AP Micro Income Inequality
23
INCOME INEQUALITY AND POVERTY 34 C H A P T E R
Transcript of AP Micro Income Inequality
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
