Chapter 21
Income Inequality,
Poverty, and
Discrimination
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Facts About Income Inequality
• Average household income
• $69,821 in 2011
• Among the highest in the world
• Distribution by quintiles
• Income mobility
• People change quintiles
• Government redistribution
• Taxes and transfers
21-2
LO1
Facts About Income Inequality
(1)
Personal
Income Category
(2)
Percentage of All
Households in this Category
Under $15,000
13.5
$15,000-$24,999
11.5
$25,000-$34,999
10.9
$35,000-$49,999
13.9
$50,000-$74,999
17.6
$75,000-$99,999
11.5
$100,000 and above
21.0
100.0
LO1
Source: Bureau of the Census, www.census.gov. Numbers do not add up
to 100 percent due to rounding.
21-3
Facts About Income Inequality
Distribution by Quintiles, 2011
(1)
Quintile
(2)
Percentage of
Total Income
(3)
Upper
Income Limit
Lowest 20%
3.2
$20,262
Second 20%
8.4
38,520
Third 20%
14.3
62,434
Fourth 20%
23.0
101,582
Highest 20%
51.1
No Limit
Total
100.0
Source: Bureau of the Census, www.census.gov
21-4
LO1
Facts About Income Inequality
Lorenz curve and Gini ratio
e
100
Lorenz Curve
(Actual Distribution)
Percentage of Income
80
Perfect Equality
60
d
A
B
40
c
20
Complete
Inequality
b
0
a
20
40
60
80
Percentage of Households
Gini Ratio =
LO1
f
100
Area A
Area A + Area B
21-5
Facts About Income Inequality
Impact of government taxes and transfers
100
Percentage of Income
80
Lorenz Curve
60
After Taxes and
Transfers
40
20
Lorenz Curve
Before Taxes and
Transfers
0
20
40
60
80
100
Percentage of Households
21-6
LO1
Causes of Income Inequality
•
•
•
•
•
•
•
Ability
Education and training
Discrimination
Preferences and risks
Unequal distribution of wealth
Market power
Luck, connections, and misfortune
21-7
LO2
Income Inequality Over Time
21-8
LO3
Income Inequality Over Time
• Rising income inequality since 1975
• Causes of growing inequality
• Greater demand for highly skilled workers
• Demographic changes
• International trade, immigration, and
decline in unionism
21-9
LO3
Income Inequality Over Time
21-10
LO3
Equality Versus Efficiency
• The case for equality
• Maximizing total utility
• The case for inequality
• Incentives and efficiency
• The equality-efficiency trade-off
21-11
LO4
Equality Versus Efficiency
The Utility-Maximizing Distribution of Income
Brooks’ Marginal
Utility From Income
Marginal Utility
Marginal Utility
Anderson’s Marginal
Utility From Income
Utility Gain
(Entire Blue Area)
Utility Loss
(Entire Red Area)
a
b’
a’
b
MUA
0
$2500 $5000
Income
MUB
0
$5000 $7500
Income
21-12
LO4
The Economics of Poverty
• Definition of poverty in 2011
• Single person < $11,702
• Family of 4 < $22,891
• Family of 6 < $29,494
• 46.2 million Americans
• Poverty rate 15%
21-13
LO5
Incidence of Poverty
21-14
LO5
Poverty Trends
• Poverty rate trends
• Significant decline 1959-1969
• Stable in 11-13% range since
• Rises with recession
• Measurement issues
• Arbitrary income threshold
• Consumption vs. income
21-15
LO5
Poverty Trends
21-16
LO5
The U.S. Income-Maintenance System
• Entitlement programs
• All those eligible receive aid
• Social insurance programs
• Social security and Medicare
• Unemployment compensation
• Public assistance programs
• Welfare
21-17
LO6
Public Assistance Programs
• Supplemental Security Income (SSI)
• Temporary Assistance for Needy Families
(TANF)
• Supplemental Nutrition Assistance Program
(SNAP)
• Medicaid
• Earned Income Tax Credit
21-18
LO6
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
21-19
LO7
Taste for Discrimination Model
African-American Wage Rate
(Dollars)
Less
Discrimination
S
More
Discrimination
$9
8
6
D3
D1
D2
0
12
16 18
African-American Employment (Millions)
LO7
21-20
Discrimination
• Statistical discrimination
• Judged on average group characteristics
• Labor market example
• Profitable, undesirable, but not malicious
21-21
LO7
Discrimination
• Occupational segregation
• The crowding model
• Crowd certain groups into less desirable
•
occupations
• Effects of crowding
• Eliminating occupational segregation
Cost to Society as well as to individuals
21-22
LO7
Occupational Segregation
Crowding women into one occupation (Z)…
Wage Rate
Occupation X
Occupation Y
Occupation Z
M
B
M
B
B
W
0
34
Quantity of Labor
(Millions)
Dz
Dy
Dx
0
34
Quantity of Labor
(Millions)
0
4 6
Quantity of Labor
(Millions)
results in men enjoying higher wages in the
other occupations (X and Y).
21-23
LO7
U.S. Family Wealth
• Family wealth rose rapidly between 1995 and 2010
Median and Average Family Wealth,
Survey Years 1995-2010
(In 2010 Dollars)
Year
1995
1998
2001
2004
2007
2010
Median
$84,000
98,100
106,100
107,200
126,400
77,300
Average*
$307,900
386,700
487,000
517,100
584,600
498,800
*The average greatly exceeds the medians because the averages are boosted by the
multibillion dollar wealth of a relatively few families.
21-24
U.S. Family Wealth
• Family wealth became more unequal between 1995 and 2010
Percentage of Total Family Wealth Held
by Different Groups,
Survey Years 1995-2010
Year
1995
1998
2001
2004
2007
2010
Percentage of Total Wealth by Group
Bottom 90%
Top 10%
Top 1%
32.2%
31.4
30.2
30.4
28.5
23.3
67.8%
68.6
69.8
69.5
71.5
76.7
34.6%
33.9
32.7
33.4
33.8
35.4
21-25