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Chapter 21 - Poverty, inequality, and discrimination. In this chapter you will learn: What the difference is between relative and absolute measures of poverty? How to explain different methods of measuring income inequality? How income mobility differs from income equality?
Chapter21 Poverty,Inequality,andDiscrimination â2014byMcGrawHillEducation Whatwillyoulearninthischapter? ã Whatthedifferenceisbetweenrelativeand absolutemeasuresofpoverty ã Howtoexplaindifferentmethodsofmeasuring income inequality • How income mobility differs from income equality • What public policies reduce poverty and inequality and what the trade‐off is between equity and efficiency • What relationship demographic differences in incomeorwageshavewithdiscrimination â2014byMcGrawHillEducation Poverty ã Povertyisalackofmaterialresources Thisisanimportanttopictoeconomistsaspoverty hasrealeffectsonindividualslives ã Causes of poverty are not always obvious – Does a lack of education make people poor? Are the poor less able or willing to access education? – Is it hard to become rich if you start out poor, or vice versa? If your parents were poor, how does this affect your changes in life? • Defining poverty is also difficult © 2014 by McGraw‐Hill Education Measuring Poverty There are two main ways to measure poverty: • Absolute poverty line is a measure that defines poverty as income below a certain amount, fixed at a given point in time • Relative poverty line is a measure that defines poverty in terms of the income of the rest of the population Poverty line ($) • The absolute poverty line in the U.S. is based on the price of food for different family sizes • The poverty lines are determined annually by the U.S. Census Bureau Family size 11,702 15,603 18,106 22,811 26,844 30,056 33,665 © 2014 by McGraw‐Hill Education Measuring Poverty The poverty rate defines the percentage of the population that have incomes below the poverty line Millions of people Recession 50 45 46% People in poverty 22% 40 35 30 15% Poverty rate 14% 25 13% 20 16% Children in poverty 15 10 1960 1970 1980 1990 2000 2010 Since the 1960s, the poverty line in the U.S. has decreased by about 10 percent through economic growth and government assistance © 2014 by McGraw‐Hill Education Measuring Poverty The poverty rate differs by demographics Proportion of demographic Demographic Number in poverty (millions) In poverty (%) White 31.6 13.0 Black 10.6 27.4 Hispanic 13.2 26.6 Asian 1.7 12.1 Male 21.0 14.0 Female 25.2 16.2 Married 3.6 6.2 Single female 4.7 31.2 Single male 0.9 15.8 Under 18 16.4 22.2 18 -64 26.3 13.7 Over 65 3.5 9.0 • Married families have the lowest rate of poverty • Single mothers have the highest rate of poverty – Nearlyonethirdofsinglemothersliveinpoverty â2014byMcGrawHillEducation MeasuringPoverty ã Themostcommoninternationalpovertymeasureisthe numberofpeoplelivingonlessthan$1.25perday ã Mustadjustfordifferencesinpricesacrosscountries using the purchasing power parity (PPP) index People living on less than $1.25 per day, by country © 2014 by McGraw‐Hill Education Why are people poor? • Most individuals in poverty are only poor temporarily, called transient poverty – This is compared to 3% of the poor who are in chronic poverty—being poor for 3 or more years • Poverty‐alleviating policies require knowing who is poor and why • Poverty may be inter‐generational: Those who grow up in poor families are more likely to be poor themselves – Children in poor communities typically have reduced opportunities to acquire human capital – Determining causality is difficult, as low human capital causes poverty and poverty causes low human capital – Createsanegativecycleofpovertyandlowhumancapital â2014byMcGrawHillEducation Whyarepeoplepoor? ã Povertymaybecausedbypoorsocial networks ã Povertymayalsobecausedbypovertytraps. Theseareselfreinforcingmechanismsthat cause the poor to stay poor – Health and economic prosperity – Credit constraints – Community composition © 2014 by McGraw‐Hill Education Measuring inequality The simplest method to measure inequality is to divide the population into five groups, called quintiles, and determine their share of income Quintile Average pre-tax income ($) Share of pre-tax income (%) Lowest 20 percent 18,400 3.3 Second 20 percent 42,500 8.4 64,500 13.1 Third 20 percent Fourth 20 percent 94,100 19.3 Highest 20 percent 264,700 55.9 Top percent 1,873,000 19.4 ã IntheU.S.,therichest20%holdoverhalfoftheincome ã Thetop1%earnsnearlyafifthofpretaxincome â2014byMcGrawHillEducation 10 Measuring inequality Inequality can also be measured using a Lorenz curve, a graphic representation of income distribution that maps percentage of the population against cumulative percentage of income earned by those people Cumulative share of income 100% Cumulative share of income 100% Share of income increases from poor to rich Each person holds an equal share of total 0% 0% income 100% Cumulative share of people If everyone earns the same income, the Lorenz curve is straight and a perfectly equal income distribution occurs 0% 100% Cumulative share of people 0% If there are rich and poor, the Lorenz curve bows in and an unequal income distribution occurs © 2014 by McGraw‐Hill Education 11 Active Learning: Measuring inequality Draw the Lorenz curve for the following U.S. income quintile data Share of pre-tax income (%) Lowest 20 percent Second 20 percent 3.3 8.4 Third 20 percent 13.1 Fourth 20 percent 19.3 Highest 20 percent 55.9 Cumulative share of income (%) Lorenz Curve Quintile 120 100 80 60 40 20 20 40 60 80 100 Cumulative share of people (%) © 2014 by McGraw‐Hill Education 12 Measuring inequality Using the Lorenz curve, the Gini coefficient can be derived, which is a single number measuring inequality and ranges from 0 to 1 • Gini coefficient = Area A / Area A + B • Higher number is interpreted as greater inequality Cumulative share of income 100% • If everyone earned the same income, the Gini coefficient would be zero A • As income inequality grows, Area A gets larger while Area B shrinks Gini coefficient = A/(A + B) – Area A = 0 B 0% 0% 100% Cumulative share of people – Gini coefficient increases © 2014 by McGraw‐Hill Education 13 Active Learning: Calculating the Gini Coefficient Use the Gini coefficient equation to fill in the blanks in the table below Situation Area A Area B 5000 1500 Gini Coeff. 0.3 500 0.9 â2014byMcGrawHillEducation 14 InequalityintheU.S.andaroundtheworld MostcountrieshaveaGini coefficientranging between0.25to0.60 Gini coefficientsaroundtheworld ã Inequalitybetweencountrieshasdecreased ã Inequalitywithincountrieshasmostlyincreased â2014byMcGrawHillEducation 15 InequalityintheU.S.andaroundtheworld Incomedistributionscanbecomparedacrosscountries Incomedistributioncomparison % of total national income United States Sweden Uganda Brazil Top quintile 50.2 37.0 50.7 58.6 Fourth quintile 23.4 22.7 20.0 19.0 Middle quintile 14.6 17.6 13.8 12.4 Second quintile 8.5 14.0 9.64 7.13 Bottom quintile 3.3 9.1 5.84 2.85 Public policy and economic growth can change a country’s income distribution • Income redistribution: Public services and income support to the poor • Skill‐biased technical change: The benefits of economic growth have increasingly been going to the highly‐skilled workers, and low‐skilled laborers lose out © 2014 by McGraw‐Hill Education 16 Inequality versus mobility • Income inequality is often tied to equality of opportunity – If everyone has a fair chance to get ahead, then the income distribution matters less • Income mobility is a way to consider the relationship between inequality and opportunities, or the ability to improve one’s economic circumstances over time Measure of intergenerational mobility 3.5 High mobility 3.0 2.5 Medium mobility 2.0 1.5 Low mobility 1.0 0.5 • A standard measure of income mobility is to compare peoples’ income to their parents’ income • This figure compares the income mobility of the United States to other wealthy countries • Canada is 2.5 times more mobile than the United States United United France Germany Sweden Canada Finland Norway Denmark Kingdom States â2014byMcGrawHillEducation 17 Policiestoreducepovertyandinequality ã Mostgovernmentsenactpoliciesaimedat limitingpovertyandinequality ã Therearethreemaintypesofpublicpolicy approachesrelatedtopovertyandinequality reduction Economic development: Investments that will spur future economic growth Safety nets: Protection against the temporary hard times that can lead to transient poverty Redistribution: Alleviating the effects of poverty or income inequality © 2014 by McGraw‐Hill Education 18 Active Learning: Policies to reduce poverty and inequality Classify the following public policies based on the approach taken to alleviating poverty as economic development, safety nets, or redistribution Transferring land to marginalized native Brazilians owned by white Brazilians A program that gives short‐term income support to war veterans who come home and are looking for work A plan to revitalize the downtown area of Detroit, MI © 2014 by McGraw‐Hill Education 19 The welfare state • Some people suggest that governments have the responsibility to promote the economic well‐ being of their citizens – Sometimes referred to as the welfare state – Create a variety of programs to help guarantee a minimum standard of living for all • There are some important U.S. welfare policies that promote economic development, social insurance, or redistribution goals Progressive taxation: Government charges lower tax rates to those with lower income. Earned Income Tax Credit (EITC) permits poor individuals to owe negative taxes if they work a sufficient amount © 2014 by McGraw‐Hill Education 20 The welfare state Conditional cash transfers: Programs that provide income support only to recipients engaging in certain actions In‐kind transfers: Programs that provide specific goods or services directly to needy individuals or households Socialinsurance:Programsthatprovidehelpfor peopleweatheringtemporarybadperiodsand survivingoldage,disability,orotherlongterm conditions â2014byMcGrawHillEducation 21 Tradeoffsbetweenequityandefficiency ã Welfareprogramscreateinefficiencyanddistort individuals’ choices • Pursuing greater income equity implies accepting some inefficiency due to increased taxation to finance public welfare programs • Welfare programs with a sharp cut‐off eligibility can distort individuals’ behavior – Imagine a program that offers a $5,000 cash transfer forthoseunderthepovertyline.Yourincomeis$500 