Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 1 ECON Designed by Amy McGuire, B-books, Ltd. 18 CHAPTER

Chapter 18 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 1

ECON

Designed byAmy McGuire, B-books, Ltd.

18

CHAPTER Income Distribution and Poverty

Micro

McEachern 2008-2009


LO1

Income Distribution by Quintiles

Distribution of Income

U.S. households

Ranked by income

Five groups of equal size (quintiles)

Percentage of income received in 1970

Poorest 20% of population

4.1% of income

Richest 20% of population

43.3% of income


Exhibit 1LO1

Share of Aggregate Household Income by Quintile: 1970, 1980, 1990, and 2005


LO1

Income Distribution by Quintiles

Richest 20% of population

Increased share of income

Two-earner households

Poorest 20% of population

Decreased share of income

Single-parent household


LO1

The Lorenz Curve

Lorenz curve

Percentage of total income

Received by any given % of

households

When incomes are arrayed from

smallest to largest

Equal distribution line


Exhibit 2LO1

Lorenz Curves Show That Income Was Less Evenly Distributed Across U.S. Households in 2005 than in

1970

Lorenz curve: convenient way of showing the % of total income received by any given % of households when households are arrayed from smallest to largest.

Point a: in 1970, the bottom 80% of households received 56.7% of all income.Point b: in 2005, the share of all income going to the bottom 80% of households was lower than in 1970.If income were evenly distributed across households, the Lorenz curve would be a straight line.


LO1

Why Incomes Differ Number of household members working

Education, ability, job experience

Productivity

High-Income household

Well-educated couple; both spouses

employed

Low-income household

One person living alone

Single-parent, female

Poorly educated


LO1

A College Education Pays More

Median wage, past 20 years

Only high-school diploma:

decreased 6%

Industry deregulation; declining

unionization

Information technology

College degree: increased 12%

Information technology

Higher rewards for education


LO1C

ase

Stu

dy

Marital Sorting and Income Inequality

Marry by education levels Women

54% of people enrolled in college, graduate school, or professional school

High paying jobs Professional careers

Choose marriage partner based on income


LO1

Problems with Distribution Benchmarks

No objective standard

Money income

Measured after cash transfers

Before taxes and in-kind transfers

Household size differs across quintiles

Reported income

Distributed of spending

More evenly distributed than income

quintiles


Redistribution Programs

LO2

Official poverty level Family of four: $19,971 in 2005

$13.70 per person per day Pretax money income

Includes cash transfers Excludes value of noncash transfers

Food stamps; Medicaid; Subsidized housing Employer-provided health insurance

Recessions: Increase in poverty International poverty line:

$1 per person per day


Exhibit 3LO2

Number and Percentage of U.S. Population in Poverty: 1959-2005


Programs to Help the Poor

LO2

Promote a healthy economy Greater job opportunities Lower unemployment rate

Antipoverty programs Social insurance Income Assistance


Exhibit 4LO2

U.S. Poverty Rates and Unemployment Rates


Social Insurance

LO2

1. Social Security

2. Medicare

3. Unemployment insurance

4. Workers’ compensation Deducted from workers’ pay

Aimed at people with work history Income redistribution

From rich to poor From young to old


Income Assistance

LO2

Welfare programs Means-tested program

1. Cash transfers programs Temporary assistance for needy

families Supplemental security income General assistance aid Earned-income tax credit


Income Assistance

LO2

2. In-kind transfer programs Medicaid Food stamps Housing assistance Support for day care, school lunches Energy assistance Education and training


Exhibit 5LO2

Federal Redistribution Outlays Each Year by Category: 1962-2008


Who Are the Poor?

LO3

Poverty among the elderly declinedGrowth in spending for Social Security

and MedicareThe elderly

Powerful political forceFeminization of poverty

Status of the household headTeen pregnancy


Exhibit 6LO3

U.S. Poverty Rates by Age: 1959-2005


Exhibit 7LO3

Poverty Rates Are Much Higher for Families Headed by Females But Have Declined in the

Last Decade


Exhibit 8LO3

Percent of Population Living in Poverty by State


Who Are the Poor?

LO3

DiscriminationSchool fundingHousingEmploymentTrainingCareer advancementWage gap

Quality of schooling


Who Are the Poor?

LO3

Affirmative ActionNumerical hiringPromotion and training goalsHigher black employmentSmaller wage gap


Who Are the Poor?

LO3

Unintended consequences of income assistanceHigh marginal tax rateWelfare benefits > income from workLong term dependency on welfare


Welfare Reform

LO4

Welfare-to-work programs

1997: Temporary assistance for needy families

States: more control

Time limits

Work participation rates

Benefit levels


LO4C

ase

Stu

dy

Welfare-to-Work Is Working?

Welfare recipients Declined 71: below the peak

Increased employment among mothers Higher income

Increased welfare spending per recipient Earned-income

tax credit Higher price of

going on welfare


Exhibit 9LO4

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

Documents

Chapter 18Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 1 ECON Designed by Amy McGuire, B-books, Ltd. 18 CHAPTER