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19. Income Distribution and 19. Income Distribution and PovertyPoverty19. Income Distribution and 19. Income Distribution and PovertyPoverty
• Income Inequality in the U.S.
• Poverty in the U.S.• Income Inequality in the U.S.
• Poverty in the U.S.
Income distribution in the U.S.Income distribution in the U.S.Income distribution in the U.S.Income distribution in the U.S.
• Median household income–$44,000
• Top 20%–$100,000 and above
• Top 5%–$175,000 and above
• Median household income–$44,000
• Top 20%–$100,000 and above
• Top 5%–$175,000 and above
Inequality in the U.S.Inequality in the U.S.Inequality in the U.S.Inequality in the U.S.
• income vs. wealth– income
-- amount in a given period–wealth
-- value of all assets at point in time
• income vs. wealth– income
-- amount in a given period–wealth
-- value of all assets at point in time
Lorenz CurveLorenz CurveLorenz CurveLorenz Curve
• Picture of income distribution
• Compare–Percentage of population–Percentage of income earned by
that population
• Picture of income distribution
• Compare–Percentage of population–Percentage of income earned by
that population
• A 45 degree line–Equal income/wealth dist.–“poorest 20% earn 20% of income”
• Our Lorenz curve–Sags outward due to inequality–“poorest 60% earn 30% of income”
• A 45 degree line–Equal income/wealth dist.–“poorest 20% earn 20% of income”
• Our Lorenz curve–Sags outward due to inequality–“poorest 60% earn 30% of income”
inequality over timeinequality over timeinequality over timeinequality over time
• income/wealth distribution more unequal since 1983
• why?– increasing gains to skill/education–stock market gains 1980s/1990s
-- wealthy own more stock
• income/wealth distribution more unequal since 1983
• why?– increasing gains to skill/education–stock market gains 1980s/1990s
-- wealthy own more stock
How does inequality arise?How does inequality arise?How does inequality arise?How does inequality arise?
• different wage rates
• different ability
• different choices–educated make better choices
• assortative mating–people marry people with similar
education, status
• different wage rates
• different ability
• different choices–educated make better choices
• assortative mating–people marry people with similar
education, status
Who is poor?Who is poor?Who is poor?Who is poor?
• Bureau of the Census
• 12.7% population is “poor” 2004–official poverty rate
• where does that come from?
• Bureau of the Census
• 12.7% population is “poor” 2004–official poverty rate
• where does that come from?
Poverty ratePoverty ratePoverty ratePoverty rate
• compare –Household’s “money income” to
“poverty threshold”
• compare –Household’s “money income” to
“poverty threshold”
Poverty thresholdPoverty thresholdPoverty thresholdPoverty threshold
• poverty threshold–cost nutritionally adequate diet
x 3–$15,700 for adult w/ 2 children in
2005
• poverty threshold–cost nutritionally adequate diet
x 3–$15,700 for adult w/ 2 children in
2005
• Problems:–Average HH spends only about
20% of income on food–Does not factor in rising costs
• Housing• Medical care• Energy
• Problems:–Average HH spends only about
20% of income on food–Does not factor in rising costs
• Housing• Medical care• Energy
• money income– earned income, interest income– cash benefits– before taxes– does not include noncash benefits
• poverty rate is sensitive to the income measure
• AND threshhold
• money income– earned income, interest income– cash benefits– before taxes– does not include noncash benefits
• poverty rate is sensitive to the income measure
• AND threshhold
poverty variespoverty variespoverty variespoverty varies
• household type
• education
• race
• sex
• age
• state
• household type
• education
• race
• sex
• age
• state
by state, 2002-04 averageby state, 2002-04 averageby state, 2002-04 averageby state, 2002-04 average
• New Hampshire 5.7%
• New York 14.4%
• New Jersey 8.2%
• Pennsylvania 10.4%
• Mississippi 17.7%
• New Hampshire 5.7%
• New York 14.4%
• New Jersey 8.2%
• Pennsylvania 10.4%
• Mississippi 17.7%
26.5%
17.8%
11.1%7.9%
3.5% 3.2%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
< HS HS diploma College degree
Poverty Rates by Education (age 25+), 2001
Women Men
Fighting povertyFighting povertyFighting povertyFighting poverty
• Minimum wage–Doesn’t keep up!–Distorts labor markets–Does really target the poor
• Minimum wage–Doesn’t keep up!–Distorts labor markets–Does really target the poor
• Unemployment compensation–Must qualify through work history–Temporary–Lengthens job search
• Unemployment compensation–Must qualify through work history–Temporary–Lengthens job search
• Earning income tax credit (EITC)–“negative tax”–Subsidize low wages of families
with children
• Earning income tax credit (EITC)–“negative tax”–Subsidize low wages of families
with children
• Transfers/ “welfare” –Means-tested assistance–Cash (TANF, SSI)–Housing–Medicaid, medicare–Food stamps, WIC, school lunches–Childcare
• Transfers/ “welfare” –Means-tested assistance–Cash (TANF, SSI)–Housing–Medicaid, medicare–Food stamps, WIC, school lunches–Childcare
Welfare MythsWelfare MythsWelfare MythsWelfare Myths
• people stay on welfare forever–70% cash recipients need
assistance for < 2 yrs. (pre 1996)–10% get assistance > 5 yrs.
