1 of 34

Income Inequality and Poverty

1

© 2011 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.

PowerPoint Slides prepared by:

Andreea CHIRITESCU

Eastern Illinois University

2 of 34

The Measurement of Inequality

  • Questions of measurement:
    • How much inequality is there in our society?
    • How often do people move among income classes?

2

© 2011 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.

3 of 34

U.S. Income Inequality

  • Distribution of income
    • Rank all families by income and divide them into five equal-sized groups
      • Bottom fifth: 4% of all income
      • Top fifth: 47.8% of all income (used to be!)

3

© 2011 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.

4 of 34

Table 1

4

© 2011 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.

The Distribution of Income in the United States: 2008

5 of 34

U.S. Income Inequality

  • Trends in income distribution
    • 1935 -1970 : more equal distribution
    • 1970 - : more unequal distribution
  • Causes:
    • Increase in international trade with low-wage countries
    • Changes in technology

5

© 2011 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.

6 of 34

Table 2

6

© 2011 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 Inequality in the United States

This table shows the percentage of total before-tax income received by families in each fifth of the income distribution and by those families in the top 5 percent.

7 of 34

Figure 1

7

© 2011 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.

Within Country Inequality around the World

This figure shows a measure of inequality: the income (or expenditure) that goes to the richest 10 percent of the population divided by the income (or expenditure) that goes to the poorest 10 percent. Among these nations, Japan and Germany have the most equal distribution of economic well-being, while South Africa and Brazil have the least equal.

8 of 34

The Poverty Rate

  • Poverty rate
    • Share of the population whose family income falls below the poverty line
  • Poverty line
    • An absolute income level, set by the government for each family size
    • Families below it are counted as poor

8

© 2011 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.

9 of 34

Figure 2

9

© 2011 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.

The Poverty Rate

The poverty rate shows the percentage of the population with incomes below an absolute level called the poverty line.

10 of 34

World Income Inequality

10

© 2011 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.

    • Global inequality ↓
      • Between-country inequality ↓
      • Within-country inequality ↑
    • Reason: China, India, and others converged rapidly

toward OECD incomes

11 of 34

World Income Inequality

11

© 2011 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.

12 of 34

Table 3

12

© 2011 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.

Who Is Poor?

This table shows that the poverty rate varies greatly among different groups within the population.

13 of 34

The Poverty Rate

  • Poverty and family composition
    • Families headed by a female adult and without a spouse present
      • Five times as likely to live in poverty as a family headed by a married couple

13

© 2011 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.

14 of 34

Problems in Measuring Inequality

  • In-kind transfers
    • Transfers to the poor in the form of goods and services rather than cash
  • Life cycle
    • Regular pattern of income variation over a person’s life
  • Permanent income
    • A person’s normal income

14

© 2011 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.

15 of 34

Alternative measures of inequality

  • Account for progressive taxes
    • Richest fifth
      • About 14 times as much after-tax income as poorest fifth
  • Consumption
    • Richest fifth
      • 3.9 times as much as the consumption of the poorest fifth

15

© 2011 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.

16 of 34

Economic Mobility

  • Economic mobility
    • Movement of people among income classes

16

© 2011 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.

17 of 34

Economic Mobility

  • Persistence of economic success from generation to generation
    • Above-average income carries over from parents to children
  • Millionaires
    • Four of five millionaires made their money on their own
    • One in five millionaires inherited their fortunes

17

© 2011 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.

18 of 34

Political Philosophy

  • What should the government do about economic inequality?
  • Political philosophies of redistributing income
    • Utilitarianism
    • Liberalism
    • Libertarianism

18

© 2011 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.

19 of 34

Utilitarianism

  • Utilitarianism
    • Political philosophy
    • The government should choose policies to maximize the total utility of everyone in society
  • Utility
    • Measure of happiness or satisfaction

​

19

© 2011 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.

20 of 34

Utilitarianism

  • Utilitarian case for redistributing income
    • Rests on diminishing marginal utility
      • An extra dollar of income gives more utility to a poor person than to a rich person
    • So redistributing income from rich to poor raises total utility

20

© 2011 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.

21 of 34

Liberalism

  • Liberalism
    • Political philosophy
    • The government should choose policies deemed just
    • Approach: Choose fair rules without knowing whether you will be rich or poor.
    • Focus
      • Individual rights and justice

21

© 2011 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.

22 of 34

Liberalism

  • Liberalism
    • Core Principle
      • Protecting personal freedoms and justice
    • Role of Government
      • Active in ensuring basic rights and freedoms

22

© 2011 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.

23 of 34

  • Libertarianism
    • Focus
      • Individual liberty and free markets
    • Core Principle
      • Minimal government, freedom of choice
    • View on Inequality
      • Inequalities are acceptable if voluntary
    • Role of Government
      • The government should not redistribute income

23

© 2011 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.

24 of 34

  • Liberalism
  • Inequality: Acceptable if the worst-off benefit
  • Government: Redistribution to protect the least advantaged
  • Libertarianism
  • Inequality: Acceptable if the process is just
  • Government: Minimal intervention and redistribution

24

© 2011 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.

25 of 34

  • Maximin criterion
    • Focus
      • Protecting the worst-off group
    • Core Principle
      • Maximizing the welfare of the least advantaged
    • View on Inequality
      • Intolerant of extreme inequalities
    • Role of Government
      • Supports redistributive policies

25

© 2011 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.

26 of 34

  • Egalitarian
    • Focus
      • Equality of outcomes/opportunities
    • View on Inequality
      • Improving the well-being of the worst-off, even at some cost to economic efficiency.
    • Role of Government
      • Advocates for significant intervention

26

© 2011 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.

27 of 34

Policies to Reduce Poverty

  • Poverty
    • Associated with various economic and social ills
      • Homelessness, drug dependence, health problems, teenage pregnancy, illiteracy, unemployment, low educational attainment, more likely to commit crimes, more likely to be victims of crimes

27

© 2011 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.

28 of 34

Policies to Reduce Poverty

  • Policies to reduce number of people living in poverty
    • Minimum-wage laws
    • Welfare
    • Negative income tax
    • In-kind transfers

28

© 2011 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.

29 of 34

Policies to Reduce Poverty

  • Minimum-wage laws
    • Workers who remain employed
      • Benefit from higher wage
    • Higher unemployment
      • Workers who might have been employed at a lower wage - worse off
    • The magnitude of these effects
      • Elasticity of demand

​

29

© 2011 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.

30 of 34

Policies to Reduce Poverty

  • Welfare
    • Government programs that supplement the incomes of the needy
      • To qualify: Low income and some additional “need”

30

© 2011 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.

31 of 34

Policies to Reduce Poverty

  • Criticism of welfare programs
    • Create incentives for people to become “needy”
      • May encourage families to break up
      • May encourage illegitimate births
    • Exacerbate the very problems they are supposed to cure

​

31

© 2011 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.

32 of 34

Policies to Reduce Poverty

  • Negative income tax
    • Collects revenue from high-income households and gives subsidies to low-income households
    • Poor families – receive financial assistance without having to demonstrate need
    • Criticism: it subsidizes not only the unfortunate but also the simply lazy

32

© 2011 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.

33 of 34

Policies to Reduce Poverty

  • In-kind transfers
    • Provide poor people directly with some of the goods and services they need to raise their living standards

33

© 2011 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.

34 of 34

Policies to Reduce Poverty

  • Antipoverty programs and work incentives
    • Many policies aimed at helping the poor have unintended effects
      • Discourage the poor from escaping poverty on their own
      • Very high effective marginal tax rates
      • Discourage families from working

​

34

© 2011 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.