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Poverty and the Income Distribution
Wendy A. Stock, Ph.D.
Professor and Department HeadDepartment of Agricultural Economics and
Economics
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Income Distribution Questions
• How much $$ does it take to be “rich” in the U.S.?
• How much $$ does it take to be in the top 1/2 of households in earnings?
• How much $$ does it take to be in the top 1/5 of households in earnings?
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Income Distribution Questions
• How equally do we share our earnings?
• Are the rich getting richer and the poor getting poorer?
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Poverty Questions
• What does it mean to be “living in poverty”?
• Is poverty worse now than it was 20-50 years ago?
• Why are some people and countries poor and others not?
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Income Distribution
Income Distribution shows the levels of income in an economy and the
percentage of households earning those income levels.
"A" "B" "C" "D" "F"05
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Course Grades
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Income Distribution Questions
• How much $$ does it take to be “rich” in the U.S.?
• How much $$ does it take to be in the top 1/2 of households in earnings?
• How much $$ does it take to be in the top 1/5 of households in earnings?
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US Median Household Income
50,303
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
19651970
19751980
19851990
19952000
20052010
Values are adjusted for inflation to reflect 2008 dollars
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Income Distribution Questions
• How much $$ does it take to be “rich” in the U.S.?
• How much $$ does it take to be in the top 1/2 of households in earnings?
• How much $$ does it take to be in the top 1/5 of households in earnings?
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Lowest Quintile
Lower-Middle Quintile
Middle Quintile
Upper-Middle Quintile
Top Quintile
Top 5%
0 25000
50000
75000
100000
125000
150000
175000
200000
Highest IncomeLowest Income
Median U.S. Household Income by Quintile, 2012
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Income Distribution Questions
• How equally do we share our earnings?
• Are the rich getting richer and the poor getting poorer?
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U.S. Household Annual Income by Quintile3%
9%
15%
23%
50%
Bottom 5th($11,352)
Lower Middle($28,777)
Middle ($48,223)
Upper Middle($76,329)
Top 5th($168,170)
Numbers in parentheses show average household incomes for each quintile
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How Equally do We Share our Wealth?
Actual
Perceived
Ideal (<$50K)
Ideal (>$100K)
Ideal (Republican)
Ideal (Democrat)
Ideal (Women)
Ideal (Men)
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Ideal, Perceived, and Actual Wealth Distribution in the U.S.
Top 20% 2nd 20% Middle 20% 4th 20% Bottom 20%
Percent of Wealth Owned
Source: Michael Norton and Dan Ariely, "Building a Better America - One Wealth Quintile At A Time"
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How is income
distributed in other
countries?
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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100.25
0.3
0.35
0.4
0.45
0.5
0.55
0.6
0.65
Figure 7: Countries' Income Inequality Over Time
Brazil
Mexico
China
United States
India
United Kingdom
Japan
Sweden
Year
Coeffi
cien
t Val
ue
An index value of 0 represents perfect equality. A value of 1 represents perfect inequality (i.e., one person has all the income). Brazil and Mexico are among countries with the most income inequality. Sweden and Japan have more equal distributions of income. The income inequality in the US has increased since the 1970s. Source: Authors compilation of World Bank data and adjusted from William Easterly (1999) "Life During Growth ," Journal of Economic Growth 4(3) (September): 239-275. Some values for 2010 are estimated.
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How is world income shared across
countries?
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Global Income Distribution
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U.S., 22.5
China, 9.7
Japan, 7
All Other, 31.7
Mexico, 2.1
Spain, 2.2
UK, 3.5 India, 4.3
Italy, 3
Brazil, 2.9
France, 3.4
Germany, 4.6FSU, 3.1
Global Income Distribution
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Income Distribution Questions
• How equally do we share our earnings?
• Are the rich getting richer and the poor getting poorer?
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Are the Rich getting Richer?
1967
4%11%
17%
24%
44%
2007
3% 9%
15%
23%
50%
Bottom Fifth
2nd Fifth
Middle
4th Fifth
Top Fifth
U.S. Household Annual Income by Quintile
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Are Rich Countries Getting Richer?
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1820 1840 1860 1880 1900 1920 1940 1960 1980
Year
Mea
n Lo
garit
hmic
Dev
iatio
n
within-country
between country
total inequality
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Poverty
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Poverty Questions
• What does it mean to be “living in poverty”?
