Chapter 31 Income Distribution and Poverty 31-1 Copyright 2002 by The McGraw-Hill Companies, Inc....

Chapter 31

Income Distribution and Poverty

31-1Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives

• How unequal is income distribution in the United States?

• What determines how income is distributed?

• How does the distribution of income differ from the distribution of wealth?

• How is poverty defined?


Chapter Objectives

• Who are the poor?

• What are the main government transfer payments for the poor?

• What are the causes of poverty?

• What are the solutions?


Some Quotations

• “The forces of a capitalist society, if left unchecked, tend to make the rich richer and the poor poorer.” - Jawaharial Nehru

• “I’ve been rich and I’ve been poor; rich is better.” - Sophie Tucker


Income Distribution in the United States

• How unequal is income distribution in the United States?– How unequal are the incomes of

• The poor and the rich?

• The blacks and whites?

• The males and females?


The Lorenz Curve

• A Lorenz curve shows the cumulative share of income earned by each quintile of households– A quintile is one-fifth (1/5) just like a

quarter is one-fourth (1/4)

– One-fifth is also 20%


The Lorenz Curve

• Is it accurate to say that 20% of our population is poor, 60% is middle class, and 20% is rich?

• Maybe not– Social scientist can’t agree about where to

draw the dividing lines between the poor and the middle class and between the middle class and the rich


U.S. Household Income, by Quintile, 1999

Lowest quintile $0 -16,799 Second quintile 16,800-30,828 Third quintile 30,829-49,015 Fourth quintile 49,016-76,009 Fifth quintile 76,010 and up


Hypothetical Lorenz Curve


100

80

60

40

20

0

Percent of households

Lorenz curve:actual incomedistribution

Line ofperfectincome equality

40200 60 80 100

How much does the lowest quintile (1/5) receive?

5 %



100

80

60

40

20

0




40200 60 80 100

How much does the second quintile (1/5) receive?

12.5 %

Not the answer!

The answer is 12.5% - 5% = 7.5%

5



100

80

60

40

20

0




40200 60 80 100

How much does the third quintile (1/5) receive?

25.0

Not the answer!

The answer is 25.0% -( 5% + 7.5% ) = 12.5%

7.55 12.5



100

80

60

40

20

0




40200 60 80 100

How much does the fourth quintile (1/5) receive?

40.0

Not the answer!

The answer is 40.0% -( 5% + 7.5% + 12.5) = 15%

7.55 12.5 15



100

80

60

40

20

0




40200 60 80 100

How much does the fifth quintile (1/5) receive? This one is easy

The answer is 100.0% -( 5% + 7.5% + 12.5 +15%) = 60%

7.55 12.5 15 60


100

80

60

40

20

0



40200 60 80 100

Income Distribution in the United States, 1999

Percentage of Total Income before Taxes Received by Each Fifth of American Families, 1960-1999 -------------------------------------------------- Income Rank 1960 1999 -------------------------------------------------- Lowest fifth 4.8% 3.7% Second fifth 12.2% 9.0% Third fifth 17.8% 15.1% Fourth fifth 24.0% 23.3% Highest fifth 41.3% 49.0%

Income Distribution Getting More Uneven

• Income tax rates on capital gains were cut– This helped the so-called rich

• Payroll taxes were raised– Thus hurt the lower income workers– About 75% of all Americans pay more in payroll

taxes than in personal income tax

• From 1960-1999 the average hourly wage fell by more than 10%

• Relatively high paying manufacturing jobs are being replaced with relatively low paying service sector jobs


Distribution of Wealth in the United States

• In 1976 the top 1% of our population held about 20% of the nation’s household wealth

• By 2000 the top 1% held 40% of the nation’s household wealth

• The top 5% of all households own 77% of equity holdings

• The bottom 80% own only 1.8%


Equity and Efficiency• Income distribution affects our economic efficiency• Two things make our economy work, the carrot

and the stick– The carrot is all the money you can make by working

hard– The stick is if you don’t work, you don’t eat

• Complete income equality would take away our productive incentives

• Great income equality means a great deal of human misery, because many of the poor would not even be able to afford the bare necessities of life


Income Distribution


• Whatever the means of income redistribution, the ends are always the same– The ends are to take from the rich and give to the

poor

• Most people probably agree that the rich and middle class should give some of their money to the poor

• However two questions must be answered– Who are the rich and middle class?– How much do we take from them?

What Determines Income Distribution?