• too lazy to work?–Over 2/3 recipients are children–over 60% of HH have someone in
labor force
• people stay on welfare forever–70% cash recipients need
assistance for < 2 yrs. (pre 1996)–10% get assistance > 5 yrs.
• too lazy to work?–Over 2/3 recipients are children–over 60% of HH have someone in
labor force
• welfare encourages “kids 4 dollars”–NO EVIDENCE– families on welfare are smaller, on
average
• welfare costs out of control?–2001, TANF, food stamps 2% of
federal budget-- defense 16%, -- Social Security 23%
• welfare encourages “kids 4 dollars”–NO EVIDENCE– families on welfare are smaller, on
average
• welfare costs out of control?–2001, TANF, food stamps 2% of
federal budget-- defense 16%, -- Social Security 23%
Effects of Welfare: work incentiveEffects of Welfare: work incentiveEffects of Welfare: work incentiveEffects of Welfare: work incentive
• prior to 1996,–no time limit on benefits–benefits cut (earnings penalty)
when recipients work
• prior to 1996,–no time limit on benefits–benefits cut (earnings penalty)
when recipients work
nonearned incomenonearned incomenonearned incomenonearned income
• increase has only an income effect– increase consumption– increase leisure (decrease work)
• increase has only an income effect– increase consumption– increase leisure (decrease work)
earnings penaltyearnings penaltyearnings penaltyearnings penalty
• cut off benefits as earned income rises–gradual (food stamps, housing)–abrupt (Medicaid)
• further reduces work incentive
• cut off benefits as earned income rises–gradual (food stamps, housing)–abrupt (Medicaid)
• further reduces work incentive
Effect:Effect:Effect:Effect:
• 10-50% reduction in work hours for recipients
• costly because–benefits–dependency– loss of skills, experience– loss of output in economy
• 10-50% reduction in work hours for recipients
• costly because–benefits–dependency– loss of skills, experience– loss of output in economy
Welfare ReformWelfare ReformWelfare ReformWelfare Reform
• 1996 federal law
• time limit on benefits–2 years consecutive–5 years total
• job training/work requirements
• collecting child support
• 1996 federal law
• time limit on benefits–2 years consecutive–5 years total
• job training/work requirements
• collecting child support
• unmarried teens w/ children– live w/parent and attend school
• individual states–reduce caseloads–reduce out-of-wedlock births–allowed to experiment w/ different
plans
• unmarried teens w/ children– live w/parent and attend school
• individual states–reduce caseloads–reduce out-of-wedlock births–allowed to experiment w/ different
plans
Results of reformResults of reformResults of reformResults of reform
• caseloads have fallen over 50% nationally
– evidence that time limits are a big motivator
– big variation across states
• declines in births to teenagers
– some evidence that stricter welfare rules played a role
• caseloads have fallen over 50% nationally
– evidence that time limits are a big motivator
– big variation across states
• declines in births to teenagers
– some evidence that stricter welfare rules played a role
the big tradeoffthe big tradeoffthe big tradeoffthe big tradeoff
• equity vs. efficiency
• redistribution increases equity
• BUT
• reduces incentives to work, produce– loss of efficiency
• redistribution costly
• equity vs. efficiency
• redistribution increases equity
• BUT
• reduces incentives to work, produce– loss of efficiency
• redistribution costly
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