Web Chapter B: Income inequality and poverty. In this chapter we will explore income inequality and actions that can be taken by government to try to correct income inequality, using the Lorenz curve and Gini ratio to help with this evaluation.
Web Chapter B Income Inequality and Poverty McGrawHill/Irwin Copyright © 2014 by The McGrawHill Companies, Inc. All rights reserved 11 Facts about Income Inequality • 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 WCB2 Facts about Income Inequality (1) Personal Income Category (2) Percentage of All Households in This Category Under $10,000 7.3 $10,000–$14,999 5.8 $15,000–$24,999 11.9 $25,000–$34,999 11.0 $35,000–$49,999 14.1 $50,000–$74,999 18.1 $75,000–$99,999 11.5 $100,000 and above 20.2 100.0 Source: Bureau of the Census, www.census.gov Numbers not add up to 100 percent due to rounding WCB3 Facts about Income Inequality Distribution by Quintiles (1) Quintile (2) Percentage of Total Income (3) Upper Income Limit Lowest 20% 3.4 $20,453 Second 20% 8.6 38,550 Third 20% 14.6 61,801 Fourth 20% 23.2 100,000 Highest 20% 50.3 No Limit Total 100.0 Source: Bureau of the Census, www.census.gov WCB4 Facts about 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 WCB5 Facts about Income Inequality Effect of Government Redistribution Distribution by Quintiles Quintile (1) Before Taxes and Transfers (2) After Taxes and Transfers Lowest 20% 0.9 4.2 Second 20% 7.0 10.5 Third 20% 14.5 16.4 Fourth 20% 24.2 24.1 Highest 20% 53.5 44.8 Source: Bureau of the Census, www.census.gov WCB6 Facts about Income Inequality Impact of Government Taxes and Transfers 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 WCB7 Causes of Income Inequality • Ability • Education and training • Discrimination • Preferences and risks • Unequal distribution of wealth • Market power • Luck, connections, and misfortune WCB8 Causes of Income Inequality WCB9 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 WCB10 Income Inequality over Time Percentage of Total Before-Tax Income Received by Each One-Fifth and by the Top Percent of Households Quintile 1970 1975 1980 1985 1990 1995 2000 2009 Lowest 20% 4.1 4.4 4.3 4.0 3.9 3.7 3.6 3.4 Second 20% 10.8 10.5 10.3 9.7 9.6 9.1 8.9 8.6 Third 20% 17.4 17.1 16.9 16.3 15.9 15.2 14.8 14.6 Fourth 20% 24.5 24.8 24.9 24.6 24.0 23.3 23.0 23.2 Highest 20% 43.3 43.2 43.7 45.3 46.6 48.7 49.8 50.3 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Top 5% 16.6 15.9 15.8 17.0 18.6 21.0 22.1 21.7 WCB11 Equality versus Efficiency • The case for equality • Maximizing total utility • The case for inequality • Incentives and efficiency • The equality-efficiency trade-off WCB12 Equality versus Efficiency The Utility-Maximizing Distribution of Income 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 WCB13 The Economics of Poverty • Definition of poverty in 2009 • Single person < $10,956 • Family of < $21,954 • Family of < $29,405 • 43.6 million Americans • 14.3 percent in poverty WCB14 Incidence of Poverty Percentage in Poverty WCB15 Poverty Trends • Poverty rate trends • Significant decline 1959–1969 • Stable in 11–13 percent range since • Rises with recession • Measurement issues • Arbitrary threshold • Consumption versus income WCB16 Poverty Trends Poverty rate (percent) Poverty Rate Trends, 1959-2009 Year WCB17 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 WCB18 The U.S. IncomeMaintenance System Program Basis of Eligibility Source of Funds Form of Aid Expenditures Beneficiaries Social Insurance Programs Social Security Age, disability, death of a parent or spouse; lifetime work earnings Federal payroll tax on employers and employees Cash $676 billion 53 million Medicare Age or disability Federal payroll tax on employers and employees Subsidized health insurance $502 billion 47 million Unemployment Compensation Unemployment State and federal payroll tax on employers Cash $43 billion 10 million Public Assistance Programs SSI Age or disability; income Federal revenues Cash $47 billion million TANF Certain families with children; income Federal-state-local revenues Cash and services $15 billion million SNAP Income Federal revenues Cash via EBT cards $65 billion 40 million Medicaid Persons eligible for TANF and SSI and medically indigent Federal-state-local revenues Standardized medical services $297 billion 59 million EITC Low-wage working families Federal revenues Refundable tax credit, cash $58 billion 26 million WCB19 Public Assistance Programs • Supplemental Security Income (SSI) • Temporary Assistance for Needy • • • Families (TANF) Supplemental Nutrition Assistance Program (SNAP) Medicaid Earned income tax credit WCB20 ... 80 Percentage of Households Gini ratio = f 100 Area A Area A + Area B WCB5 Facts about Income Inequality Effect of Government Redistribution Distribution by Quintiles Quintile (1) Before Taxes... 11.5 $100,000 and above 20.2 100.0 Source: Bureau of the Census, www.census.gov Numbers not add up to 100 percent due to rounding WCB3 Facts about Income Inequality Distribution by Quintiles (1)... immigration, and decline in unionism WCB10 Income Inequality over Time Percentage of Total Before-Tax Income Received by Each One-Fifth and by the Top Percent of Households Quintile 1970 1975 1980