• Some positive determinants are training, education, intelligence, inborn skills, physical attributes, luck, and who you know

• Some negative determinants are job discrimination, luck, and who you don’t know

• Two-thirds of all personal income is earned in wages and salaries

• Property income accounts for almost one-quarter of personal income

• Government transfer payments account for the rest

Differences in Wages and Salaries

• Why do some people earn more than others?– Why do doctors make more than word

processors?– Why do professional athletes make more

than cashiers?

• The answer is supply and demand– People in certain occupations are in short

supply relative to the demand for these occupations



• How important is education?– We know that college graduates earn more

than high school graduates• The average college graduate will earn three

times as much as someone who has not completed the eighth grade

– Today we know that you need to be able to read, write, do arithmetic, think, solve problems and be computer literate



• Why Does a College Graduate Earn More?– The college graduate is probably smarter, richer, and

more motivated

– The college graduate probably has better connections

– The college graduate probably comes from a home with a more supportive learning environment



• How Important is Talent?– Michael Jackson earns $60 million a year– Oprah Winfrey brings in $150 million a year– People with good communication skills and who are

extroverted usually do best in most jobs

• Yet, talent usually is not a deciding factor in how much people earn– New employees tend to be hired at the same starting

salary• They tend to advance lockstep from one pay level to the next

– The most important factor in determining pay level seems to be seniority for most Americans



• Discrimination– Discrimination still exist in spite of the gains

made in equal economic opportunity• 1960s women made 60% of what men earn

• 1973 women made 63% of what men earn

• 1996 women made 74% of what men earn

• 2000 women make almost 80% of what men earn

• The average college-educated woman still earns less than the average high school-educated man



• Discrimination– Discrimination still exist in spite of the gains

made in equal economic opportunity• Blacks earn about 60% of what whites earn

• The past forty years the unemployment rate for blacks has consistently been double that for whites

• In past recessions the unemployment for rate for black teenagers rose above 50%

• Hispanics have suffered almost as much as blacks in employment discrimination since WW II


Property Income

• Wages and salaries accounted for 62% of personal income in 1997

• Property income accounted for 26%– Most property income goes to the rich in the form of

rent, interest, dividends, capital gains, and profits– Less than 10% of the middle class have property

income– The two largest sources of wealth, exclusive of

inheritance, are the stock market and starting up new companies

• Government transfer payments accounted for 12%


• Social security benefits constitute more than two-thirds of all federal transfer payments– Social security benefits are not aimed

specifically at the poor– Social security benefits keeps many people

above the poverty line– Social Security benefits are the main support

of many retirees


Government Transfer Payments

• Unemployment benefits– Unemployment benefits are the sole means of

support for most people collecting them– Unemployment benefits go to less than half of

the unemployed, primarily to lower income groups

• Medicare helps the elderly regardless of income level

• Public assistance and food stamp programs targets lower income groups


Government Transfer Payments

• Almost all agree that some income redistribution is needed

• The hard questions are– How much income redistribution is needed?– To whom should it be redistributed?

• We all probably want to see a more equitable and efficient society, but we are far from reaching a consensus on how this can be attained


Income Redistribution

Upward Mobility: Europe versus the United States


THE NETHERLANDS

*Excluding the former East Germany**Average of all years in the 1980s

SWEDEN

FRANCE

GERMANY*

IRELAND

U.S. WHITE

U.S. BLACK

44%

37%

28%

26%

25%

17%

8%

Percentage share of poor who left poverty within a year in the 1980s

• Dimensions of the poverty problem

• Some of the causes of poverty• How we are dealing with poverty• Some possible remedies for

poverty


Poverty in America

• The relative concept of poverty

• The absolute concept of poverty


Poverty Defined

• By defining the poor as the lowest income quintile, we set up poverty as a relative concept– There are two basic problems with this concept– If everyone’s income quadrupled, we would still be

calling the bottom 20% poor, even though they would be living better than the entire middle class previously

– The lowest American quintile is infinitely better off than average citizens of the world’s poorest nations

• The question remains “Relative to what?”


The Relative Concept of Poverty

• There are two basic problems with the absolute concept of poverty– Who gets to determine the dividing line between

the poor and not so poor?– How is that determination reached?– One approach is to set up a minimum basic

standard of living and figure out how much it cost to maintain that standard from year to year


The Absolute Concept of Poverty

• Calculated annually by the U. S. Department of Agriculture– In 1999 this line was set at $17,029 for a family

of four– Can a family of four live on this?

• It depends on what you mean by live• It depends on where you live

• None of the nation’s thousands of locally administered welfare programs brings any of the poor up to the poverty line


The Official Poverty Line

U.S. Poverty Rate: Percentage of Individuals Below the Poverty Line,

1960-1999


1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 20008

10

12

14

16

18

20

22

Who Are the Poor?

• People older than 65 used to have higher poverty rates than the general population

• The advent of Medicare, higher social security benefits and SSI have reduced the poverty rates for older Americans to well below the overall rate for the general population


Who Are the Poor?

• Most Poor People Are White• 1996 white population was 225,440,005

– Multiply this by 9% (poverty rate for whites) = 20,289,600 whites below the poverty line

• 1996 black population was 33,518,658– Multiply this by 30% (poverty rate for

blacks) = 10,055,597 blacks below the poverty line


Who Are the Poor?

• It is obvious that a disproportionate number of poor are blacks and other minorities– One out 4 blacks are poor, but blacks are

only 13% of the population– The poverty rate for the American Indian is

47.3% The bottom line is that poverty is not just a problem for minorities but a problem for all Americans


Who Are the Poor?• Most poor people live outside the cities

• They live in the suburbs, small towns, and rural areas

• While it is true that the majority of the poor are white residents of the suburbs, small towns, and rural areas, a disproportionate number of the poor are urban Blacks and Hispanics

• If you want to be poor, you can increase your chances substantially by being Black or Hispanic and living in a large city


Poverty Rates by Race, 1999


10

20

30

40

50

60

70

0

White (non-Hispanic)BlackHispanic

Who Are the Poor?

• Three-fourths of the poor are single mothers and their children

• People living in the rural south and the Appalachian regions

• Migrant farm workers, native Americans, and recent immigrants

• People who once held jobs in declining industries (steel, autos, rubber, oil, mining, farming, etc)

• Inner city residents


Poverty Rates of Selected Population Groups, by Race, 1999


Children under 6 Female-headed families with children under 18

0

10

20

30

40

50

14.6%

36.6%

30.6% 31.6%

47.2%46.4%

Children Living in Relative Poverty, Selected Countries, 1999


The Working Poor

• All the people employed at or just above the minimum wage could be considered the working poor– Most of them receive little or no government

benefits

• Even if they don’t get one cent from the government, they are still a part of the poverty problem


• Remember the unemployment rate does not count these people– They number in the millions– If they were fully accounted for, the total

number of unemployed would increase by 3 to 4 million people


The Long-Term Unemployed and Discouraged Workers

• There have always been homeless people

• There are now probably between two and three million homeless– There is much disagreement how many

homeless people there really are– If we include individuals who are

temporarily staying with family and friends this estimate is probably in the ball park


The Homeless

• Four trends have made this problem much worse– Entry level factory jobs are declining in large cities

– The availability of affordable housing (basically furnished rooms) has almost disappeared

– There is ongoing gentrification in most cities

– There has been a deinstitutionalization of the mentally ill without the promised halfway houses to treat and shelter them


The Homeless Problem

• The U.S Department of Health and Human Services estimates that one-third of the homeless are mentally ill and that one-half are alcoholics or drug addicts

• Not all of the homeless are poor– There are people earning more than $50,000 who

live in shelters or in their cars in Santa Clara County, California

– The problem is being trapped between jobs that pay too little and housing that cost too much


The Homeless Problem

• The Social Security Act of 1935 set up three major programs– Social Security– Unemployment insurance

• Social security and unemployment insurance are both financed by taxes paid by employers and workers

– Pubic assistance• Public assistance was intended to help families

experiencing temporary economic distress• Public assistance instead has engendered a permanent

dependence in millions of families


The Main Government Transfer Programs

• Medicare and Medicaid– Medicare is a supplement to social security that

provides retirees with low cost medical care– Medicaid provides free medical care to the poor

(usually nonworking)– About 45 million working poor have no health

insurance• They have jobs without health insurance• They are too young for Medicare• They are too well off to receive help from

Medicaid


The Main Government Transfer Programs

• The past four decades have produced second, third, and fourth-generation welfare families

• Teenage girls get pregnant and have babies– They go on welfare, they do not marry, they have no

hope of becoming self-sufficient, and their kids repeat the cycle

• These young mothers are provided with surrogate husbands in the form of a welfare check– Some states are now restricting this eligibility


The Welfare Culture

• “I’m sorry that I got myself into this and my children into this. And I don’t know how to get them out of it. If I don’t get them away from here, they’re going to end up dead, in jail, or like me.”


