Ch15 Income Distribution and Poverty

7/25/2019 Ch15 Income Distribution and Poverty

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2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !air Karl Case, Ra !air

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Prepared by: FernandoPrepared by: FernandoQuijano and Yvonn QuijanoQuijano and Yvonn Quijano

Income DistributionIncome Distributionand Povertyand Poverty


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$he %tilit Possibilities !rontier $he %tilit Possibilities !rontier

& $he$he utility possibilitiesutility possibilitiesfrontier frontier is a graphicis a graphicrepresentation of a t'o(representation of a t'o(person 'orl) that sho's allperson 'orl) that sho's allpoints at 'hich *+s utilitpoints at 'hich *+s utilit

can be increase) onl if B+scan be increase) onl if B+sutilit is )ecrease)utilit is )ecrease)


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$he %tilit Possibilities !rontier $he %tilit Possibilities !rontier

& *n point insi)e the *n point insi)e theutility possibilitiesutility possibilitiesfrontier frontier is inefficient *tis inefficient *tpoint *, both - an) .point *, both - an) .coul) be better offcoul) be better off

&Point B is preferable toPoint B is preferable to

point *point *&Both B an) C areBoth B an) C are

efficient, but ma notefficient, but ma notbe e uall )esirablebe e uall )esirable


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$he ources of Househol) -ncome$he ources of Househol) -ncome

& Househol)s )eri1e their incomesHousehol)s )eri1e their incomesfrom three basic sourcesfrom three basic sources

"" from 'ages or salaries recei1e) infrom 'ages or salaries recei1e) ine3change for labor e3change for labor

22 from propert 4that is, capital, lan),from propert 4that is, capital, lan),an) so forth5 an)an) so forth5 an)

from go1ernmentfrom go1ernment


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7ages an) alaries7ages an) alaries

& *ll factors of pro)uction are pai) a *ll factors of pro)uction are pai) areturn e ual to their marginalreturn e ual to their marginalre1enue pro)uct4the mar8et 1aluere1enue pro)uct4the mar8et 1alueof 'hat the pro)uce at the marginof 'hat the pro)uce at the margin

& $he re'ar)s of a s8ill that is limite)$he re'ar)s of a s8ill that is limite)in suppl )epen) on the )eman) forin suppl )epen) on the )eman) forthat s8ill People 'ith rare s8ills canthat s8ill People 'ith rare s8ills canma8e enormous salariesma8e enormous salaries


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7ages an) alaries7ages an) alaries

& Human capital Human capital is the stoc8 ofis the stoc8 of8no'le)ge, s8ills, an) talents that people8no'le)ge, s8ills, an) talents that peoplepossess5 it can be inborn or ac uire)possess5 it can be inborn or ac uire)through e)ucation an) trainingthrough e)ucation an) training

& Compensating differentialsCompensating differentials areare)ifferences in 'ages that result from)ifferences in 'ages that result from)ifferences in 'or8ing con)itions Ris8)ifferences in 'or8ing con)itions Ris8

9obs usuall pa higher 'ages5 highl 9obs usuall pa higher 'ages5 highl)esirable 9obs usuall pa lo'er 'ages)esirable 9obs usuall pa lo'er 'ages


7/33 2002 Prentice Hall Business Publishing 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ra !air Karl Case, Ra !air

-ncome from Propert-ncome from Propert

& Property incomeProperty income is income )eri1e)is income )eri1e)from o'nership of real propert an)from o'nership of real propert an)financial hol)ings -t ta8es the formfinancial hol)ings -t ta8es the formof profits, interest, )i1i)en)s, an)of profits, interest, )i1i)en)s, an)rentsrents

& $he amount of propert income that$he amount of propert income thata househol) earns )epen)s ona househol) earns )epen)s on

"" ho' much propert it o'ns, an)ho' much propert it o'ns, an)

22 'hat 8in)s of assets it o'ns'hat 8in)s of assets it o'ns



-ncome from :o1ernment-ncome from :o1ernment

& Transfer paymentsTransfer payments are pa mentsare pa mentsb the go1ernment to people 'ho )ob the go1ernment to people 'ho )onot suppl goo)s or ser1ices innot suppl goo)s or ser1ices ine3changee3change

