Case Econ08 Ppt 16

© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

Prepared by:

Fernando & Yvonn Quijano

16Chapter

Income Distributionand Poverty

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2 of 38© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

Chapter Outline

16Income Distributionand Poverty

The Utility Possibilities Frontier

The Sources of Household IncomeWages and SalariesIncome from PropertyIncome from the Government: Transfer Payments

The Distribution of IncomeIncome Inequality in the United StatesPovertyThe Distribution of Wealth

The Redistribution DebateArguments against RedistributionArguments in Favor of Redistribution

Redistribution Programs and PoliciesFinancing Redistribution Programs: TaxesExpenditure ProgramsHow Effective Are Antipoverty Programs?

Government or the Market? A Review

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INCOME DISTRIBUTION AND POVERTY

equity Fairness.

Why do some people get more than others? What are the sources of inequality? Should the government change the distribution generated by the market?

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THE UTILITY POSSIBILITIES FRONTIER

utility possibilities frontier A graphicrepresentation of a two-person world that shows all points at which A’s utility can beincreased only if B’s utility is decreased.

FIGURE 16.1 Utility Possibilities Frontier

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THE SOURCES OF HOUSEHOLD INCOME

human capital The stock of knowledge, skills, and talents that people possess; it can be inborn or acquired through education and training.

Households derive their incomes from three basic sources: (1) from wages or salaries received in exchange for labor; (2) from property—that is, capital, land, and so forth; and (3) from government.

WAGES AND SALARIES

Required Skills, Human Capital, and Working Conditions

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compensating differentials Differences inwages that result from differences in working conditions. Risky jobs usually payhigher wages; highly desirable jobs usually pay lower wages.

According to experts, the Alaskan fishing industry faces the most dangerous working conditions in the country. For this reason, Alaskan fishermen are paid compensating differentials that raise their average wage high above the average wage of the U.S. general population.

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Multiple Household Incomes

Another source of wage inequality among households lies in the fact that many households have more than one earner in the labor force. Second, and even third, incomes are becoming more the rule than the exception for U.S. families.

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The Minimum Wage Controversy

minimum wage The lowest wage that firms are permitted to pay workers.

Many fast-food restaurants pay their employees minimum wage. In some locations, however, restaurantsfind that they must pay aboveminimum wage to attract and retain staff.

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FIGURE 16.2 Effect of Minimum Wage Legislation

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Unemployment

Unemployment hurts primarily those who are laid off, and thus its costs are narrowly distributed. For some workers, the costs of unemployment are lowered by unemployment compensation benefits paid out of a fund accumulated with receipts from a tax on payrolls.

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INCOME FROM PROPERTY

property income Income from the ownership of real property and financial holdings. It takes the form of profits, interest, dividends, and rents.

The amount of property income that a household earns depends on (1) how much property it owns and (2) what kinds of assets it owns. Such income generally takes the form of profits, interest, dividends, and rents.

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INCOME FROM THE GOVERNMENT: TRANSFER PAYMENTS

transfer payments Payments by government to people who do not supply goods or services in exchange.

Transfer programs are by and large designed to provide income to those in need. Theyare part of the government’s attempts to offset some of the problems of inequality andpoverty.

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THE DISTRIBUTION OF INCOME

economic income The amount of money a household can spend during a given periodwithout increasing or decreasing its net assets. Wages, salaries, dividends, interest income, transfer payments, rents, and soforth are sources of economic income.

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INCOME INEQUALITY IN THE UNITED STATES

TABLE 16.1 Distribution of Total Income and Components in the United States, 2000 (Percentages)

HOUSEHOLDSTOTAL

INCOMELABORINCOME

PROPERTY INCOME

TRANSFER INCOME

Bottom fifth 2.7 1.7 0.7 19.2

Second fifth 7.2 6.3 4.2 25.8

Third fifth 12.6 12.7 9.2 23.0

Fourth fifth 21.3 23.6 15.1 17.0

Top fifth 56.7 55.6 73.2 14.8

Top 1 percent 14.8 10.9 31.6 1.2

Source: Julie-Anne Cronin, US Department of the Treasury, OTA Paper 85, pg 19.

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Changes in the Distribution of Income

TABLE 16.2 Distribution of Money Income of U.S. Families by Quintiles, 1947–2000 (Percentages)

1947 1960 1972 1980 1984 1994 1997 2000

Bottom fifth 5.0 4.8 5.4 5.2 4.7 4.2 4.2 4.2

Second fifth 11.8 12.2 11.9 11.5 11.0 10.0 9.9 9.7

Third fifth 17.0 17.8 17.5 17.5 17.0 15.7 15.7 15.5

Fourth fifth 23.1 24.0 23.9 24.3 24.4 23.3 23.0 23.0

Top fifth 43.0 41.3 41.4 41.5 42.9 46.9 47.2 47.6

Top 5% 17.2 15.9 15.9 15.3 16.0 20.1 20.7 20.8

Source: Statistical Abstract of the United States, various editions; Department of Commerce, HHES Division.

