Chapter 20 explores the causes of income inequality, its measurement, and means by which government redistributes income to reduce poverty. The Lorenz Curve (numerically, a Gini ratio) illustrates the degree of income inequality in a country. Income inequality is caused by differences in ability, education and training, discrimination, preferences and willingness to take risks, wealth, market power, luck, connections, and misfortune.
20 IncomeInequalityandPoverty McGrawưHill/Irwin Copyrightâ2012byTheMcGrawưHillCompanies,Inc.Allrightsreserved FactsAboutIncomeInequality Average household income • $66,424 in 2008 • Among the highest in the world • Distribution by quintiles • Income mobility • People change quintiles • Government redistribution • Taxes and transfers LO1 20-2 Facts About Income Inequality Distribution by Quintiles, 2008 (1) Quintile (2) Percentage of Total Income (3) Upper Income Limit Lowest 20% 3.4 $20,712 Second 20% 8.6 39,000 Third 20% 14.5 62,725 Fourth 20% 22.9 100,240 Highest 20% 50.5 No Limit Total 100.0 Source: Bureau of the Census, http://www.census.gov LO1 20-3 Facts About Income Inequality Lorenz Curve and Gini Ratio e 100 Lorenz Curve Percentage of Income 80 (Actual Distribution) Perfect Equality 60 A B 40 c 20 b Complete Inequality a 20 40 60 80 Percentage of Households Gini Ratio = LO1 d f 100 Area A Area A + Area B 20-4 Facts About Income Inequality Impact of government taxes and transfers 100 Percentage of Income 80 60 After Taxes and Transfers 40 20 LO1 Lorenz Curve Lorenz Curve Before Taxes and Transfers 20 40 60 80 100 Percentage of Households 20-5 Causes of Income Inequality • Ability • Education and training • Discrimination • Preferences and risks • Unequal distribution of wealth • Market power • Luck, connections, and misfortune LO2 20-6 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 LO3 20-7 Equality Versus Efficiency • The case for equality • Maximizing total utility • The case for inequality • Incentives and efficiency • The equality-efficiency tradeoff LO4 20-8 Equality Versus Efficiency The Utility-Maximizing Distribution of Income Brooks’ Marginal Utility From Income Utility Gain (Entire Blue Area) a MUA $2500 $5000 Income LO4 Utility Loss (Entire Red Area) b’ a’ Marginal Utility Marginal Utility Anderson’s Marginal Utility From Income b MUB $5000 $7500 Income 20-9 The Economics of Poverty • • • LO5 Definition of poverty in 2008 • Single person < $10,201 • Family of < $21,834 • Family of < $28,769 39.8 million Americans Poverty rate 13.2% 20-10 Poverty Trends • Poverty rate trends • Significant decline 1959-1969 • Stable in 11-13% range since • Rises with recession • Measurement issues • Arbitrary threshold • Consumption vs income LO5 20-11 Poverty Trends 20-12 The U.S. IncomeMaintenance System • Entitlement programs • All those eligible receive aid • Social insurance programs • Social security and Medicare • Unemployment compensation • Public assistance programs • Welfare LO6 20-13 Public Assistance Programs • Supplemental Security Income (SSI) • Temporary Assistance for Needy • • • LO6 Families (TANF) Supplemental Nutrition Assistance Program (SNAP) Medicaid Earned Income Tax Credit 20-14 Discrimination • Inferior treatment • Taste-for-discrimination model • Prejudiced people receive disutility • Willing to pay to avoid • Discrimination coefficient • Prejudice and the market AfricanAmerican—White wage ratio • Competition and discrimination LO7 20-15 African-American Wage Rate (Dollars) Taste for Discrimination Model Less Discrimination S More Discrimination $9 D1 D3 D2 LO7 12 16 18 African-American Employment (Millions) 20-16 Discrimination • Statistical discrimination • Judged on average group characteristics • Labor market example • Profitable, undesirable, but not malicious LO7 20-17 Discrimination • Occupational segregation • The crowding model • Crowd certain groups into less desirable occupations • Effects of crowding • Elimination of crowding LO7 20-18 Occupational Segregation 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) …results in men enjoying higher wages in the other occupations (X and Y) LO7 20-19 ... Prejudice and the market AfricanAmerican—White wage ratio • Competition and discrimination LO7 2 0-1 5 African-American Wage Rate (Dollars) Taste for Discrimination Model Less Discrimination S More Discrimination. .. Medicaid Earned Income Tax Credit 2 0-1 4 Discrimination • Inferior treatment • Taste-for -discrimination model • Prejudiced people receive disutility • Willing to pay to avoid • Discrimination coefficient... Area B 2 0-4 Facts About Income Inequality Impact of government taxes and transfers 100 Percentage of Income 80 60 After Taxes and Transfers 40 20 LO1 Lorenz Curve Lorenz Curve Before Taxes and Transfers