& Transfer programsTransfer programs are part of theare part of thego1ernment+s attempts to offsetgo1ernment+s attempts to offsetsome of the problems of ine ualitsome of the problems of ine ualitan) po1ertan) po1ert



$he ;istribution of -ncome$he ;istribution of -ncome

& Economic incomeEconomic income is the amount ofis the amount ofmone a househol) can spen)mone a househol) can spen))uring a gi1en perio) 'ithout)uring a gi1en perio) 'ithoutincreasing or )ecreasing its netincreasing or )ecreasing its netassetsassets

& 7ages, salaries, )i1i)en)s, interest7ages, salaries, )i1i)en)s, interestincome, transfer pa ments, rents,income, transfer pa ments, rents,an) so forth are sources of economican) so forth are sources of economicincomeincome



-ncome -ne ualit in the %nite) tates-ncome -ne ualit in the %nite) tates

Distribution of Total Income and Components in the United States, 1997Distribution of Total Income and Components in the United States, 1997(Percentages(Percentages

!"US#!"$DS!"US#!"$DST"T%$T"T%$

I&C"'#I&C"'#%)#S %&D%)#S %&DS%$%*I#SS%$%*I#S

P*"P#*T+P*"P#*T+I&C"'#I&C"'#

T*%&S #*T*%&S #*I&C"'#I&C"'#

Bottom fifthBottom fifth 6 06 0 # 0> 0 26 "26 "

$hir) fifth$hir) fifth "> "6 > " =" =

$op fifth$op fifth >6 6>6 6 # 2# 2



@one -ncome@one -ncome

& Money incomeMoney income is a measure of theis a measure of theincome use) b the Census Bureauincome use) b the Census BureauBecause it e3clu)es noncashBecause it e3clu)es noncashtransfer pa ments an) capital gainstransfer pa ments an) capital gainsincome, it is less inclusi1e thanincome, it is less inclusi1e thanAeconomic incomeAeconomic income



Changes in the ;istribution of -ncomeChanges in the ;istribution of -ncome

Distribution of 'one- Income of U.S. amilies b- /uintiles, 1907 1997Distribution of 'one- Income of U.S. amilies b- /uintiles, 1907 1997(Percentages(Percentages

19071907 19231923 19741974 19531953 19501950 19901990 19971997

Bottom fifthBottom fifth # 0# 0 > ?> ? # ># > # 2# 2 > < > 2> 2 > 2> 2

econ) fifthecon) fifth "" ?"" ? "2 2"2 2 "" ="" = "" #"" # "" 0"" 0 "0 0"0 0 = == =$hir) fifth$hir) fifth "< 0"< 0 "< ?"< ? "< #"< # "< #"< # "< 0"< 0 "# " >" >>" > >" #>" # >2 =>2 = >6 =>6 = >< 2>< 2

$op # percent$op # percent "< 2"< 2 "# ="# = "# ="# = "#"# "6 0"6 0 20 "20 " 20



$he orenD Cur1e$he orenD Cur1e

& $he$he Lorenz curveLorenz curve is a 'i)elis a 'i)eluse) graph of the )istribution ofuse) graph of the )istribution ofincome, 'ith cumulati1eincome, 'ith cumulati1epercentage of families plotte)percentage of families plotte)along the horiDontal a3is an)along the horiDontal a3is an)cumulati1e percentage of incomecumulati1e percentage of incomeplotte) along the 1ertical a3isplotte) along the 1ertical a3is



$he orenD Cur1e$he orenD Cur1e

& -f income is e uall-f income is e uall)istribute), there is no)istribute), there is nosha)e) areasha)e) area