• Is poverty worse now than it was 20-50 years ago?
• Why are some people and countries poor and others not?
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Poverty Threshold or Poverty Line
U.S. poverty line 2012single householder:
$11,170family of four: $23,050
specific level of income, below which a person is in poverty - varies by time, place,
and family size
Would that provide a
comfortable lifestyle?
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% living below the poverty thresholdPoverty Rate
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What about world
poverty?
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• Source: http://en.wikipedia.org/wiki/File:Percentage_population_living_on_less_than_1_dollar_day_2007-2008.png
From UN Human Development Statistics, licensed under the Creative Commons Attribution ShareAlike 3.0 license
Percentage of Population Living on Less Than $1.25 Per Day, 2007-2008
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Poverty Questions
• What does it mean to be “living in poverty”?
• Is poverty worse now than it was 20-50 years ago?
• Why are some people or countries poor and others not?
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Causes of Individual Poverty
• Individual-level– Demographics– Skills, motivation,
intelligence– Restricted opportunities
educational quality, discrimination, health status
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GroupPoverty
Rate GroupPoverty
RateAll people 15.0 Education All families 13.1 Less than high
school24.9
Married couples 5.8 High school diploma 22.6Female householder families, no husband
31.6 Some college 15.5
Male householder families, no wife
15.8 Four year degree or more
6.5
Age Race & Ethnicity Under 18 21.9 White, non-Hispanic 9.8Age 18-64 13.7 Black, non-Hispanic 27.6Age 65+ 8.7 Asian 12.3
Hispanic 25.3Disabled 28.8 Nondisabled 12.5
U.S. Poverty Rates by Demographic Characteristics, 2011
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Causes of Individual Poverty
• Structural or Macro-level– Recessions
– Resource availabilityclean water, land, rainfall, animal health, roads, conflict
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Causes of Country Poverty & Economic Growth
Proximate Causes Fundamental Causes
1. Physical Capital
2. Human Capital
3. Technology
1. Geographyclimate, soil quality
2. CultureSlow v. rapid change in religious beliefs, nationalistic ideas, etc.
3. Institutionsrule of law, property rights
Source: Daron Acemoglu, MIT, “Why Nations Fail” http://economics.mit.edu/files/7850
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How do we combat poverty?
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U.S. Poverty Policy
• Many Approaches– Direct payments– Food, health, and housing– Training and education– Tax policy (EITC)– Regulation (Minimum Wage)
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Global Poverty Policy• UN Millennium Development
Goals:– Combat global poverty– Combat global disease (AIDS, TB,
Malaria)– Increase educational attainment– Improve women’s status– Promote environmental
sustainability
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Is poverty policy
effective?
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Poverty Policy Effectiveness?
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51
39
19
16
8
6
5
3
58
42
35
36
11
4
8
4
57
49
39
60
11
2
3
5
0 10 20 30 40 50 60 70
Sub-Saharan Africa
Southern Asia
South-Eastern Asia
Eastern Asia
Latin America & the Caribbean
Western Asia
Former Soviet Union
Northern Africa
1990
1999
2005
Percentage of people living on less than $1.25/day, 1990, 1999, 2005
Poverty Policy Effectiveness?
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Discussion Questions
What are the costs and benefits of having an unequal income distribution?
What are the tradeoffs associated with providing income support to the poor?
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Discussion Questions
Suppose that a direct payment anti-poverty program provides a base payment of $10,000 per year to poor families. At the same time, however, the value of the base payment is reduced by $1.00 for every $1.00 of income the family earns. How would such a program affect a household’s incentive to work? Would the effect on work incentives be different if the base payment were reduced by only $0.50 for each dollar of income earned?
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Other Sources for Discussion
The PBS program, “The New Heroes” highlights social entrepreneurs, including those focused on problems of global poverty and disease. http://www.pbs.org/opb/thenewheroes/whatis/
Ehrenreich, Barbara (2001) Nickel and Dimed: On (Not) Getting By in America. New York, NY: Henry Holt and Company http://www.henryholt.com/holt/nickelanddimed.htm describes the author’s experience with living on the minimum wage for one year
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Poverty and the Income Distribution
Wendy A. Stock, Ph.D.
Professor and Department HeadDepartment of Agricultural Economics and
Economics