Billion in 1999)
Unemployment Compensation
$32 Billion ($20 Billion in 1999)

19. THE INCOME-MAINTENANCE SYSTEM
Entitlement Programs
Public Assistance Programs, 2002
Supplemental Security Income (SSI)
$35 Billion ($29 Billion in 1999)
Temporary Assistance for Needy Families
$14 Billion ($23 Billion in 1999)
Food Stamps
$20 Billion ($20 Billion in 1999)
Medicaid
$207 Billion ($124 Billion in 1999)
Earned-Income Tax Credit (EITC)
$55 Billion ($30 Billion in 1999)

20. WELFARE: GOALS AND CONFLICTS
Common Features
Minimum Annual Income
Benefit-Reduction Rate
Conflicts Among Goals
Eliminating Poverty
Maintaining Work Incentives
Holding Down Costs

21. WELFARE: GOALS AND CONFLICTS
Welfare Reform
Growing Government Dependence
Personal Responsibility Act 1996
Temporary Assistance to Needy Families
5-Year-Lifetime Limit
Must Work After 2 Years
Reduced Food Stamp Eligibility
Tightened Some Definitions
5-Year Waiting Period on New Legal Immigrants

22. KEY TERMS income inequality Lorenz curve Gini Ratio income mobility
noncash transfers
equality-efficiency tradeoff
poverty rate
entitlement programs
social insurance programs
OASDHI
Medicare
unemployment compensation
public assistance programs
Supplemental Security Income (SSI)
Temporary Assistance for Needy Families (TANF)
food stamp program
Medicaid
earned-income tax credit (EITC)
Copyright McGraw-Hill/Irwin, 2005
BACK
END

23. Next: Labor Market Institutions and Issues:
Unionism, Discrimination, Immigration
Chapter 22