& @ore une ual@ore une ual)istributions of income)istributions of incomepro)uce orenD Cur1espro)uce orenD Cur1es

that are farther fromthat are farther fromthe >#()egree linethe >#()egree line



$he :ini Coefficient$he :ini Coefficient

& $he$he Gini coefficient Gini coefficient is a commonl use)is a commonl use)measure of ine ualitmeasure of ine ualit

of income )eri1e)of income )eri1e)from a orenD Cur1efrom a orenD Cur1e-t can range from Dero-t can range from Dero

ma3imum e ualit F toma3imum e ualit F toa ma3imum of "a ma3imum of "

ma3imum ine ualit Fma3imum ine ualit F



;ifferences Bet'een *frican(*merican;ifferences Bet'een *frican(*mericanHousehol)s, 7hite Househol)s, an) ingle(Househol)s, 7hite Househol)s, an) ingle(

Person Househol)sPerson Househol)s

Distribution of 'one- Income of !ouseholds, 1997 (PercentagesDistribution of 'one- Income of !ouseholds, 1997 (Percentages

%$$%$$!"US#!"$DS!"US#!"$DS

% *IC%&6% *IC%&6%'#*IC%&%'#*IC%&

!"US#!"$DS!"US#!"$DS!IT#!IT#

!"US#!"$DS!"US#!"$DS!ISP%&IC!ISP%&IC

!"US#!"$DS!"US#!"$DS"P#*S"&"P#*S"&!"US#!"$DS!"US#!"$DS

0("0,0000("0,000 "" 0"" 0 2" >2" > = #= # "6 ?"6 ? 2# >2# >

"0("#,000"0("#,000 ? "? " "0 #"0 # < ?< ? "0 ="> = "< ="< = "> 6"> 6 "= 2"> 2 " 2" 2 "# 0"# 0 "> 0"> 0

#(#0,000#(#0,000 "6"6 "> ="> = "6 #"6 # "6 6"6 6 "" 6"" 6

#0(



Po1ertPo1ert

& -n simplest terms,-n simplest terms, poverty poverty is theis thecon)ition of people 'ho ha1e 1ercon)ition of people 'ho ha1e 1erlo' incomeslo' incomes

& $he$he poverty line poverty line is the officiallis the officiallestablishe) income le1el thatestablishe) income le1el that)istinguishes the poor form the)istinguishes the poor form thenonpoor -t is set at three times thenonpoor -t is set at three times thecost of the ;epartment ofcost of the ;epartment of

*griculture+s minimum foo) bu)get *griculture+s minimum foo) bu)get



Po1ert in the %nite) tatesPo1ert in the %nite) tatesince "=60ince "=60

Percentage of Persons in Po ert- b- Demographic )roup, 1920 6 1997Percentage of Persons in Po ert- b- Demographic )roup, 1920 6 1997" ICI%$" ICI%$'#%SU*#'#%SU*#

19201920

" ICI%$" ICI%$'#%SU*#'#%SU*#

19201920

%D8UST#D "*%D8UST#D "*I&6 I&D T*%&S #*SI&6 I&D T*%&S #*S

%T '%* #T :%$U#, 1997%T '%* #T :%$U#, 1997 aa

*ll *ll "= 0"= 0 "" "0 0"0 0

7hite7hite "> ="> = "" 0"" 0 ? >? > *frican(*merican *frican(*merican >= 6>= 6 26 #26 # "="=

HispanicHispanic ** 2< "2< " "= 6"= 6

!emale househol)er I!emale househol)er Ino husban) present no husban) present ># =># = # "# " **

El)erl 6#GFEl)erl 6#GF 2? #2? # "0 #"0 # **

Chil)ren un)er "?Chil)ren un)er "? 20



$he ;istribution of 7ealth$he ;istribution of 7ealth

& $he )istribution of 'ealth is much$he )istribution of 'ealth is muchmore une ual than the )istribution ofmore une ual than the )istribution ofincome 7ealth is passe) fromincome 7ealth is passe) fromgeneration to generation an)generation to generation an)accumulatesaccumulates

& ome argue that une ual )istributionome argue that une ual )istributionof 'ealth is a natural conse uenceof 'ealth is a natural conse uenceof ris8 ta8ing in a mar8et economof ris8 ta8ing in a mar8et econom



$he ;istribution of 7ealth$he ;istribution of 7ealth

Percentage of Different %ssets ";ned b- !ouseholds, 1995Percentage of Different %ssets ";ned b- !ouseholds, 1995 Survey ofSurvey ofConsumer FinancesConsumer Finances

