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

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. Exhibit 1: Share of Aggregate Household Income by Quintile

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

6. Exhibit 2: Lorenz Curve 20 40 60 80
100
Cumulative percent of households
Cumulative percent of income
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.
1970 . a .
Line of equal distribution b
2002

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Exhibit 3 Number and Percentage of U. S
Exhibit 3 Number and Percentage of U.S. Population in Poverty,

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

22. Exhibit 5: Poverty Rates by Age

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

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

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