2. 16 Income Distribution and Poverty Chapter Outline
The Utility Possibilities Frontier The Sources of Household Income Wages and Salaries Income from Property Income from the Government: Transfer Payments The Distribution of Income Income Inequality in the United States Poverty The Distribution of Wealth The Redistribution Debate Arguments against Redistribution Arguments in Favor of Redistribution Redistribution Programs and Policies Financing Redistribution Programs: Taxes Expenditure Programs How Effective Are Antipoverty Programs? Government or the Market? A Review

3. INCOME DISTRIBUTION AND POVERTY
equity Fairness.
Why do some people get more than others? What are the sources of inequality? Should the government change the distribution generated by the market?

4. THE UTILITY POSSIBILITIES FRONTIER
FIGURE Utility Possibilities Frontier
utility possibilities frontier A graphic
representation of a two-person world that shows all points at which A’s utility can be
increased only if B’s utility is decreased.

5. THE SOURCES OF HOUSEHOLD INCOME
Households derive their incomes from three basic sources: (1) from wages or salaries received in exchange for labor; (2) from property—that is, capital, land, and so forth; and (3) from government.
WAGES AND SALARIES
Required Skills, Human Capital, and Working Conditions
human capital The stock of knowledge, skills, and talents that people possess; it can be inborn or acquired through education and training.

6. THE SOURCES OF HOUSEHOLD INCOME
compensating differentials Differences in
wages that result from differences in working conditions. Risky jobs usually pay
higher wages; highly desirable jobs usually pay lower wages.
According to experts, the Alaskan fishing industry faces the most dangerous working conditions in the country. For this reason, Alaskan fishermen are paid compensating differentials that raise their average wage high above the average wage of the U.S. general population.

7. THE SOURCES OF HOUSEHOLD INCOME
Multiple Household Incomes
Another source of wage inequality among households lies in the fact that many households have more than one earner in the labor force. Second, and even third, incomes are becoming more the rule than the exception for U.S. families.

8. THE SOURCES OF HOUSEHOLD INCOME
The Minimum Wage Controversy
minimum wage The lowest wage that firms are permitted to pay workers.
Many fast-food restaurants pay their employees minimum wage. In some locations, however, restaurants
find that they must pay above
minimum wage to attract and retain staff.

9. THE SOURCES OF HOUSEHOLD INCOME
FIGURE Effect of Minimum Wage Legislation

10. THE SOURCES OF HOUSEHOLD INCOME
Unemployment
Unemployment hurts primarily those who are laid off, and thus its costs are narrowly distributed. For some workers, the costs of unemployment are lowered by unemployment compensation benefits paid out of a fund accumulated with receipts from a tax on payrolls.

11. THE SOURCES OF HOUSEHOLD INCOME
INCOME FROM PROPERTY
property income Income from the ownership of real property and financial holdings. It takes the form of profits, interest, dividends, and rents.
The amount of property income that a household earns depends on (1) how much property it owns and (2) what kinds of assets it owns. Such income generally takes the form of profits, interest, dividends, and rents.

12. THE SOURCES OF HOUSEHOLD INCOME
INCOME FROM THE GOVERNMENT: TRANSFER PAYMENTS
transfer payments Payments by government to people who do not supply goods or services in exchange.
Transfer programs are by and large designed to provide income to those in need. They
are part of the government’s attempts to offset some of the problems of inequality and
poverty.

13. THE DISTRIBUTION OF INCOME
economic income The amount of money a household can spend during a given period
without increasing or decreasing its net assets. Wages, salaries, dividends, interest income, transfer payments, rents, and so
forth are sources of economic income.

14. THE DISTRIBUTION OF INCOME
INCOME INEQUALITY IN THE UNITED STATES
TABLE Distribution of Total Income and Components in the United States, 2000 (Percentages)
HOUSEHOLDS
TOTAL INCOME
LABOR INCOME
PROPERTY INCOME
TRANSFER INCOME
Bottom fifth
2.7
1.7
0.7
19.2
Second fifth
7.2
6.3
4.2
25.8
Third fifth
12.6
12.7
9.2
23.0
Fourth fifth
21.3
23.6
15.1
17.0
Top fifth
56.7
55.6
73.2
14.8
Top 1 percent
10.9
31.6
1.2
Source: Julie-Anne Cronin, US Department of the Treasury, OTA Paper 85, pg 19.

