Ch 18 income distribution and poverty micro econ4

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Chapter 18 ECON4 William A. McEachern

1

Income

Distribution

and Poverty





Income Distribution by Quintiles

• Distribution of income

– U.S. households

– Ranked by income

– Five groups of equal size (quintiles)

• Percentage of income received in 1980

– Poorest 20% of population

• 4.3% of income

– Richest 20% of population

• 43.7% of income

2






• Measuring income

– After cash transfer payments are

received

– Before taxes are paid

– Before in-kind transfers are received

• Food vouchers

• Medicare, Medicaid

• Public housing

• Employer- provided benefits

3



Exhibit 1

4

Share of Aggregate Household Income by Quintile






• Richest 20% of population

– Increased share of income

– 51.1% in 2012

– Growth of two-earner households

• Poorest 20% of population

– Decreased share of income

– Growth of single-parent households

5





The Lorenz Curve

• Lorenz curve

– Percentage of total income

– Received by any given percentage of

households

– When incomes are arrayed from smallest

to largest

• Equal distribution line

6



Exhibit 2

7

Lorenz Curves Show That Income Was Less Evenly Distributed

Across U.S. Households in 2012 Than It Was in 1980The Lorenz curve is a

convenient way of showing the

percentage of total income

received by any given

percentage of households when

households are arrayed from

smallest to largest based on

income. For example, point a

shows that in 1980, the bottom

80 percent of households

received 56.3 percent of all

income. Point b shows that in

2012, the share of all income

going to the bottom 80 percent

of households was lower than in

1980. If income were evenly

distributed across households,

the Lorenz curve would be a

straight line.





Why Incomes Differ

• Median income

– Middle income

– When all incomes are ranked from

smallest to largest

• Median wage

– Middle wage

– When all wages are ranked from smallest

to largest

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Why Incomes Differ

• Income differences

– Number of household members working

• Median income of households with two

earners

– 91% higher than for households with one earner

– Education, ability, job experience

– Productivity

9





Why Incomes Differ

• High-income household

– Well-educated couple

– Both spouses employed

• Low-income household

– One person living alone

– Or a family headed by a single-parent

• Female, poorly educated, not working

10





A College Education Pays More

• Median wage, past 20 years

– Only high-school diploma: decreased 6%

– College degree: increased 12%

• Widening wage gap:

– Industry deregulation

– Declining unionization

– Freer international trade and migration

– New computer-based information

technologies11





A College Education Pays More

• Widening wage gap:

