Chapter 20 - Income inequality, poverty, and discrimination. In this chapter, you will learn to: Income inequality in the U.S, sources of income inequality, income inequality since 1970, economic arguments regarding income inequality, poverty measurement and incidence, the U.S. income-maintenance program, labor market discrimination.
Chapter 20 Income Inequality, Poverty, and Discrimination McGrawHill/Irwin Copyright © 2009 by The McGrawHill Companies, Inc. All rights reserved Chapter Objectives • • • • Income inequality in the U.S Sources of income inequality Income inequality since 1970 Economic arguments regarding income inequality • Poverty measurement and incidence • The U.S income-maintenance program • Labor market discrimination 20-2 Facts About Income Inequality • Average household income – $66,570 in 2006 – Among highest in the world • Distribution by quintiles • Income mobility – People change quintiles • Government redistribution – Taxes and transfers 20-3 Facts About Income Inequality Distribution by Quintiles, 2006 (1) Quintile (2) Percentage of Total Income (3) Upper Income Limit Lowest 20% 3.4 $20,035 Second 20% 8.6 37,774 Third 20% 14.5 60,000 Fourth 20% 22.9 97,032 Highest 20% 50.5 No Limit Total 100.0 Source: Bureau of the Census 20-4 Income Inequality • Lorenz Curve and Gini Ratio e 100 Lorenz Curve Percentage of Income 80 (Actual Distribution) Perfect Equality 60 A d B 40 c 20 b Complete Inequality a 20 40 60 80 Percentage of Households Gini Ratio = f 100 Area A Area A + Area B 20-5 Government Redistribution 100 Percentage of Income 80 60 Lorenz Curve After Taxes and Transfers 40 20 Lorenz Curve Before Taxes and Transfers 20 40 60 80 100 Percentage of Households Impact of Government Taxes and Transfers 20-6 Causes of Income Inequality • • • • • • • Ability Education and training Discrimination Preferences and risks Unequal distribution of wealth Market power Luck, connections, and misfortune 20-7 Income Inequality Over Time • Rising income inequality since 1970 • Causes of growing inequality – Greater demand for highly skilled workers – Demographic changes – International trade, immigration, and decline in unionism 20-8 Income Inequality Percentage Total Income Received by Top OneTenth of Receivers, Selected Nations 2007 10 20 30 40 50 Columbia Brazil South Africa Guatemala Mexico United States Italy Japan Sweden Germany Source: United Nations, Human Development Report, 2007/2008 20-9 Equality Versus Efficiency • The case for equality – Maximizing total utility • The case for inequality – Incentives and efficiency • The equality-efficiency tradeoff 20-10 Equality Versus Efficiency Brooks’ Marginal Utility From Income Utility Gain (Entire Blue Area) a Utility Loss (Entire Red Area) b’ a’ MUA Marginal Utility Marginal Utility Anderson’s Marginal Utility From Income $2500 $5000 Income b MUB $5000 $7500 Income The Utility-Maximizing Distribution of Income 20-11 The Economics of Poverty • Definition of poverty 2006 – Single person < $9,800 – Family of < $20,000 – Family of < $26,800 – 36.5 million Americans – Poverty rate 12.3% 20-12 Incidence of Poverty Poverty Rates Among Selected Population Groups, 2006 10 20 30 Female Householders African Americans Hispanics Foreign-Born (Not Citizens) Children Under 18 Women Total Population Asians Whites Men Persons 65 or Over Married-Couple Families Full-Time Workers 20-13 Source: Bureau of the Census, www.census.gov The Economics of Poverty • Poverty rate trends – Significant decline 1959-1969 – Stable in 11-13% range since – Rises with recession • Measurement issues – Arbitrary threshold – Consumption vs income 20-14 Income-Maintenance System • Entitlement programs – All those eligible receive aid • Social insurance programs – Social security and Medicare – Unemployment compensation • Public assistance programs – Welfare 20-15 Public Assistance Programs • Supplemental security income • Temporary assistance for needy families • Food stamp program • Medicaid • Earned Income Tax Credit 20-16 Discrimination • Inferior treatment • Taste-for-discrimination model – Prejudice people receive disutility – Willing to pay to avoid – Discrimination coefficient – Prejudice and the market AfricanAmerican-White wage ratio – Competition and discrimination 20-17 African-American Wage Rate (Dollars) Taste for Discrimination Model Less Discrimination S More Discrimination $9 D1 D3 D2 12 16 18 African-American Employment (Millions) 20-18 Discrimination • Statistical discrimination – Judged on average group characteristics – Labor market example – Profitable, undesirable, but not malicious 20-19 Discrimination • Occupational segregation – The crowding model – Crowd certain groups into less desirable occupations – Effects of crowding – Elimination of crowding 20-20 Occupational Segregation By crowding women into one occupation (Z)… Wage Rate Occupation X Occupation Y M B M B Occupation Z B W 34 Quantity of Labor (Millions) Dz Dy Dx 34 Quantity of Labor (Millions) Quantity of Labor (Millions) Men enjoy higher wages in the other occupations (X and Y) 20-21 U.S Family Wealth • Family wealth rose rapidly between 1995 and 2004 Median and Average Family Wealth, 1995-2004 In 2004 Dollars Year Median Average 1995 1998 2001 2004 $70,800 83,100 91,700 93,100 $260,800 327,500 421,500 448,200 20-22 U.S Family Wealth • Family wealth became more unequal between 1995 and 2004 Percentage of Total Family Wealth Held by Different Percentile Groups, 1995-2004 Year 1995 1998 2001 2004 Percentile of Wealth Distribution Bottom 90% Bottom 10% Top 1% 32.2% 31.4 30.2 30.5 67.8% 68.6 69.8 69.5 34.6% 33.9 32.7 33.4 20-23 Key Terms • income inequality • Lorenz curve • Gini ratio • income mobility • noncash transfers • equality-efficiency tradeoff • poverty rate • public assistance programs • Supplemental Security Income (SSI) • Temporary Assistance for Needy Families (TANF) • food-stamp program • Medicaid • earned-income tax credit • Discrimination (EITC) • entitlement programs • social insurance programs • taste for discrimination model • discrimination coefficient • Social Security • statistical discrimination • Medicare • Unemployment compensation • occupational segregation 20-24 Next Chapter Preview… The Economics of Health Care 20-25 ... (X and Y) 2 0- 21 U.S Family Wealth • Family wealth rose rapidly between 1995 and 200 4 Median and Average Family Wealth, 1995 -2 00 4 In 200 4 Dollars Year Median Average 1995 1998 200 1 200 4 $70,800... 448 ,200 2 0- 22 U.S Family Wealth • Family wealth became more unequal between 1995 and 200 4 Percentage of Total Family Wealth Held by Different Percentile Groups, 1995 -2 00 4 Year 1995 1998 200 1 200 4... Married-Couple Families Full-Time Workers 2 0- 13 Source: Bureau of the Census, www.census.gov The Economics of Poverty • Poverty rate trends – Significant decline 195 9-1 969 – Stable in 1 1-1 3% range