CHAPTER 19: Inequity and Poverty
19.1 ECONOMIC INEQUALITY
We measure economic inequality by looking at the distributions of ___________ and _________.
A household’s ___________ is the amount that it receives in a given period.
A household’s _________ is the value of the things that it owns at a point in time.
The distributions of income and wealth in the United States in 2004.
Lorenz Curves
A Lorenz curve is a curve that graphs the cumulative ____________ of ________ (or wealth) against the
cumulative _____________ of ____________.
The Lorenz curves for the United States in 2004
(They are based on the tables you’ve just seen)
The cumulative percentages of income and wealth
are graphed against the cumulative percentage of
households.
1. If each ____ percent of households received
____ percent of total income, there would be
no rich and poor—there would be _________
as shown by the Line of equality.
2. The distribution of income shows that the
poorest _____ percent of households received
_____ percent of total income, and the richest
_____ percent received _____ percent.
3. The distribution of wealth shows that the
poorest _____ percent of households owned
_____ percent of total wealth, and the richest
_____ percent owned _____ percent.
The ___________ the Lorenz curve is from the
Line of equality, the ___________ is the
____________.
The distribution of __________ is much more
___________ than the distribution of _________.
Inequality over Time
U.S. income and wealth have become more __________ over the past few decades.
The highest incomes have ____________ much _________ than the ________ incomes.
The gap between rich and poor has ___________.
Distribution of income has changed
The average income of the lowest 20 percent group
__________ from $7,700 to $10,300—an increase
of 34 percent.
The average income of three middle groups also
__________ by 34 percent.
The average income of highest 20 percent _________
by 77 percent.
Economic Mobility
Economic mobility is the movement of a family ___ or ______ the income ladder and through the income quintiles
(20 percent groups).
If there were no economic mobility, a family would be stuck at a given point in the income distribution—
persistently ______ to persistently ______.
How much economic mobility has there been?
The percentage of families that moved by one
quintile or more over a ten-year period
The figure shows quite a lot of economic mobility.
About 30 percent of families move up a quintile or
more in a decade;
Slightly smaller percentage move down by a quintile
or more;
Between 35 and 40 percent remain in the same
quintile.
Who are the Rich and the Poor?
The lowest-income household in the United States today is likely to be a black woman over 65 years of age who
lives alone somewhere in the South and has fewer than nine years of elementary school education.
The highest-income household in the United States today is likely to be a college-educated white married couple
between 45 and 54 years of age living together with two children somewhere in the Northeast or the West.
The median income in 2004 was $44,389
_____________ is the single biggest factor
affecting household income distribution.
Size of ___________, _________ status, and
_____ of householder are also important.
______ and ________ are the least important.
Poverty
Poverty is a state in which a household’s ________ is ____ _____ to be able to buy the quantities of food, shelter,
and clothing that are deemed necessary.
In 2004, the poverty level for a ______-person household was an income of $________.
In that year, _____ million or _____ percent of Americans lived below the poverty level.
The changing poverty rate in the United States
The white poverty rate ______ during the 1960s
and has remained constant since then.
The Hispanic poverty rate __________ during
the 1980s before __________ during the 1990s.
The black poverty rate has _________ in two
waves: the late 1960s and the late 1990s.
Poverty Duration
Another measure of poverty is duration.
Duration of poverty is an important indicator of the hardship poverty brings.
The duration of poverty in the United States from 1996 to 1999.
More than _____ percent of poverty last for
between ____ and ____ months.
But almost ______ percent of poverty lasts for
more than _____ months.
These families experience ________ poverty.
19.2 HOW INEQUALITY AND POVERTY ARISE
Economic inequality and poverty arise from five key factors
Human capital
Discrimination
Financial and physical capital
Entrepreneurial ability
Personal and family characteristics
Human Capital: High-skilled workers have a higher ________ of __________ ___________ than low-skilled
workers.
The demand for high-skilled and low-skilled labor
High-skilled labor has a higher VMP than low-skilled labor
and a greater ___________.
The demand curve for high-skilled labor, DH, lies ________
the demand curve for low-skilled labor, DL, by the VMP of
skill.
The Supply of High-Skilled and Low-Skilled Labor
Skills are ________ to acquire, and a worker pays the cost of acquiring a skill before ____________ from a
higher wage.
High-skilled labor bears the _______ of acquiring skill.
The supply curve of high-skilled labor, SH, lies ________ the
supply curve of low-skilled labor, SL, by the compensation
for the cost of acquiring skill.
Wage Rates of High-Skilled and Low-Skilled Labor
The combined effects of _______ on the __________ for and supply of labor generate a ________ wage for
high-skilled labor than for low-skilled labor.
The demand for low-skilled labor, DL, and the supply of
low-skilled labor, SL, determine the _______ ______ of
low-skilled labor—in this example at $10 an hour.
The demand for high-skilled labor, DH, and the supply of
high-skilled labor, SH, determine the _______ ______ of
high-skilled labor—in this example at $20 an hour.
Discrimination
Human capital differences explain much of the _________ ____________ that exists.
Economists are not sure whether and by how much ________________ adds to income inequality.
One line of argument is that _______________ prevents discrimination.
But _______ and ______ income differences do persist.
Financial and Physical Capital
People with high incomes are usually those who own large amounts of _________ capital and _________ capital.
They receive ___________ in form of interest, dividends, and capital gains.
Families with a lot of capital tend to become even ________ wealthy because
- They ____________ wealth to their children.
- Rich people _________ rich people (on average).
Saving and wealth accumulation is not inevitably a source of __________.
When a family saves to redistribute an uneven income over the life cycle, it enjoys more _______ consumption.
If a lucky generation that has a high income saves and makes a bequest to an unlucky generation, this saving
__________ economic inequality.
Entrepreneurial Ability
Some people become extremely ______ through a combination of hard work, good luck, and outstanding
entrepreneurial ability.
But others who borrow to create a business, work hard, and have bad luck become extremely ______.
Personal Characteristics
Personal and family characteristics play a crucial role, for good or evil, in influencing economic well-being.
19.3 INCOME REDISTRIBUTION
How Government Redistributes Income
Three main ways in which governments in the United States redistribute income are:
Income taxes, Income maintenance programs, and Subsidized services
Income Taxes
Income taxes may be progressive, regressive, or proportional.
A progressive tax: One that taxes income at an average rate that ____________ with the level of income.
A regressive tax: One that taxes income at an average rate that ____________ with the level of income.
A proportional tax: One that taxes income at a ___________ rate, regardless of income.
Income Maintenance Programs
Three main types of program are
Social Security programs, Unemployment compensation, and Welfare programs
Social Security Programs: OASDHI or Old age, Survivors, Disability, and Health Insurance Medicare, which
provides hospital and health insurance for the _________ and __________.
Unemployment Compensation: To provide an _________ to ____________ workers.
A _____ is paid based on the income of each covered worker.
Each worker receives a benefit when he or she becomes ____________.
Welfare Programs
1. Supplementary Security Income (SSI), designed to help the neediest _______, ________, and ______ people.
2. Temporary Assistance for Needy Families (TANF) program, designed to help households that have
inadequate ________.
3. Food Stamp program, designed to help the poorest households obtain a basic _____.
4. ___________, designed to cover the costs of medical care for households receiving help under the _____ and
_______ programs.
Subsidized Services
Services provided by the government at prices far _______ the cost of production.
The most important of these are Education and Health care
The Scale of Income Redistribution
Market income is the income that a household earns in factor markets with no _____________.
Money income is market income plus money benefits paid by the ____________.
We can measure the scale of income redistribution by calculating the percentage of market income paid in ______
minus the percentage received in ___________ at each income level.
Income redistribution
In part (a), the Lorenz curve for the distribution of
income _______ taxes and benefits is _________
to the line of equality than the __________ income
distribution and the ________ income distribution.
In part (b), the three lowest income groups ______
and the two highest income groups _____.
Why We Redistribute Income
Two approaches:
Normative approach: Discusses why we ________ compel everyone to help the poor and looks for principles to
guide in the ___________ scale of redistribution.
Positive approach: Seeks reasons why we ____ compel everyone to help the poor and tries to explain the actual
scale of redistribution.
Normative Theories of Income Redistribution
Utilitarianism points to the ideal distribution being one of ________.
But __________ is also desirable.
Greater equality can be achieved only at the cost of ____________—the big tradeoff.
John Rawls proposed the principle that income should be redistributed to the point at which the poorest person’s
share is ____________.
Libertarian philosophers, such as Robert Nozick, say that _____ _____________ is _________ because it violates
the sanctity of private property and voluntary exchange.
Modern political parties stand in the center of these ___________—some favor a bit _______ redistribution than
others, but the major parties are basically happy with the current scale of redistribution.
Positive Theories of Income Redistribution
There is no good __________ theory, but economists have a promising idea called the median voter theory.
Median voter theory is a theory that government pursues policies that make the _________ voter as well off as
possible.
In the majority voting system, the voter whose views carry most weight is the one in the _________
—the median voter.
Political parties will deliver the scale of redistribution that the _________ voter _________.
The Major Welfare Challenge
The poorest people in the United States are young women who have not completed high school, have a child
(or children), live without a partner, and are more likely to be black or Hispanic than white.
These young women and their children present the major welfare challenge:
- The long-term solution involves ___________ and ______ training.
- The short-term solution is _________.
Welfare must be designed to strengthen the incentive to pursue the long-term solution while giving support in the
short term.
The Current Approach: TANF
TANF is a ________ ________ paid to the states to administer payments to individuals.
An adult member of a household receiving assistance must work or perform community service.
Assistance is limited to ____ years.
Some economists suggest a negative income tax.
Negative Income Tax
A negative income tax is a tax and redistribution scheme that provides every household with a guaranteed
_____________ __________ income and taxes all earned income above the guaranteed minimum at a fixed
rate.
A negative income tax does not remove the __________ of the tax but it does improve the incentives to work
and save at all levels of income.