– Supply of less-educated workers

increased more than the supply of more

educated workers

• Higher return to education

– Marriage trends

12





Distribution Benchmarks

• Problems with income distributions

– No objective standard

– Money income

• Measured after cash transfers

• Before taxes and in-kind transfers

– Household size differs across quintiles

– Reported income

– Distribution of spending

• More evenly distributed than income quintiles

13





Redistribution Programs

• Official poverty level

– Benchmark level of income

• Initially based on three times the cost of a

nutritionally adequate diet

• Pretax money income

– Includes cash transfers

– Excludes value of noncash transfers

• Food stamps; Medicaid; Subsidized housing

• Employer-provided health insurance

14





Redistribution Programs

• Poverty levels, 2012

– Family of four: $23,050

• $15.83 per person per day

• Recessions

– Increase in poverty

• Internationally, 40 percent of world’s

population lives on $2 per person per

day

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Exhibit 3

16

Number and Percentage of U.S. Population in Poverty





Programs to Help the Poor

• Promote a healthy economy

– Greater job opportunities

– Lower unemployment rate

• Antipoverty programs

– Social insurance

– Income assistance

17



Exhibit 4

18

U.S. Poverty Rates and Unemployment Rates Are Related Over Time





Social Insurance

• Social insurance

– Government programs

– Help make up for lost income of people

who worked but are now

• Retired

• Unemployed

• Unable to work because of disability or

work-related injury

19





Social Insurance

• Social security

– Supplements retirement income

• Record of contributing to the program during

their working years

• Largest government redistribution program

• Medicare

– Provides health insurance for short-term

medical care

• Older Americans, regardless of income

20





Social Insurance

• Unemployment insurance

– Supports those who have lost jobs

• Workers’ compensation

– Supports workers injured on the job

• Social insurance system

– Deducted from workers’ pay

• Aimed at people with work history

– Protect some families from poverty

• Particularly the elderly

21





Social Insurance

• Social insurance system

– Aimed at those with a work history

– Income redistribution

• From rich to poor

• From young to old

– Current beneficiaries

• Receive far more in benefits than they ever

paid into the program

22





Income Assistance

• Income assistance programs

– Welfare programs

– Provide money and in-kind assistance to

the poor

– Benefits do not depend on prior

contributions

• Means-tested program

– An individual’s income and assets must not

exceed specified levels

23





Income Assistance

• Cash transfers programs

– Temporary Assistance for Needy Families

(TANF)

• Cash for poor families with dependent

children

• Funded by federal government, run by the

states

24





Income Assistance


– Supplemental Security Income (SSI)

• Cash to the elderly poor and the disabled

• Includes people addicted to drugs and

alcohol, children with learning disabilities, and

the homeless

• Funded by federal and state governments

25





Income Assistance


– General assistance aid

• Poor, but don’t qualify for TANF or SSI

– Earned-income tax credit

• Supplements the wages of the working poor

26





Income Assistance

• In-kind transfer programs

– Medicaid

• Provides medical care for poor people

• The most costly welfare program

– Supplemental Nutrition Assistance

Program (SNAP)

• Offers low-income households vouchers

redeemable for food

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Income Assistance

• In-kind transfer programs

– Housing assistance

• Direct assistance for rental payments and

subsidized low-income housing

– Support for day care

– School lunches

– Extra food for pregnant women

– Energy assistance

– Education and training (Head Start)

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Exhibit 5

29

Federal Redistribution Outlays Each Year by Category





Who Are the Poor?

• Poverty among the elderly declined

– Growth in spending for Social Security

and Medicare

• The elderly

– Powerful political force

30



Exhibit 6

31

U.S. Poverty Rates by Age





Who Are the Poor?

• Feminization of poverty

– Poverty rates among families headed by

females

• Much higher than rates among other families

• Trended down

– Percentage of births to unmarried

mothers

• Is five times greater today than in the 1960s

• 87% of teenagers who gave birth were

unmarried

32



Exhibit 7

33

Poverty Rates Are Much Higher for Families Headed by

Females but Have Declined Since 1990



Exhibit 8

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Percent of Population Living in Poverty by State





Who Are the Poor?

• Discrimination

– School funding

– Housing

– Employment

– Training

– Career advancement

– Wage gap

• Quality of schooling

35





Who Are the Poor?

• Equal Employment Opportunity

Commission

– Civil Rights Act of 1964

– Monitors cases involving

• Unequal pay for equal work

• Unequal access to promotion

• Affirmative action plans

– Numerical hiring, promotion, training

goals

36





Who Are the Poor?

• Unintended consequences of income

assistance

– High marginal tax rate on earned income

• Discourages employment and self-sufficiency

• Welfare benefits > income from work

– Long term dependency on welfare

• Deteriorating labor skills

– Parents

• Encouraged poor performance in school

– Children could qualify for SSI37





Welfare Reform

• Welfare-to-work programs

– Increased employment

• 1996: TANF

– Replaced Aid to Families with Dependent

Children (AFDC)

– States: more control

• Time limits

• Work participation rates

• Benefit levels

38





Welfare Rolls Have Declined

• Welfare reforms

– Increased employment among mothers

who head families

– Increased welfare spending per recipient

– Investment in work-related services

• Job placement, transportation, child care

– Earned-income tax credit

• Welfare recipients

– Declined 69% below the peak by 2010

39



Exhibit 9

40

Welfare Recipients as a Percentage of the U.S. Population

Declined Sharply after Welfare Reform

Ch 18 income distribution and poverty micro econ4

Economy & Finance

Transcript of Ch 18 income distribution and poverty micro econ4