KRUGMAN'SMICROECONOMICS for AP*

Income Distribution and Income Inequality

Margaret Ray and David Anderson

Micro:

Econ:

42

78

Module

What you will learnin this Module:• What defines poverty, what causes

poverty, and the consequences of poverty.

• How income inequality in America has changed over time.

• How programs like Social Security affect poverty and income inequality.

Poverty

• Trends in poverty

• Who is poor?

• Causes of poverty

• Consequences of poverty

Income Inequality

• Using quintiles to analyze income distribution

• The Gini coefficient

Income group

Average 2008 income

% of total income if distributed equally

2008 % of total income

Bottom quintile

$11,656 20% 3.4%

Second quintile

$29,517 20% 8.6%

Third quintile $50,132 20% 14.7%

Fourth quintile

$79,760 20% 23.3%

Top quintile $171,057 20% 50%

Income Inequality

• A country’s level of income inequality can be measured with a statistic known as a A country’s level of income inequality can be measured with a statistic known as a Gini Gini coefficientcoefficient..

• If a Gini = 0, the income is distributed equally like the third column of the table above.If a Gini = 0, the income is distributed equally like the third column of the table above.

• If the Gini =1, all of the income goes to one person. This is as unequal as it gets!If the Gini =1, all of the income goes to one person. This is as unequal as it gets!

• The Gini in the U.S. is .468, which is high when compared to other wealthy nations in Europe, The Gini in the U.S. is .468, which is high when compared to other wealthy nations in Europe, Australia or Canada. There is greater income inequality in South America and parts of Africa Australia or Canada. There is greater income inequality in South America and parts of Africa and Asia. and Asia.

Income Inequality

•The question of having equal The question of having equal opportunity to move up the ladder opportunity to move up the ladder and have the “good life”. What do and have the “good life”. What do you think?you think?

Economic Insecurity

In addition to the problem of poverty, we are concerned with the possibility that people or families can fall into poverty due to unanticipated events.

U.S. Antipoverty Programs

• Means-tested (Welfare Programs)

• Social Security and unemployment insurance

• The effects of programs on poverty

The Debate Over Income Redistribution

• Problems with income redistribution

• The politics of income redistribution

Table 78.1 Percent of Eighth-Graders Finishing College, 1988Ray and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Table 78.2 U.S. Income Distribution in 2008Ray and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Unnumbered Figure 78.1 Long-Term Trends in Income Inequality in the United StatesRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Unnumbered Figure 78.2 Long-Term Trends in Income Inequality in the United StatesRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Figure 78.2 Income Inequality Around the WorldRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Table 78.3 Major U.S. Welfare State Programs, 2009Ray and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Table 78.4 Effects of Taxes and Transfers on the Poverty Rate, 2008Ray and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Table 78.5 Effects of Taxes and Transfers on the Income Distribution, 2005Ray and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Table 78.6 Social Expenditure and Marginal Tax RatesRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers