Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
U.S. Income
Maintenance
System
Last Word
Key Terms
End Show
20-1
20
Income
Inequality
and Poverty
Copyright 2008 The McGraw-Hill Companies
Chapter Objectives
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
U.S. Income
Maintenance
System
Last Word
Key Terms
End Show
20-2
• How Income Inequality in the United
States is Measured and Described
• The Extent and Sources of Income
Inequality
• How Income Inequality Has
Changed Since 1970
• The Economic Arguments For and
Against Income Inequality
• How Poverty is Measured and its
Incidence by Age, Gender, Ethnicity,
and Other Characteristics
• The Major Components of the
Income-Maintenance Program in the
United States
Copyright 2008 The McGraw-Hill Companies
Facts About Income Inequality
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
U.S. Income
Maintenance
System
Last Word
Key Terms
• Average Household Income
$60,258 in 2004 - Among the
Highest in the World
Distribution of U.S. Income by Households, 2004
(1)
Personal
Income Category
(2)
Percentage of All
Households in this Category
Under $10,000
$10,000 - $14,999
$15,000 - $24,999
$25,000 - $34,999
$35,000 - $49,999
$50,000 - $74,999
$75,000 - $99,999
$100,000 and Above
8.7
6.7
12.9
11.9
14.8
18.3
11.0
15.7
100.0
End Show
Source: Bureau of the Census
20-3
Copyright 2008 The McGraw-Hill Companies
Facts About Income Inequality
• Division Into 5 Equal Groups
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
U.S. Income
Maintenance
System
Last Word
Distribution by Quintiles, 2004
(1)
Quintile
(2)
Percentage of
Total Income
(3)
Upper
Income Limit
Lowest 20%
3.4
$18,500
Second 20%
8.7
34,738
Third 20%
14.7
55,331
Fourth 20%
22.2
88,029
Highest 20%
50.1
No Limit
Total
100.0
Source: Bureau of the Census
Income Mobility:
The Time Dimension
Key Terms
End Show
20-4
Copyright 2008 The McGraw-Hill Companies
Facts About Income Inequality
• Lorenz Curve and Gini Ratio
The Lorenz Curve
e
100
(Actual Distribution)
80
Perfect Equality
60
d
A
c
20
Complete
Inequality
b
0
a
20
40
60
80
Percentage of Households
Gini Ratio =
20-5
B
40
Key Terms
End Show
W 20.1
Lorenz Curve
Percentage of Income
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
U.S. Income
Maintenance
System
Last Word
Copyright 2008 The McGraw-Hill Companies
f
100
Area A
Area A + Area B
G 20.1
Facts About Income Inequality
100
80
Percentage of Income
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
U.S. Income
Maintenance
System
Last Word
• Effect of Government
Redistribution
60
Lorenz Curve
After Taxes and
Transfers
40
20
0
Lorenz Curve
Before Taxes and
Transfers
20
40
60
80
100
Percentage of Households
Key Terms
Impact of Government Taxes and Transfers
End Show
20-6
Copyright 2008 The McGraw-Hill Companies
Facts About Income Inequality
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
U.S. Income
Maintenance
System
Last Word
Key Terms
End Show
• Effect of Government
Redistribution
• Noncash Transfers
• Percentage of Total
Income Received, 2003
(1)
Quintile
(2)
Before Taxes
And Transfers
(3)
After Taxes
And Transfers
Lowest 20%
.8
4.5
Second 20%
7.2
10.7
Third 20%
14.8
16.4
Fourth 20%
24.0
24.0
Highest 20%
53.1
44.4
Source: Bureau of the Census
20-7
Copyright 2008 The McGraw-Hill Companies
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
U.S. Income
Maintenance
System
Last Word
Key Terms
End Show
20-8
Causes of Income Inequality
• Ability
• Education and Training
• Discrimination
• Preferences and Risks
• Unequal Distribution of
Wealth
• Market Power
• Luck, Connections, and
Misfortune
Copyright 2008 The McGraw-Hill Companies
Causes of Income Inequality
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
U.S. Income
Maintenance
System
Last Word
Key Terms
• 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
End Show
20-9
Copyright 2008 The McGraw-Hill Companies
Causes of Income Inequality
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
U.S. Income
Maintenance
System
Last Word
Key Terms
Percentage of Total Income Received
by the Top One-Tenth of Income
Receivers, Selected Nations
GLOBAL PERSPECTIVE
0
Guatemala
Brazil
South Africa
Mexico
United States
Italy
Sweden
Germany
10
20
30
40
50
48.3
46.9
44.7
43.1
29.9
26.8
22.2
22.1
End Show
Source: World Bank, World Development Indicators, 2005
20-10
Copyright 2008 The McGraw-Hill Companies
Equality Versus Efficiency
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
U.S. Income
Maintenance
System
Last Word
Key Terms
• The Case for Equality:
Maximizing Total Utility
• The Case for Inequality:
Incentives and
Efficiency
• The Equality-Efficiency
Tradeoff
End Show
20-11
Copyright 2008 The McGraw-Hill Companies
Equality Versus Efficiency
The Utility-Maximizing Distribution of Income
(Entire Blue Area)
Utility Loss
(Entire Red Area)
b’
a’
b
MUA
$2500 $5000
Income
End Show
20-12
Marginal Utility
Utility Gain
a
0
Key Terms
Brooks’ Marginal
Utility From Income
Anderson’s Marginal
Utility From Income
Marginal Utility
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
U.S. Income
Maintenance
System
Last Word
Copyright 2008 The McGraw-Hill Companies
MUB
0
$5000 $7500
Income
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
U.S. Income
Maintenance
System
Last Word
Key Terms
The Economics of Poverty
• Definition of Poverty
–Single in 2004 was $9,645
–Family of 4 was $19,307
–Family of 6 was $25,785
–37 Million Americans
–Poverty Rate 12.7%
–Disproportionate Sharing
• Incidence of Poverty
End Show
20-13
Copyright 2008 The McGraw-Hill Companies
The Economics of Poverty
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
U.S. Income
Maintenance
System
Last Word
Key Terms
End Show
20-14
Poverty Rates Among Selected
Population Groups,2004
0
Female-Householders
African-Americans
Hispanics
Foreign-Born (Not Citizens)
Children Under 18
Women
Total Population
Men
Whites
Asian
Persons 65 or Older
Married-Couple Families
Full-Time Workers
Copyright 2008 The McGraw-Hill Companies
10
20
30
28.4
24.7
21.9
21.4
17.8
13.9
12.7
11.5
10.8
9.8
9.8
5.5
2.8
The Economics of Poverty
• Poverty Trends
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
U.S. Income
Maintenance
System
Last Word
–Fell Between 1959 and 1969
–Stable in 1970s
–Rose in the Early 1980s
–Up and Down Late 1990s
and 2000s
–Rose with Recession 2001 2004
• Measurement Issues
Key Terms
End Show
20-15
Copyright 2008 The McGraw-Hill Companies
U.S. Income-Maintenance System
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
U.S. Income
Maintenance
System
Last Word
Key Terms
End Show
20-16
• Entitlement Programs
–Social Insurance Programs
–Social Security
–Medicare
–Unemployment
Compensation
–Public Assistance “Welfare”
–Supplemental Security
Income (SSI) Program
–Temporary Assistance for
Needy Families (TANF)
–Food-Stamp Program
Copyright 2008 The McGraw-Hill Companies
U.S. Income-Maintenance System
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
U.S. Income
Maintenance
System
Last Word
Key Terms
End Show
20-17
• Medicaid
• Earned-Income Tax
Credit (EITC)
• Welfare: Goals and
Conflicts
• Common Features
• Conflicts Between
Goals
• Welfare Reform
Copyright 2008 The McGraw-Hill Companies
W 20.2
U.S. Family Wealth and Its
Distribution
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
U.S. Income
Maintenance
System
Last Word
Key Terms
• Family Wealth Rose Rapidly
and Became More Unequal
Between 1995 and 2004
Median and Average Family
Wealth, 1995-2004 In 2004 Dollars
Year
Median
Average
1995
1998
2001
2004
$70,800
83,100
91,700
93,100
$260,800
327,500
421,500
448,200
End Show
20-18
Copyright 2008 The McGraw-Hill Companies
U.S. Family Wealth and Its
Distribution
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
U.S. Income
Maintenance
System
Last Word
Key Terms
End Show
20-19
• Family Wealth Rose Rapidly
and Became More Unequal
Between 1995 and 2004
Percentage of Total Family Wealth
Held by Different Percentile
Groups, 1995-2004
Year
Percentile of Wealth Distribution
Bottom 90%
Bottom 10%
Top 1%
1995
1998
2001
2004
Copyright 2008 The McGraw-Hill Companies
32.2%
31.4
30.2
30.5
67.8%
68.6
69.8
30.5
34.6%
33.9
32.7
33.4
Key Terms
Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
U.S. Income
Maintenance
System
Last Word
Key Terms
•
•
•
•
•
•
•
•
•
•
•
income inequality
Lorenz curve
Gini ratio
income mobility
noncash transfers
equality-efficiency
tradeoff
poverty rate
entitlement
programs
social insurance
programs
Social Security
Medicare
End Show
20-20
Copyright 2008 The McGraw-Hill Companies
• unemployment
compensation
• public assistance
programs
• Supplemental
Security Income
(SSI)
• Temporary
Assistance for
Needy Families
(TANF)
• food-stamp
program
• Medicaid
• earned-income tax
credit (EITC)
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Facts About
Income
Inequality
Causes of
Income
Inequality
Equality
Versus
Efficiency
The
Economics
of Poverty
U.S. Income
Maintenance
System
Last Word
The
Economics
of Health
Care
Key Terms
End Show
20-21
Copyright 2008 The McGraw-Hill Companies