The Words of a Welfare Mother

• Poor are Lazy

• Heritage of Slavery

• Employment Discrimination

• Black Male Joblessness

• Poverty Breeds Poverty

• Inadequate Human Capital


Theories of the Causes of Poverty

• The theory was popular through the 19th century up to the time of the Depression

• The belief was that prosperity was associated with being one of God’s chosen people– If you were rich or well off, you obviously were

going to heaven– If you were poor, you obviously were not going to

heaven

• This theory went down the tubes with the Great Depression


The Poor are Lazy

• Blacks were brought here in chains and held back for three centuries by slavery and a feudal sharecropping system in the south

• Blacks were systematically excluded from all but the most menial jobs and were denied educational opportunities open to almost all other Americans

• Mortgage loans, restaurant meals, hotel and motel lodging, and union membership were routinely denied

• This didn’t start changing until the 1960s


The Heritage of Slavery

• Employment discrimination has been especially strong in holding down the incomes of Women, Blacks, Hispanics, and other minorities

• Education, training, and experience also contribute to these wage differentials

• Social scientists generally believe that about half of these wage differentials result from discrimination and the rest from other factors


Employment Discrimination

• In 1970, 33% of black families were headed by women. In the 1990s this number was over 60%

• The growing number of a permanent welfare population of single black mothers has raised the question of where the young black males who got them pregnant are– Four-fifths of white males aged 20 to 44 have jobs– One-half of black males aged 20 to 44 have jobs

• Some are officially unemployed• Some are “discouraged workers”• Some may be working in the underground economy either legally

or illegally

• The loss of blue collar jobs has hurt young black men the most


Black Male Joblessness

• Before birth an infant may suffer from poor prenatal care and may be addicted to drugs

• In early childhood children in poverty may get inadequate nutrition and medical and dental care

• Children in poverty may grow up in an unsafe, even violent environment

• Children in poverty may experience emotional deprivation and grow up in a broken home

• The bottom line is that all of the above can be serious handicaps to overcome


Poverty Breeds Poverty

• Human capital is defined as the acquired skills of individuals, along with their education, training, and work habits– People who grow up poor usually have poor home

learning environments, attend the worst schools, drop out before graduation, acquire little useful work experience, do not develop good work habits, and have poor communication skills

• In short, these people are virtually unemployable in today’s economy


Inadequate Human Capital

• The poverty theory debate– Both agree on the ends - getting

people off welfare and into self-supporting jobs

– They disagree on the means - how to do it


The Conservative View versus the Liberal View

• Conservatives advocate the “stick approach” - you don’t work you don’t eat

• Most conservatives believe that the social programs of the 60s and 70s not only didn’t work but caused more poverty by destroying people’s incentive to work


The Conservative View

• The “carrot approach” - training and jobs

• Had there been no 60s and 70s social programs there would have been even more poverty than we have now

• These programs prevented a bad situation from getting worse– During times of rising unemployment,

especially among black males, it is a victory just to keep the poverty rate from rising


The Liberal View

• Minimize employment discrimination

• Provide the poor with better education and training

• Provide the poor with millions of government jobs


The Liberal Solution

• Provide the poor with jobs mainly through the private sector

• Cut the poor off from public assistance– This would leave them with no recourse except

the job market, family members, friends, and public or private locally funded services


The Conservative Solution

• Workfare is a combination of work and welfare

• Workfare is a compromise between liberals and conservatives

• The workfare concept has widespread support


Workfare

– The federal guarantee of cash assistance to the poor is ended– The head of every welfare family would have to work within

two years or the family would lose benefits– After receiving welfare for two months adults must find jobs

or perform community service– Lifetime welfare benefits would be limited to 5 years

(Hardship exemptions would be available to 20% of families)– Each state receives a lump sum to run its own programs– Future legal immigrants barred from welfare assistance– $24 billion cut from the food stamp program– Up to 20% of those on public assistance – the ones who are

least employable - will be allowed to remain on the rolls beyond the time limit


The Personal Responsibility and Work Opportunity Reconciliation Act of 1996

• Experts estimate that at least 2 million families have become long-term, repeat users of public assistance

• 64% of the women who join the welfare rolls leave within two years– But 75% of them return to welfare


Conclusion

• The economic boom of the 90s enabled perhaps half of those leaving the welfare roles to find employment– But the boom cannot go on indefinitely– What will happen to the millions of former

welfare recipients most of whom have minimal job skills and training when the unemployment rate begins to rise?


Conclusion

• The federal government needs to do for the poor what it did for the working and middle class during the Great Depression– We need a full-scale jobs project patterned

after the WPA (Works Progress Administration)–which provided productive jobs for millions of Americans

• People can, for example, be put to work rebuilding our crumbling infrastructure


Conclusion

• Since the overwhelming majority of adults who have been receiving public assistance or are still on the rolls are single mothers with young children, there is a tremendous need for child care– It appears that the provision of free or low-cost

child care would significantly lower the poverty rate


Conclusion

Chapter 31 Income Distribution and Poverty 31-1 Copyright 2002 by The McGraw-Hill Companies, Inc....

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