18 Income Distribution and Poverty How much inequality and poverty exist in our society? What...
-
date post
21-Dec-2015 -
Category
Documents
-
view
225 -
download
3
Transcript of 18 Income Distribution and Poverty How much inequality and poverty exist in our society? What...
18 Income Distribution and PovertyIncome Distribution and Poverty
How much inequality and poverty exist in our society?
What policies are used to fight poverty?
What are the problems with these policies?
2
Introduction
Income is generally determined by earnings
Earnings are a function of productivity
What if productivity of resources varies across individuals?
The result is income inequality.
3
The U.S. Income Distribution: 2005
Group Annual household income
Bottom fifth Under $19,178
Second fifth $19,179 – $36,000
Middle fifth $36,001 – $57,658
Fourth fifth $57,659 – $91,705
Top fifth $91,706 and over
Top 5 percent $184,500 and over
4
The U.S. Income Distribution: 2005
GroupShare of total
household income
Bottom fifth 3.4
Second fifth 8.6
Middle fifth 14.6
Fourth fifth 23.0
Top fifth 50.4
Top 5 percent 22.2
5
U.S. Inequality Over Time
4
6
8
10
12
14
19
30
19
40
19
50
19
60
19
70
19
80
19
90
20
00
Income share of the top 20% divided by income share of the bottom 20%
Income share of the top 20% divided by income share of the bottom 20%
6
Lorenz Curve The distribution of income can be represented
by a Lorenz curve.
In a Lorenz curve:
• the horizontal axis measures the cumulative percentage of households
• the vertical axis measures the cumulative percentage of households
7
AA CC TT II VV E LE L EE AA RR NN II NN G G 11: : Lorenz CurveLorenz Curve
7
Using the distribution of income for 2005, draw a Lorenz curve.
Group Income Share
Bottom 20% 3.4
2nd 20% 8.6
Middle 20% 14.6
4th 20% 23.0
Top 20% 50.4
8
AA CC TT II VV E LE L EE AA RR NN II NN G G 11: : AnswerAnswer
8
Create cumulative totals of the columns.
Group TotalIncome Share
Total Share
Bottom 20% 20% 3.4 3.4
2nd 20% 40% 8.6 12.0
Middle 20% 60% 14.6 26.6
4th 20% 80% 23.0 49.6
Top 20% 100% 50.4 100
9
AA CC TT II VV E LE L EE AA RR NN II NN G G 11: : AnswerAnswer
9
Plot the cumulative number of households against the total share.
0
20
40
60
80
100
0 20 40 60 80 100
10
AA CC TT II VV E LE L EE AA RR NN II NN G G 11: : AnswerAnswer
10
A Lorenz curve that is a straight diagonal line would indicate an equal distribution of income.
0
20
40
60
80
100
0 20 40 60 80 100
11
Gini Coefficient
Another way to describe income inequality is by using a Gini coefficient.
• related to the Lorenz curve
12
Gini CoefficientLet A = area between the line of perfect equality and the
Lorenz curve
Let B = area below the Lorenz curve
A
B
Gini coefficient = A /(A + B)
A higher Gini coefficient means greater inequality
13
Gini Coefficient for the U.S.
0.30.320.340.360.380.4
0.420.440.460.480.5
1970 1980 1990 2000 2005
14
Inequality Around the World
0 5 10 15 20 25 30 35
Japan
Germany
India
Canada
United Kingdom
United States
Russia
China
Nigeria
Mexico
Brazil
South Africa
Income share of the top 20% divided by income share of the bottom 20%
Income share of the top 20% divided by income share of the bottom 20%
15
Gini Coefficients Around the World
Country Gini Coefficient
South Africa 77.0
Brazil 60.7
Mexico 53.1
Nigeria 50.6
China 52.2
Russia 48.7
United States 46.9
United Kingdom 34.0
Canada 33.1
India 38.0
Germany 30.0
Japan 24.9
17
Poverty Poverty line: an absolute level of income
set by the government for each family size below which a family is deemed to be in poverty
Poverty rate: the percentage of the population whose family income falls below the poverty line
In 2005 in the U.S.,
• median household income = $46,326
• poverty line for family of four = $19,806
• poverty rate = 12.6%
18
The U.S. Poverty Rate Over Time
Percent of the population below poverty line
Percent of the population below poverty line
19
U.S. Poverty Rates by Group, 2005
Group Poverty Rate
All persons 12.6%
White, not Hispanic 8.3
Black 24.9
Hispanic 21.8
Asian, Pacific Islander 11.1
Children 17.6
Elderly 10.1
Married-couple families 5.1
Female household, no spouse present
28.7
20
Policies to Reduce Poverty Poor families more likely to experience
• homelessness
• drug dependence
• health problems
• teen pregnancy
• illiteracy
• unemployment
Most people believe the government should provide a “safety net.”
We now consider a few such policies…
21
1. Minimum-Wage Laws Arguments for:
• helps the poor without any cost to the government
• little impact on employment if demand for unskilled labor is relatively inelastic
Arguments against:
• In the long run, demand for unskilled labor is likely elastic, so minimum wage causes substantial unemployment among the unskilled.
• Those helped by minimum wage are more likely to be teens from middle-income families than low-income adult workers.
22
2. Welfare
Welfare: government programs that supplement the incomes of the needy• Temporary Assistance for Needy Families (TANF)
• Supplemental Security Income (SSI)
Critics argue that such programs create incentives to become or remain needy
• argue that welfare contributed to the rise of the single-parent family
The severity of such incentive problems is unknown
23
3. Negative Income Tax Negative income tax: a tax system that collects
revenue from high-income households and gives transfers to low-income households
Example: Taxes owed = (1/3 of income) – $10,000
• If earnings = $90,000, taxes owed = $20,000
• If earnings = $60,000, taxes owed = $10,000
• If earnings = $30,000, taxes owed = $0
• If earnings = $15,000, taxes “owed” = –$5,000i.e., would receive $5000 payment from gov’t
The Earned Income Tax Credit (EITC) is similar to a negative income tax.
24
4. In-Kind Transfers
In-kind transfers are goods or services provided to the needy. Examples:
• homeless shelters
• soup kitchens
• food stamps
• Medicaid
An alternative: cash payments