P#*C#&T%)# "P#*C#&T%)# "" *S" *S

C"''"& ST"CC"''"& ST"C# < 0< 0 2> 22> 2 "0 2"0 2 2# 62# 6

$op " percent$op " percent # 2# 2 >< < < 2 02 0 "> ?"> ? > 0> 0

$op "0 percent$op "0 percent =" 2=" 2 ?6 2?6 2 0 2=2= "? #"? #

Source:Source: .ames Poterba, A toc8 @ar8et 7ealth an) Consumption,.ames Poterba, A toc8 @ar8et 7ealth an) Consumption, Journal of Economic Perspectives,Journal of Economic Perspectives, "> 2F, == I ""? , pring 2000"> 2F, == I ""? , pring 2000


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$he Re)istribution ;ebate$he Re)istribution ;ebate

& Practical arguments againstPractical arguments againstre)istributionre)istribution

& $a3ation an) transfer programs interfere$a3ation an) transfer programs interfere'ith the incenti1es to 'or8, sa1e, an)'ith the incenti1es to 'or8, sa1e, an)in1estin1est

& Bureaucratic 'aste an) inefficienc isBureaucratic 'aste an) inefficienc is

ine1itable in the a)ministration of socialine1itable in the a)ministration of socialprogramsprograms


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& *rguments in fa1or of re)istribution *rguments in fa1or of re)istribution

& * 'ealth countr , such as the %nite) * 'ealth countr , such as the %nite)tates, has the moral obligation totates, has the moral obligation to

pro1i)e all its members 'ith thepro1i)e all its members 'ith thenecessities of life $he Constitution )oesnecessities of life $he Constitution )oescarr a guarantee of the Aright to lifecarr a guarantee of the Aright to life


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& tilitarian !usticetilitarian !ustice is the i)ea that Aais the i)ea that Aa)ollar in the han) of a rich person is)ollar in the han) of a rich person is'orth less than a )ollar in the han) of a'orth less than a )ollar in the han) of apoor person -f the marginal utilit ofpoor person -f the marginal utilit ofincome )eclines 'ith income, transferringincome )eclines 'ith income, transferringincome from the rich to the poor 'illincome from the rich to the poor 'ill

increase total utilitincrease total utilit


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& "a#lsian !ustice"a#lsian !ustice is a theor ofis a theor of)istributional 9ustice that conclu)es that)istributional 9ustice that conclu)es thatthe social contract emerging from thethe social contract emerging from theAoriginal position 'oul) call for anAoriginal position 'oul) call for anincome )istribution that 'oul) ma3imiDeincome )istribution that 'oul) ma3imiDethe 'ell(being of the 'orst(off member ofthe 'ell(being of the 'orst(off member of

societsociet


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$he 7or8s of Karl @ar3$he 7or8s of Karl @ar3

& @ar3 )i) not 'rite 1er much about@ar3 )i) not 'rite 1er much aboutsocialism or communismsocialism or communism

& He 'rote a criti ue of capitalism, butHe 'rote a criti ue of capitalism, but'as not 1er clear about 'hat 'oul)'as not 1er clear about 'hat 'oul)replace itreplace it

& -n one essa he 'rote, Afrom each-n one essa he 'rote, Afrom eachaccor)ing to his abilit , to eachaccor)ing to his abilit , to eachaccor)ing to his nee)saccor)ing to his nee)s


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$he 7or8s of Karl @ar3$he 7or8s of Karl @ar3

& $he$he labor t$eory of valuelabor t$eory of value , state), state)most simpl , is the theor that themost simpl , is the theor that the1alue of a commo)it )epen)s onl1alue of a commo)it )epen)s onlon the amount of labor re uire) toon the amount of labor re uire) topro)uce itpro)uce it

& $he o'ners of capital are able to$he o'ners of capital are able toe3tract Asurplus 1alue out of labore3tract Asurplus 1alue out of labor


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Re)istribution Programs an) PoliciesRe)istribution Programs an) Policies