15. THE DISTRIBUTION OF INCOME
Changes in the Distribution of Income
TABLE Distribution of Money Income of U.S. Families by Quintiles, 1947–2000 (Percentages)
1947
1960
1972
1980
1984
1994
1997
2000
Bottom fifth
5.0
4.8
5.4
5.2
4.7
4.2
Second fifth
11.8
12.2
11.9
11.5
11.0
10.0
9.9
9.7
Third fifth
17.0
17.8
17.5
15.7
15.5
Fourth fifth
23.1
24.0
23.9
24.3
24.4
23.3
23.0
Top fifth
43.0
41.3
41.4
41.5
42.9
46.9
47.2
47.6
Top 5%
17.2
15.9
15.3
16.0
20.1
20.7
20.8
Source: Statistical Abstract of the United States, various editions; Department of Commerce, HHES Division.

16. THE DISTRIBUTION OF INCOME
money income The measure of income used by the Census Bureau. Because it excludes noncash transfer payments and
capital gains income, it is less inclusive than “economic income.”

17. THE DISTRIBUTION OF INCOME
The Lorenz Curve and the Gini Coefficient
Lorenz curve A widely used graph of the distribution of income, with cumulative
percentage of families plotted along the horizontal axis and cumulative percentage of income plotted along the vertical axis.

18. THE DISTRIBUTION OF INCOME
FIGURE Lorenz Curve for the United States, 2002

19. THE DISTRIBUTION OF INCOME
Gini coefficient A commonly used measure of inequality of income derived from a Lorenz curve. It can range from
0 to a maximum of 1.
If income is equally distributed, there is no shaded area (because the Lorenz curve and
the 45-degree line are the same), and the Gini coefficient is zero. The Lorenz curves for
distributions with more inequality are farther down to the right, their shaded areas are
larger, and their Gini coefficients are higher. The maximum Gini coefficient is 1. As the
Lorenz curve shifts down to the right, the shaded area becomes a larger portion of the
total triangular area below 0 A. If one family earned all the income (with no one else
receiving anything), the shaded area and the triangle would be the same, and the ratio
would equal 1.

20. AFRICAN-AMERICAN HOUSEHOLDS ONE-PERSON HOUSEHOLDS
THE DISTRIBUTION OF INCOME
Differences among African-American Households, White Households, and Single-Person Households
TABLE Distribution of Money Income of Households, 2002 (Percentages)
ALL HOUSEHOLDS
AFRICAN-AMERICAN HOUSEHOLDS
WHITE HOUSEHOLDS
HISPANIC HOUSEHOLDS
ONE-PERSON HOUSEHOLDS
0-15,000
16.1
27.4
14.5
19.1
36.3
15-25,000
13.2
16.4
12.8
17.2
19.8
25-35,000
12.3
12.0
15.7
13.7
35-50,000
15.1
14.8
15.2
13.4
50-75,000
18.3
13.9
18.9
16.9
9.7
75,-100,000
11.0
6.7
11.6
7.5
3.7
>100,000
14.1
6.4
15.0
7.2
3.5
Total
100.0
Note: Totals may not add to 100 due to rounding. Source: Statistical Abstract of the United States, 2002, Tables 665 and 667.

21. THE DISTRIBUTION OF INCOME
POVERTY
The Problem of Definition
Although it is difficult to define precisely, the word poverty is one that we all understand intuitively to some degree.

22. THE DISTRIBUTION OF INCOME
The Official Poverty Line
poverty line The officially established income level that distinguishes the poor from the nonpoor. It is set at three times
the cost of the Department of Agriculture’s minimum food budget.
The official poverty line has been set at a figure that is simply three times the cost of
the Department of Agriculture’s minimum food budget.

23. THE DISTRIBUTION OF INCOME
Poverty in the United States Since 1960
TABLE Percentage of Persons in Poverty by Demographic Group, 1964–2001
OFFICIAL MEASURE 1964
OFFICIAL MEASURE 2004
All
19.0
12.7
White
14.9
10.8
African-American
49.6
24.7
Hispanic NA
21.8
Female householder – no husband present
45.9
28.4
Elderly (65+)
28.5
9.8
Children under 18
20.7
17.8
aIncludes food, housing, and medical benefits. Source: Statistical Abstract of the United States,

24. COMMON STOCK EXCLUDING PENSIONS NONEQUITY FINANCIAL ASSETS
THE DISTRIBUTION OF INCOME
THE DISTRIBUTION OF WEALTH
TABLE Percentage of Different Assets Owned by Households, 1998 Survey of Consumer Finances
PERCENTAGE OF OWNERS
COMMON STOCK EXCLUDING PENSIONS
ALL COMMON STOCK
NONEQUITY FINANCIAL ASSETS
HOUSING EQUITY
NET WORTH
Top .5%
41.4
37.0
24.2
10.2
25.6
Top 1%
53.2
47.7
32.0
14.8
34.0
Top 10%t
91.2
86.2
72.2
50.7
68.9
Bottom 80%
1.7
4.1
14.0
29.3
18.5
Source: James Poterba, “Stock Market Wealth and Consumption,” Journal of Economic Perspectives, 14(2), 99 – 118 , Spring 2000.

