Income Inequality and Poverty

Chapter 21Income Inequality, Poverty, and Discrimination

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21-2

Facts About Income Inequality

• Average household income

• $69,821 in 2011

• Among the highest in the world

• Distribution by quintiles

• Income mobility

• People change quintiles

• Government redistribution

• Taxes and transfers

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(1)

Personal

Income Category

(2)

Percentage of All

Households in this Category

Under $15,000 13.5

$15,000-$24,999 11.5

$25,000-$34,999 10.9

$35,000-$49,999 13.9

$50,000-$74,999 17.6

$75,000-$99,999 11.5

$100,000 and above 21.0

100.0

Source: Bureau of the Census, www.census.gov. Numbers do not add up to 100 percent due to rounding.LO1

http://www.census.gov/

21-4


(1)Quintile

(2)Percentage ofTotal Income

Lowest 20%

Second 20%

Third 20%

Fourth 20%

Highest 20%

Total

Distribution by Quintiles, 2011

3.2

8.4

14.3

23.0

51.1

100.0

Source: Bureau of the Census, www.census.gov

(3)Upper

Income Limit

$20,262

38,520

62,434

101,582

No Limit

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21-5


Lorenz curve and Gini ratio

20 40 60 80 100

20

40

60

80

100

0

Perfect Equality

Lorenz Curve(Actual Distribution)

Complete Inequality

A B

ab

c

d

e

f

Gini Ratio =Area A

Area A + Area B

Percentage of Households

Perc

enta

ge o

f Inc

ome

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20 40 60 80 100

20

40

60

80

100

0

Lorenz CurveBefore Taxes and

Transfers

Percentage of Households

Perc

enta

ge o

f Inc

ome

Lorenz CurveAfter Taxes and

Transfers

Impact of government taxes and transfers

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21-7

Causes of Income Inequality

• Ability

• Education and training

• Discrimination

• Preferences and risks

• Unequal distribution of wealth

• Market power

• Luck, connections, and misfortune

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21-8

Income Inequality Over Time

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• Rising income inequality since 1975

• Causes of growing inequality

• Greater demand for highly skilled workers

• Demographic changes

• International trade, immigration, and decline in unionism

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21-10


LO3

21-11

Equality Versus Efficiency

• The case for equality

• Maximizing total utility

• The case for inequality

• Incentives and efficiency

• The equality-efficiency trade-off

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21-12

The Utility-Maximizing Distribution of IncomeAnderson’s MarginalUtility From Income

Brooks’ MarginalUtility From Income

0 0

Mar

gina

l Uti

lity

Mar

gina

l Uti

lity

Income Income

$5000 $5000$2500 $7500

MUBMUA

a

a’ b’

b

Utility Gain(Entire Blue Area)

Utility Loss(Entire Red Area)

Equality Versus Efficiency

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21-13

The Economics of Poverty

• Definition of poverty in 2011

• Single person < $11,702

• Family of 4 < $22,891

• Family of 6 < $29,494

• 46.2 million Americans

• Poverty rate 15%

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Incidence of Poverty

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Poverty Trends

• Poverty rate trends

• Significant decline 1959-1969

• Stable in 11-13% range since

• Rises with recession

• Measurement issues

• Arbitrary income threshold

• Consumption vs. income

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21-16

Poverty Trends

LO5

21-17

The U.S. Income-Maintenance System

• Entitlement programs

• All those eligible receive aid

• Social insurance programs

• Social security and Medicare

• Unemployment compensation

• Public assistance programs

•Welfare

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21-18

Public Assistance Programs

• Supplemental Security Income (SSI)

• Temporary Assistance for Needy Families (TANF)

• Supplemental Nutrition Assistance Program (SNAP)

• Medicaid

• Earned Income Tax Credit

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21-19

Discrimination

• Inferior treatment

• Taste-for-discrimination model

• Prejudiced people receive disutility

•Willing to pay to avoid

• Discrimination coefficient

• Prejudice and the market African-American—White wage ratio

• Competition and discrimination

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21-20

Taste for Discrimination ModelA

fric

an-A

mer

ican

Wag

e Ra

te(D

olla

rs)

African-American Employment (Millions)

0

D3

D2

D1

S

12 16 18

6

$98

MoreDiscrimination

LessDiscrimination

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Discrimination

• Statistical discrimination

• Judged on average group characteristics

• Labor market example

• Profitable, undesirable, but not malicious

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Discrimination

• Occupational segregation

• The crowding model

• Crowd certain groups into less desirable occupations

• Effects of crowding

• Eliminating occupational segregation

• Cost to Society as well as to individuals

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21-23

Occupational SegregationW

age

Rate

B BBM M

W

3 4 3 4 64

Dx Dy Dz

Occupation X Occupation Y Occupation Z

Quantity of Labor(Millions)



Crowding women into one occupation (Z)…

results in men enjoying higher wages in the other occupations (X and Y).

000

LO7

21-24

U.S. Family Wealth

Median and Average Family Wealth, Survey Years 1995-2010

(In 2010 Dollars)

199519982001200420072010

$84,00098,100

106,100107,200126,400

77,300

$307,900386,700487,000517,100584,600498,800

• Family wealth rose rapidly between 1995 and 2010

Year Median Average*

*The average greatly exceeds the medians because the averages are boosted by the multibillion dollar wealth of a relatively few families.

21-25

U.S. Family Wealth

• Family wealth became more unequal between 1995 and 2010Percentage of Total Family Wealth Held

by Different Groups, Survey Years 1995-2010

199519982001200420072010

32.2%31.430.230.428.523.3

34.6%33.932.733.433.835.4

67.8%68.669.869.571.576.7

Year Bottom 90% Top 1%Top 10%Percentage of Total Wealth by Group

Income Inequality and Poverty

Economy & Finance

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