INCOME INEQUALITYAND POVERTY

34C H A P T E R

Distribution of U.S. Personal Income by Families, 2001

Personal Income Category

Percentage of All Families in This

Category

Under $10,000$10,000 - $14,999$15,000 - $24,999$25,000 - $34,999$35,000 - $49,999$50,000 - $74,999$75,000 - $99,999$100,000-$199,999$200,000 and over

5.3 4.3 11.3 11.9 15.7 20.8 13.1

14.6 3.0

100.0

FACTS ABOUT INCOME INEQUALITY2001 U.S. Average Family Income $66,863

The Lorenz Curvegraphically...

Distribution of Personal Income by Quintiles, 2001Percentage of Total Income

UpperIncome Limit

$24,000 41,127 62,500 94,150

4.2 9.7 15.4 22.9 47.7100.0

FACTS ABOUT INCOME INEQUALITY

Quintile

Lowest 20%Second 20%Third 20%Fourth 20%Highest 20%Total

20 40 60 80 100

100

80

60

40

20

0

Percent of Families

Per

cen

t o

f In

com

e Perfect Equality

CompleteInequality

THE LORENZ CURVE

20 40 60 80 100

100

80

60

40

20

0

Percent of Families

Per

cen

t o

f In

com

e Perfect Equality

CompleteInequality

Lorenz Curve (actual distribution)

Area betweenthe lines shows

the degree ofincome inequality

THE LORENZ CURVE

20 40 60 80 100

100

80

60

40

20

0

Percent of Families

Per

cen

t o

f In

com

e Perfect Equality

CompleteInequality

Lorenz Curve (actual distribution)

Area betweenthe lines shows

the degree ofincome inequality

THE LORENZ CURVE

Gini RatioNumerical Measure of Overall

Dispersion of Income

Area Between Lorenz Curve and Diagonal Total Area Below the Diagonal

GiniRatio =

20 40 60 80 100

100

80

60

40

20

0

Percent of Families

Per

cen

t o

f In

com

e Perfect Equality

CompleteInequality

Lorenz Curve (actual distribution)

Area betweenthe lines shows

the degree ofincome inequality

THE LORENZ CURVE

Limitations due to

Income Mobility:

The Time Dimension –

Income churning over longer

time periods is evident

20 40 60 80 100

100

80

60

40

20

0

Percent of Families

Per

cen

t o

f In

com

e Perfect Equality

CompleteInequality

Lorenz Curve (actual distribution)

Area betweenthe lines shows

the degree ofincome inequality

THE LORENZ CURVE

Effect of governmentredistribution of cashand noncash transfers

20 40 60 80 100

100

80

60

40

20

0

Percent of Families

Per

cen

t o

f In

com

e Perfect Equality

CompleteInequality

Lorenz Curve (actual distribution)

Area betweenthe lines shows

the degree ofincome inequality

THE LORENZ CURVE

Lorenz curveafter taxes and

transfers

Ability DifferencesEducation and TrainingDiscriminationPreferences and RisksUnequal Distribution of

WealthMarket PowerLuck, Connections, and

Misfortune

CAUSES OF INCOME INEQUALITY

TRENDS IN INCOME INEQUALITY

1929 - 1947Significant reduction in

income inequality

1947 - 1969Less inequality but at a

slower pace

1969 - 2001More unequal since 1969

BrazilGuatemala

South AfricaMexico

United StatesFrance

ItalySweden

0 10 20 30 40 50

GLOBAL PERSPECTIVEPercentage of Total Income ReceivedBy Top One-Tenth of Income Receivers,Selected Nations

Source: World Development Report, 2003

Greater Demand for Highly Skilled Workers

Demographic ChangesInternational Trade •Immigration•Decline in Unionism

CAUSES OF GROWING INEQUALITY

EQUALITY VERSUS EFFICIENCY

The Case for Equality

Maximizing Total Utility

The Case for Inequality

Incentives and Efficiency

Tradeoff Between Equality

and Efficiency

THE ECONOMICS OF POVERTYPoverty Defined – 2001

Single $ 9,039Family of 4 18,104Family of 6 24,195

Poverty Rates in the U.SBlacks 22.7%Hispanics 21.4%Whites 9.9%

THE ECONOMICS OF POVERTY

Incidence of PovertyPoverty RatePoverty TrendsThe “Invisible” Poor

•Short-Periods of Time•Geographic Isolation•Politically Invisible – Are Easy to Ignore

0 10 20 30

Married-couple familiesPersons 65 or over

WhitesTotal population

Children under 18Foreign born (not citizens)

HispanicsBlacks

Female householders

PERCENTAGE IN POVERTY

2001 Data

THE INCOME-MAINTENANCE SYSTEM

Social Insurance Programs, 2002

OASDHI$432 Billion ($386 Billion in 1999)

Medicare$219 Billion ($210 Billion in 1999)

Unemployment Compensation$32 Billion ($20 Billion in 1999)

Entitlement Programs

THE INCOME-MAINTENANCE SYSTEM

Public Assistance Programs, 2002Supplemental Security Income (SSI) $35 Billion ($29 Billion in 1999)Temporary Assistance for Needy Families $14 Billion ($23 Billion in 1999)Food stamps$20 Billion ($20 Billion in 1999)

Medicaid$207 Billion ($124 Billion in 1999)

Earned-Income Tax Credit (EITC) $55 Billion ($30 Billion in 1999)

Entitlement Programs

Common Features•Minimum Annual Income•Benefit-Reduction Rate

Conflicts Among Goals•Eliminating Poverty•Maintaining Work Incentives

•Holding Down Costs

WELFARE: GOALS AND CONFLICTS

Welfare ReformGrowing Government DependencePersonal Responsibility Act 1996Temporary Assistance to Needy

Families•5-Year Lifetime Limit•Must Work After 2 Years•Reduced Food-Stamp Eligibility•Tightened Some Definitions•5-Year Waiting Period on New

Legal Immigrants

WELFARE: GOALS AND CONFLICTS

income inequalityLorenz curveGini Ratioincome mobilitynoncash transfersequality-efficiency tradeoff poverty rateentitlement programssocial insurance programsOASDHIMedicare

unemployment compensationpublic assistance programsSupplemental Security Income (SSI)Temporary Assistance for Needy Families (TANF)food stamp programMedicaidearned-income tax credit (EITC)

ENDBACKCopyright McGraw-Hill/Irwin, 2005

Next:

Labor Market Institutionsand Issues: Unionism, Discrimination, Immigration

Chapter 35