Chapter 18 notes

PowerPoint Slides prepared by: Andreea CHIRITESCU

Eastern Illinois University

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Income Distribution

and Poverty

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Income Distribution by Quintiles

• Distribution of income– U.S. households

– Ranked by income

– Five groups of equal size (quintiles)

• Percentage of income received in 1980– Poorest 20% of population

• 4.3% of income

– Richest 20% of population• 43.7% of income

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© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Income Distribution by Quintiles

• Measuring income– After cash transfer payments are

received

– Before taxes are paid

– Before in-kind transfers are received• Food vouchers• Medicare, Medicaid• Public housing• Employer- provided benefits

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Exhibit 1

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Share of Aggregate Household Income by Quintile

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Income Distribution by Quintiles

• Richest 20% of population– Increased share of income

– 50% in 2008

– Growth of two-earner households

• Poorest 20% of population– Decreased share of income

– Growth of single-parent households

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The Lorentz Curve

• Lorentz curve– Percentage of total income

– Received by any given percentage of households

– When incomes are arrayed from smallest to largest

• Equal distribution line

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Exhibit 2

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Lorenz Curves Show That Income Was Less Evenly Distributed Across U.S. Households in 2008 Than It Was in 1980

The Lorenz curve is a convenient way of showing the percentage of total income received by any given percentage of households when households are arrayed from smallest to largest based on income. For example, point a shows that in 1980, the bottom 80 percent of households received 56.3 percent of all income. Point b shows that in 2008, the share of all income going to the bottom 80 percent of households was lower than in 1980. If income were evenly distributed across households, the Lorenz curve would be a straight line.

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Why Incomes Differ

• Income differences – Number of household members working

• Median income of households with two earners

– 91% higher than for households with one earner

– Education, ability, job experience

– Productivity

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Why Incomes Differ

• High-income household– Well-educated couple

– Both spouses employed

• Low-income household– One person living alone

– Or a family headed by a single-parent• Female, poorly educated, not working

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A College Education Pays More

• Median wage, past 20 years– Only high-school diploma: decreased 6%

– College degree: increased 12%

• Widening wage gap:– Industry deregulation

– Declining unionization

– Freer international trade and migration

– New computer-based information technologies

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A College Education Pays More

• Widening wage gap:– Supply of less-educated workers

increased more than the supply of more educated workers• Higher return to education

– Marriage trends

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Marital sorting and income inequality

• Marry by education levels• Women

– 54% of people enrolled in college, graduate school, or professional school

– High paying jobs

– Professional careers

• Choose marriage partner based on income

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Marital sorting and income inequality

• Children born to single mothers– 11% in 1970

– 41% in 2008

– Face special challenges

– Higher rate of poverty

• Widening income gap– Growth in power couples in the top

quintile

– Growth of unmarried mothers in the bottom quintile

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Distribution Benchmarks

• Problems with income distributions– No objective standard

– Money income• Measured after cash transfers• Before taxes and in-kind transfers

– Household size differs across quintiles

– Reported income

– Distribution of spending• More evenly distributed than income quintiles

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Redistribution Programs

• Official poverty level – Benchmark level of income

• Initially based on three times the cost of a nutritionally adequate diet

• Pretax money income– Includes cash transfers

– Excludes value of noncash transfers• Food stamps; Medicaid; Subsidized housing• Employer-provided health insurance

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Redistribution Programs

• Poverty levels, 2009– One individual: $10.830

– Family of four: $22,050• $15.10 per person per day

– Family of nine: $40,750

• Recessions– Increase in poverty

• International poverty line: – $2 per person per day

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Exhibit 3

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Number and Percentage of U.S. Population in Poverty

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Programs to Help the Poor

• Promote a healthy economy– Greater job opportunities

– Lower unemployment rate

• Antipoverty programs– Social insurance

– Income assistance

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Exhibit 4

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U.S. Poverty Rates and Unemployment Rates Are Related Over Time

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Social Insurance

• Social insurance– Government programs

– Help make up for lost income of people who worked but are now • Retired• Unemployed• Unable to work because of disability or

work-related injury

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Social Insurance

• Social security – Supplements retirement income

• Record of contributing to the program during their working years

• Largest government redistribution program

• Medicare – Provides health insurance for short-term

medical care • Older Americans, regardless of income

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Social Insurance

• Unemployment insurance – Supports those who have lost jobs

• Workers’ compensation – Supports workers injured on the job

• Social insurance system– Deducted from workers’ pay

• Aimed at people with work history

– Protect some families from poverty• Particularly the elderly

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Social Insurance

• Social insurance system– Aimed at those with a work history

– Income redistribution• From rich to poor• From young to old

– Current beneficiaries • Receive far more in benefits than they ever

paid into the program

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Income Assistance

• Income assistance programs– Welfare programs

– Provide money and in-kind assistance to the poor

– Benefits do not depend on prior contributions

• Means-tested program– An individual’s income and assets must not

exceed specified levels

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Income Assistance

• Cash transfers programs– General assistance aid

• Poor, but don’t qualify for TANF or SSI

– Earned-income tax credit• Supplements the wages of the working poor

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Income Assistance

• In-kind transfer programs– Medicaid

• Provides medical care for poor people• The most costly welfare program

– Supplemental Nutrition Assistance Program (SNAP)• Offers low-income households vouchers

redeemable for food

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Income Assistance

• In-kind transfer programs– Housing assistance

• Direct assistance for rental payments and subsidized low-income housing

– Support for day care

– School lunches

– Extra food for pregnant women

– Energy assistance

– Education and training (Head Start)

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Exhibit 5

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Federal Redistribution Outlays Each Year by Category

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Who Are the Poor?

• Poverty among the elderly declined– Growth in spending for Social Security

and Medicare

• The elderly – Powerful political force

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Exhibit 6

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U.S. Poverty Rates by Age

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Who Are the Poor?

• Feminization of poverty– Poverty rates among families headed by

females• Much higher than rates among other families• Trended down

– Percentage of births to unmarried mothers• Is five times greater today than in the 1960s• 87% of teenagers who gave birth were

unmarried31

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Exhibit 7

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Poverty Rates Are Much Higher for Families Headed by Females but Have Declined Since 1990

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Exhibit 8

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Percent of Population Living in Poverty by State

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Who Are the Poor?

• Discrimination– School funding

– Housing

– Employment

– Training

– Career advancement

– Wage gap• Quality of schooling

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Who Are the Poor?

• Equal Employment Opportunity Commission– Civil Rights Act of 1964

– Monitors cases involving• Unequal pay for equal work• Unequal access to promotion

• Affirmative action plans– Numerical hiring, promotion, training

goals

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Welfare Rolls Have Declined

• Welfare reforms– Increased employment among mothers

who head families

– Increased welfare spending per recipient

– Investment in work-related services• Job placement, transportation, child care

– Earned-income tax credit

• Welfare recipients– Declined 71% below the peak by 2009

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Exhibit 9

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Welfare Recipients as a Percentage of the U.S. Population Declined Sharply after Welfare Reform

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The rich got poorer during the recession

• High-income households – One of the hardest hit groups

– Drop in income and wealth• Stock market crash• Real-estate crash• Sharp drop on corporate dividends

– They cut their consumption more

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The rich got poorer during the recession

• Declining fortunes of the rich– Reduced contributions

• Universities, charities, museums

– Federal and state tax revenues declined• Top 1% of tax filers paid over 40% of all

federal income taxes collected

– No new successful businesses• No new jobs

– Decreased consumption spending • Lower employment

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