belowthepovertylineandyouareoffered employmentthatincreasesyourincomeby$3,000.Do youaccepttheemploymentandlosethetransfer? â2014byMcGrawHillEducation 22 Tradeoffsbetweenequityandefficiency ã Meanstested eligibilitytargetsresources based on a recipient’s income and attempts to eliminate sharp eligibility cut‐offs • Some poverty policies can actually improve both equity and efficiency – Improved access to credit markets typically improves efficiency and equity • When designing public policies, policymakers mustunderstandthepotentialfortradeoffs andunintendedconsequences â2014byMcGrawHillEducation 23 Discrimination ã Historically,povertyanddiscriminationhaveoftengone handinhand Discrimination is the practice of making choices by using generalizations based on people’s observable characteristics like race, gender, and age • Making choices based on differences in the average characteristics between two groups, statistical discrimination, can sometimes be rational • Society loses when talented individuals who face discrimination are discouraged from acquiring skills, education,andpositionstheymightotherwiseget ã Statisticaldiscriminationcanberationalforan individualemployer,butthatdoesntnecessarilymake itright,sociallyefficient,orevenlegal â2014byMcGrawHillEducation 24 Discrimination ã It’s difficult to determine how big of an effect discrimination has on people’s economic opportunities and success • Income by various demographic categories can reveal disparities Income by race and gender in the United States Group Male ($) Female ($) Asian 36,267 23,612 White 34,047 20,947 All 32,137 20,831 Black 23,203 19,700 Hispanic 22,233 16,269 • The challenge is distinguishing between what causes poverty and what is correlated with poverty • It is possible that omitted variables are causing the correlation, such as educationalqualifications,workexperience,oroccupationalchoice(social) Itmaybethatdiscriminationistheomittedvariablefactor.Then,incomewould beanoutcomeofthatdiscrimination â2014byMcGrawHillEducation 25 Discrimination ã Undersomeconditions,marketsmayhelptoeliminate discrimination – Sellers that discriminate decrease their pool of potential buyers and may be pushed out of the market by sellers who do not discriminate – If laws decree discrimination, then markets cannot function properly to eliminate it • In response to the preferences of consumers, discrimination is consistent with efficient markets – As long as sellers and buyers agree with and support the discrimination – Sellers may lose customers if they go against the norm and sell to those that are discriminated against – Doesn’t make it morally right or acceptable © 2014 by McGraw‐Hill Education 26 Discrimination • Even though the passage of the Civil Rights Act in 1964 made many forms of discrimination illegal, it couldn’t undo the effects of discrimination that took place in earlier decades • Discrimination can have long‐lasting effects on people and markets, even after the active discrimination itself ends – Policies such as affirmative action attempt to ensure that people of other races gain access to college admissions or hiring decisions © 2014 by McGraw‐Hill Education 27 Summary • Poverty is a lack of material resources • Causes of poverty are not always obvious • An absolute poverty line defines poverty as income below a certain amount • A relative poverty line defines poverty in terms of the income of the rest of the population • The most commonly used international poverty measure is also an absolute poverty line, $1.25 per person per day at purchasing power parity • Income inequality is commonly summarized by income brackets called quintiles © 2014 by McGraw‐Hill Education 28 Summary • The Lorenz curve maps the cumulative percent of the population against the cumulative percent of income those people earn • The Gini coefficient summarizes inequality in a single number and is based on the Lorenz curve • Income mobility is the ability to improve one’s economiccircumstanceovertime ã Thethreemainmethodsofaddressingpoverty areeconomicdevelopment,safetynets,and wealthredistribution â2014byMcGrawHillEducation 29 Summary ã Fourmainpoliciesareusedtoreducepovertyand inequality: progressive taxation, income support, in‐kind transfers, and social insurance • Means‐tested programs define eligibility for benefits based on recipients’ income • Income for adults varies widely by race and gender in the U.S • Determining whether discrimination occurred is oftendifficultduetoomittedvariables ã Undersomeconditions,marketsmayhelpto eliminatediscrimination â2014byMcGrawHillEducation 30 10 ... mustunderstandthepotentialfortradeoffs andunintendedconsequences â2014byMcGrawHillEducation 23 Discrimination • Historically, poverty? ?and? ?discrimination? ?have often gone hand‐in‐hand – Discrimination. .. In response to the preferences of consumers, discrimination? ?is consistent with efficient markets – As long as sellers? ?and? ?buyers agree with? ?and? ?support the discrimination Sellersmaylosecustomersiftheygoagainstthenormand selltothosethatarediscriminatedagainst... Canada Finland Norway Denmark Kingdom States © 2014 by McGraw‐Hill Education 17 Policies to reduce poverty? ?and? ?inequality • Most governments enact policies aimed at limiting poverty? ?and? ?inequality