& $he income ta3 is$he income ta3 is progressive progressive 4those 'ith higher incomes4those 'ith higher incomespa a higher percentage of their incomes in ta3espa a higher percentage of their incomes in ta3es

#ffecti e *ates of ederal, State, and $ocal Ta=es,#ffecti e *ates of ederal, State, and $ocal Ta=es,4333 (Ta=es as a Percentage of Total Income4333 (Ta=es as a Percentage of Total Income

Bottom 20Bottom 20 > 0> 0econ) 20econ) 20 " 2" 2

$hir) 20$hir) 20 22

!ourth 20!ourth 20 2 62 6

$op 20$op 20 ==

$op "0$op "0 > #> #

$op #$op # > => =

$op "$op " < 0< 0

Source:Source: *uthors+ estimate *uthors+ estimate


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E3pen)iture ProgramsE3pen)iture Programs

& $he$he Social Security systemSocial Security system is a fe)eralis a fe)erals stem of social insurance programs -ts stem of social insurance programs -tinclu)es three separate programs that areinclu)es three separate programs that arefinance) through separate trust fun)sfinance) through separate trust fun)s

& the Jl) *ge an) ur1i1ors -nsurance J* -Fthe Jl) *ge an) ur1i1ors -nsurance J* -Fprogram,program,

& the ;isabilit -nsurance ;-F program, an)the ;isabilit -nsurance ;-F program, an)

& the Health -nsurance H-, or @e)icareFthe Health -nsurance H-, or @e)icareFprogramprogram


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& Public assistancePublic assistance , or, or #elfare#elfare , consists, consistsof go1ernment transfer programs thatof go1ernment transfer programs thatpro1i)e cash benefits topro1i)e cash benefits to

"" families 'ith )epen)ent chil)ren 'hosefamilies 'ith )epen)ent chil)ren 'hoseincomes an) assets fall belo' a 1er lo'incomes an) assets fall belo' a 1er lo'le1el, an)le1el, an)

22 the 1er poor, regar)less of 'hether or notthe 1er poor, regar)less of 'hether or notthe ha1e chil)renthe ha1e chil)ren


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& $he$he Supplemental Security %ncomeSupplemental Security %ncome&SS%'&SS%' program is )esigne) to ta8e care ofprogram is )esigne) to ta8e care ofthe el)erl 'ho en) up 1er poorthe el)erl 'ho en) up 1er poor

& nemployment compensationnemployment compensation is a stateis a statego1ernment transfer program that pa sgo1ernment transfer program that pa scash benefits for a certain perio) of timecash benefits for a certain perio) of timeto lai)(off 'or8ers 'ho ha1e 'or8e) for ato lai)(off 'or8ers 'ho ha1e 'or8e) for aspecifie) perio) of time for a co1ere)specifie) perio) of time for a co1ere)emplo eremplo er


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& Medicaid Medicaid an)an) MedicareMedicare are in(8in)are in(8in)go1ernment transfer programs thatgo1ernment transfer programs thatpro1i)e health an) hospitaliDationpro1i)e health an) hospitaliDationbenefitsbenefits

& @e)icare to the age) an) their sur1i1ors an)@e)icare to the age) an) their sur1i1ors an)to certain of the )isable), regar)less ofto certain of the )isable), regar)less of

income, an) @e)icai) to people 'ith lo'income, an) @e)icai) to people 'ith lo'incomesincomes


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& Food stampsFood stamps are 1ouchers that ha1e a faceare 1ouchers that ha1e a face1alue greater than their cost an) that can be1alue greater than their cost an) that can beuse) to purchase foo) at grocer storesuse) to purchase foo) at grocer stores

& Housing programsHousing programs are )esigne) to impro1e theare )esigne) to impro1e theualit of life for lo'(income peopleualit of life for lo'(income people

& $he$he Earned %ncome Ta( Credit Earned %ncome Ta( Credit is an importantis an important

program that allo's lo'er income families 'ithprogram that allo's lo'er income families 'ithchil)ren a cre)it e ual to a percentage of allchil)ren a cre)it e ual to a percentage of all'age an) salar income against their income'age an) salar income against their incometa3esta3es

Ch15 Income Distribution and Poverty

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