1. 32
Income Inequality and Poverty

2. Chapter Objectives
How Income Inequality in the United States is Measured and Described
The Extent and Sources of Income Inequality
How Income Inequality Has Changed Since 1970
The Economic Arguments For and Against Income Inequality
How Poverty is Measured and its Incidence by Age, Gender, Ethnicity, and Other Characteristics
The Major Components of the Income-Maintenance Program in the United States

3. Facts About Income Inequality
Average Household Income $60,258 in Among the Highest in the World
Distribution of U.S. Income by Households, 2004
(1)
Personal
Income Category
(2)
Percentage of All
Households in this 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 and Above
8.7
6.7
12.9
11.9
14.8
18.3
11.0
15.7
100.0
Source: Bureau of the Census

4. Facts About Income Inequality
Division Into 5 Equal Groups
Distribution by Quintiles, 2004
(2)
Percentage of
Total Income
(3)
Upper
Income Limit
(1)
Quintile
Lowest 20%
Second 20%
Third 20%
Fourth 20%
Highest 20%
Total
3.4
8.7
14.7
22.2
50.1
100.0
$18,500
34,738
55,331
88,029
No Limit
Source: Bureau of the Census
Income Mobility:
The Time Dimension

5. Facts About Income Inequality
Lorenz Curve and Gini Ratio
The Lorenz Curve
W 32.1 20 40 60 80
100 e
Lorenz Curve
(Actual Distribution)
Percentage of Households
Percentage of Income
Perfect Equality d A B c
Complete
Inequality b a f
Gini Ratio =
Area A
Area A + Area B
G 32.1

6. Facts About Income Inequality
Effect of Government Redistribution 20 40 60 80
100
Percentage of Households
Percentage of Income
Lorenz Curve
After Taxes and
Transfers
Lorenz Curve
Before Taxes and
Transfers
Impact of Government Taxes and Transfers

7. Facts About Income Inequality
Effect of Government Redistribution
Noncash Transfers
Percentage of Total Income Received, 2003
(2)
Before Taxes
And Transfers
(3)
After Taxes
And Transfers
(1)
Quintile
Lowest 20%
Second 20%
Third 20%
Fourth 20%
Highest 20% .8
7.2
14.8
24.0
53.1
4.5
10.7
16.4
24.0
44.4
Source: Bureau of the Census

8. Causes of Income Inequality
Ability
Education and Training
Discrimination
Preferences and Risks
Unequal Distribution of Wealth
Market Power
Luck, Connections, and Misfortune

9. Causes of Income Inequality
Income Inequality Over Time
Rising Income Inequality Since 1970
Causes of Growing Inequality
Greater Demand for Highly Skilled Workers
Demographic Changes
International Trade, Immigration, and Decline in Unionism

10. Causes of Income Inequality
Percentage of Total Income Received by the Top One-Tenth of Income Receivers, Selected Nations
GLOBAL PERSPECTIVE
Guatemala
Brazil
South Africa
Mexico
United States
Italy
Sweden
Germany
48.3
46.9
44.7
43.1
29.9
26.8
22.2
22.1
Source: World Bank, World Development Indicators, 2005

11. Equality Versus Efficiency
The Case for Equality: Maximizing Total Utility
The Case for Inequality: Incentives and Efficiency
The Equality-Efficiency Tradeoff

12. Equality Versus Efficiency
The Utility-Maximizing Distribution of Income
Anderson’s Marginal
Utility From Income
Brooks’ Marginal
Utility From Income
Marginal Utility
Income
Utility Gain
(Entire Blue Area)
Utility Loss
(Entire Red Area) a b’ a’ b
MUA
MUB
$2500
$5000
$5000
$7500

13. The Economics of Poverty
Definition of Poverty
Single in 2004 was $9,645
Family of 4 was $19,307
Family of 6 was $25,785
37 Million Americans
Poverty Rate 12.7%
Disproportionate Sharing
Incidence of Poverty

14. The Economics of Poverty
Poverty Rates Among Selected Population Groups,2004
Female-Householders
African-Americans
Hispanics
Foreign-Born (Not Citizens)
Children Under 18
Women
Total Population
Men
Whites
Asian
Persons 65 or Older
Married-Couple Families
Full-Time Workers
28.4
24.7
21.9
21.4
17.8
13.9
12.7
11.5
10.8
9.8
9.8
5.5
2.8

15. The Economics of Poverty
Poverty Trends
Fell Between 1959 and 1969
Stable in 1970s
Rose in the Early 1980s
Up and Down Late 1990s and 2000s
Rose with Recession
Measurement Issues

16. U.S. Income-Maintenance System
Entitlement Programs
Social Insurance Programs
Social Security
Medicare
Unemployment Compensation
Public Assistance “Welfare”
Supplemental Security Income (SSI) Program
Temporary Assistance for Needy Families (TANF)
Food-Stamp Program

17. U.S. Income-Maintenance System
Medicaid
Earned-Income Tax Credit (EITC)
Welfare: Goals and Conflicts
Common Features
Conflicts Between Goals
Welfare Reform
W 32.2

18. U.S. Family Wealth and Its Distribution
Last
Word
Family Wealth Rose Rapidly and Became More Unequal Between 1995 and 2004
Median and Average Family Wealth, In 2004 Dollars
Year
Median
Average
1995
1998
2001
2004
$70,800
83,100
91,700
93,100
$260,800
327,500
421,500
448,200

19. U.S. Family Wealth and Its Distribution
Last
Word
Family Wealth Rose Rapidly and Became More Unequal Between 1995 and 2004
Percentage of Total Family Wealth Held by Different Percentile Groups,
Year
Bottom 90%
Top 1%
Bottom 10%
Percentile of Wealth Distribution
1995
1998
2001
2004
32.2%
31.4
30.2
30.5
67.8%
68.6
69.8
30.5
34.6%
33.9
32.7
33.4

20. Key Terms income inequality Lorenz curve Gini ratio income mobility
noncash transfers
equality-efficiency tradeoff
poverty rate
entitlement programs
social insurance programs
Social Security
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)

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The
Economics
of Health
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