20
.
Income Inequality and Poverty
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Facts About Income Inequality
• Average household income
• $66,424 in 2008
• Among the highest in the world
• Distribution by quintiles
• Income mobility
• People change quintiles
• Government redistribution
• Taxes and transfers
LO1 20-2
Facts About Income Inequality
(1)
Personal
Income Category
(2)
Percentage of All
Households in this Category
Under $10,000 7.1
$10,000-$14,999 5.8
$15,000-$24,999 11.8
$25,000-$34,999 10.9
$35,000-$49,999 14.0
$50,000-$74,999 17.9
$75,000-$99,999 11.9
$100,000 and above 20.5
100.0
Source: Bureau of the Census, http://www.census.gov. Numbers do not add up to 100 percent due to rounding.
LO1 20-3
Facts About Income Inequality
(1)Quintile
(2)Percentage ofTotal Income
Lowest 20%
Second 20%
Third 20%
Fourth 20%
Highest 20%
Total
Distribution by Quintiles, 2008
3.4
8.6
14.5
22.9
50.5
100.0
Source: Bureau of the Census, http://www.census.gov
(3)Upper
Income Limit
$20,712
39,000
62,725
100,240
No Limit
LO1 20-4
Facts about Income Inequality
Lorenz Curve and Gini Ratio
20 40 60 80 100
20
40
60
80
100
0
Perfect Equality
Lorenz Curve(Actual Distribution)
Complete Inequality
A B
ab
c
d
e
f
Gini Ratio =Area A
Area A + Area B
Percentage of Households
Per
cen
tag
e o
f In
co
me
LO1 20-5
Facts About Income Inequality
20 40 60 80 100
20
40
60
80
100
0
Lorenz CurveBefore Taxes and
Transfers
Percentage of Households
Per
cen
tag
e o
f In
co
me
Lorenz CurveAfter Taxes and
Transfers
Impact of government taxes and transfers
LO1 20-6
Causes of Income Inequality
• Ability
• Education and training
• Discrimination
• Preferences and risks
• Unequal distribution of wealth
• Market power
• Luck, connections, and misfortune
LO2 20-7
Income Inequality Over Time
LO3 20-8
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
LO3 20-9
Income Inequality Over Time
LO4 20-10
Equality Versus Efficiency
• The case for equality
• Maximizing total utility
• The case for inequality
• Incentives and efficiency
• The equality-efficiency tradeoff
LO4 20-11
The Utility-Maximizing Distribution of Income
Anderson’s MarginalUtility From Income
Brooks’ MarginalUtility From Income
0 0
Mar
gin
al U
tilit
y
Mar
gin
al U
tilit
y
Income Income
$5000 $5000$2500 $7500
MUBMUA
a
a’ b’
b
Utility Gain(Entire Blue Area)
Utility Loss(Entire Red Area)
Equality Versus Efficiency
LO4 20-12
The Economics of Poverty
• Definition of poverty in 2008
• Single person < $10,201
• Family of 4 < $21,834
• Family of 6 < $28,769
• 39.8 million Americans
• Poverty rate 13.2%
LO5 20-13
Incidence of Poverty
LO5 20-14
Poverty Trends
• Poverty rate trends
• Significant decline 1959-1969
• Stable in 11-13% range since
• Rises with recession
• Measurement issues
• Arbitrary threshold
• Consumption vs. income
LO5 20-15
Poverty Trends
LO5 20-16
The U.S. Income-Maintenance System
• Entitlement programs
• All those eligible receive aid
• Social insurance programs
• Social security and Medicare
• Unemployment compensation
• Public assistance programs
• Welfare
LO6 20-17
Public Assistance Programs
• Supplemental Security Income (SSI)
• Temporary Assistance for Needy Families (TANF)
• Supplemental Nutrition Assistance Program (SNAP)
• Medicaid
• Earned Income Tax Credit
LO6 20-18
Discrimination
• Inferior treatment
• Taste-for-discrimination model
• Prejudiced people receive disutility
• Willing to pay to avoid
• Discrimination coefficient
• Prejudice and the market African-American—White wage ratio
• Competition and discrimination
LO7 20-19
Taste for Discrimination Model
Afr
ican
-Am
eric
an W
age
Rat
e(D
oll
ars)
African-American Employment (Millions)
0
D3
D2
D1
S
12 16 18
6
$98
MoreDiscrimination
LessDiscrimination
LO7 20-20
Discrimination
• Statistical discrimination
• Judged on average group characteristics
• Labor market example
• Profitable, undesirable, but not malicious
LO7 20-21
• Occupational segregation
• The crowding model
• Crowd certain groups into less desirable occupations
• Effects of crowding
• Elimination of crowding
LO7
Discrimination
20-22
Occupational SegregationW
age
Rat
e
B BBM M
W
3 4 3 4 64
Dx Dy Dz
Occupation X Occupation Y Occupation Z
Quantity of Labor(Millions)
Quantity of Labor(Millions)
Quantity of Labor(Millions)
Crowding women into one occupation (Z)…
results in men enjoying higher wages in the other occupations (X and Y).
000
LO7 20-23
U.S. Family Wealth
Median and Average Family Wealth, Survey Years 1995-2007
(In 2007 Dollars)
19951998200120042007
$78,20093,100
101,300102,300120,600
$260,800360,100464,800493,500557,800
• Family wealth rose rapidly between 1995 and 2007
Year Median Average*
*The average greatly exceeds the medians because the averages are boosted by the multibillion dollar wealth of a relatively few families.
LO7 20-24
U.S. Family Wealth
• Family wealth became more unequal between 1995 and 2007
Percentage of Total Family Wealth Held by Different Groups, Survey
Years 1995-2007
19951998200120042007
32.2%31.430.230.528.5
34.6%33.932.733.433.8
67.8%68.669.869.571.5
Year Bottom 90% Top 1%Bottom 10%
Percentage of Total Wealth by Group
LO7 20-25