25. THE REDISTRIBUTION DEBATE
ARGUMENTS AGAINST REDISTRIBUTION
Those who argue against government redistribution believe that the market, when left to operate on its own, is fair.
ARGUMENTS IN FAVOR OF REDISTRIBUTION
The argument most often used in favor of redistribution is that a society as wealthy as the
United States has a moral obligation to provide all its members with the necessities of life.

26. THE REDISTRIBUTION DEBATE
Utilitarian Justice
utilitarian justice The idea that “a dollar in the hand of a rich person is worth less than a dollar in the hand of a poor person.” If
the marginal utility of income declines with income, transferring income from the rich to the poor will increase total utility.

27. THE REDISTRIBUTION DEBATE
Social Contract Theory—Rawlsian Justice
Rawlsian justice A theory of distributional justice that concludes that the social contract emerging from the “original position” would call for an income distribution that would maximize the well-being of the worst-off member of society.

28. THE REDISTRIBUTION DEBATE
The Works of Karl Marx
labor theory of value Stated most simply, the theory that the value of a commodity
depends only on the amount of labor required to produce it.
Income Distribution as a Public Good
We turn to government to provide things we want that will not be provided adequately if we act separately—in this case, help for the poor and hungry.

29. REDISTRIBUTION PROGRAMS AND POLICIES
FINANCING REDISTRIBUTION PROGRAMS: TAXES
Redistribution always involves those who end up with less and those who end up with more.
Because redistributional programs are financed by tax dollars, it is important to know who the donors and recipients are—who pays the taxes and who receives the benefits of those taxes.
All people pay about the same percentage of their income in total taxes.

30. REDISTRIBUTION PROGRAMS AND POLICIES
TABLE Effective Rates of Federal, State, and Local Taxes, 2000 (Taxes as a Percentage of Total Income)
FEDERAL
TOTAL
Bottom 20%
5.9
28.1
Second 20
11.7
26.3
Third 20
17.4
29.2
Fourth 20
20.1
32.6
Top 20
24.6
33.9
Top 10
25.7
34.5
Top 5
26.6
34.9
Top 1
29.1
37.0
Source: Julie-Anne Cronin, US Department of the Treasury, OTA Paper 85 and authors’ estimate.

31. REDISTRIBUTION PROGRAMS AND POLICIES
EXPENDITURE PROGRAMS
Social Security
Social Security system The federal system of social insurance programs. It includes three separate programs that are
financed through separate trust funds: the Old Age and Survivors Insurance (OASI) program, the Disability Insurance (DI) program, and the Health Insurance (HI, or
Medicare) program.

32. REDISTRIBUTION PROGRAMS AND POLICIES
Public Assistance
public assistance, or welfare Government transfer programs that provide cash benefits to (1) families with dependent children whose incomes and assets fall below a very low level and (2) the very poor regardless of whether or not they have children.

33. REDISTRIBUTION PROGRAMS AND POLICIES
Supplemental Security Income
The Supplemental Security Income program (SSI) is a federal program that was set up under the Social Security Administration in 1974.
Unemployment Compensation
unemployment compensation A state
government transfer program that pays cash benefits for a certain period of time to laid-off workers who have worked for a
specified period of time for a covered employer.

34. REDISTRIBUTION PROGRAMS AND POLICIES
Medicaid and Medicare
Medicaid and Medicare In-kind government transfer programs that provide health and hospitalization benefits: Medicare to the aged and their survivors and to certain of the disabled, regardless of income, and Medicaid to people with low
incomes.

35. REDISTRIBUTION PROGRAMS AND POLICIES
Food Stamps
food stamps Vouchers that have a face value greater than their cost and that can be used to purchase food at grocery stores.
Housing Programs
The Earned Income Tax Credit

36. REDISTRIBUTION PROGRAMS AND POLICIES
HOW EFFECTIVE ARE ANTIPOVERTY PROGRAMS?
Some say economic growth is the best way to cure poverty.
The opposite view is that poverty would be much more widespread without antipoverty programs.

37. GOVERNMENT OR THE MARKET? A REVIEW
Remember that government is not a cure for all economic woes. There is no guarantee that public-sector involvement will improve matters. Many argue that government involvement may bring about even more inequity and inefficiency because bureaucrats
are often driven by self-interest, not public interest.

38. REVIEW TERMS AND CONCEPTS
compensating differentials
economic income
equity
food stamps
Gini coefficient
human capital
labor theory of value
Lorenz curve
Medicaid and Medicare
minimum wage
money income
poverty line
property income
public assistance, or welfare
Rawlsian justice
Social Security system
transfer payments
unemployment compensation
utilitarian justice
utility possibilities frontier