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money income The measure of income used by the Census Bureau. Because it excludes noncash transfer payments andcapital gains income, it is less inclusive than “economic income.”

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Lorenz curve A widely used graph of the distribution of income, with cumulativepercentage of families plotted along the horizontal axis and cumulative percentage of income plotted along the vertical axis.

The Lorenz Curve and the Gini Coefficient

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FIGURE 16.3 Lorenz Curve for the United States, 2002

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Gini coefficient A commonly used measure of inequality of income derived from a Lorenz curve. It can range from0 to a maximum of 1.

If income is equally distributed, there is no shaded area (because the Lorenz curve andthe 45-degree line are the same), and the Gini coefficient is zero. The Lorenz curves fordistributions with more inequality are farther down to the right, their shaded areas arelarger, and their Gini coefficients are higher. The maximum Gini coefficient is 1. As theLorenz curve shifts down to the right, the shaded area becomes a larger portion of thetotal triangular area below 0 A. If one family earned all the income (with no one elsereceiving anything), the shaded area and the triangle would be the same, and the ratiowould equal 1.

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Differences among African-American Households, White Households, and Single-Person Households

TABLE 16.3 Distribution of Money Income of Households, 2002 (Percentages)

ALLHOUSEHOLDS

AFRICAN-AMERICAN

HOUSEHOLDSWHITE

HOUSEHOLDSHISPANIC

HOUSEHOLDSONE-PERSONHOUSEHOLDS

0-15,000 16.1 27.4 14.5 19.1 36.3

15-25,000 13.2 16.4 12.8 17.2 19.8

25-35,000 12.3 14.5 12.0 15.7 13.7

35-50,000 15.1 14.8 15.2 16.4 13.4

50-75,000 18.3 13.9 18.9 16.9 9.7

75,-100,000 11.0 6.7 11.6 7.5 3.7

>100,000 14.1 6.4 15.0 7.2 3.5

Total 100.0 100.0 100.0 100.0 100.0

Note: Totals may not add to 100 due to rounding.Source: Statistical Abstract of the United States, 2002, Tables 665 and 667.

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POVERTY

The Problem of Definition

Although it is difficult to define precisely, the word poverty is one that we all understand intuitively to some degree.

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The Official Poverty Line

poverty line The officially established income level that distinguishes the poor from the nonpoor. It is set at three timesthe cost of the Department of Agriculture’s minimum food budget.

The official poverty line has been set at a figure that is simply three times the cost ofthe Department of Agriculture’s minimum food budget.

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Poverty in the United States Since 1960

TABLE 16.4 Percentage of Persons in Poverty by Demographic Group, 1964–2001

OFFICIALMEASURE

1964

OFFICIALMEASURE

2004

All 19.0 12.7

White 14.9 10.8

African-American 49.6 24.7

Hispanic NA 21.8

Female householder – no husband present 45.9 28.4

Elderly (65+) 28.5 9.8

Children under 18 20.7 17.8

aIncludes food, housing, and medical benefits.Source: Statistical Abstract of the United States, 2002-2005.

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THE DISTRIBUTION OF WEALTH

TABLE 16.5 Percentage of Different Assets Owned by Households, 1998 Survey of Consumer Finances

PERCENTAGE OF OWNERS

COMMON STOCK EXCLUDING PENSIONS

ALL COMMON STOCK

NONEQUITY FINANCIAL

ASSETSHOUSING EQUITY

NET WORTH

Top .5% 41.4 37.0 24.2 10.2 25.6

Top 1% 53.2 47.7 32.0 14.8 34.0

Top 10%t 91.2 86.2 72.2 50.7 68.9

Bottom 80% 1.7 4.1 14.0 29.3 18.5

Source: James Poterba, “Stock Market Wealth and Consumption,” Journal of Economic Perspectives, 14(2), 99 – 118 , Spring 2000.

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THE REDISTRIBUTION DEBATE

ARGUMENTS AGAINST REDISTRIBUTION

Those who argue against government redistribution believe that the market, when left to operate on its own, is fair.

ARGUMENTS IN FAVOR OF REDISTRIBUTION

The argument most often used in favor of redistribution is that a society as wealthy as theUnited States has a moral obligation to provide all its members with the necessities of life.

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Utilitarian Justice

utilitarian justice The idea that “a dollar in the hand of a rich person is worth less than a dollar in the hand of a poor person.” Ifthe marginal utility of income declines with income, transferring income from the rich to the poor will increase total utility.

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Social Contract Theory—Rawlsian Justice

Rawlsian justice A theory of distributional justice that concludes that the social contract emerging from the “original position” would call for an income distribution that would maximize the well-being of the worst-off member of society.

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The Works of Karl Marx

labor theory of value Stated most simply, the theory that the value of a commoditydepends only on the amount of labor required to produce it.

Income Distribution as a Public Good

We turn to government to provide things we want that will not be provided adequately if we act separately—in this case, help for the poor and hungry.

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REDISTRIBUTION PROGRAMS AND POLICIES

FINANCING REDISTRIBUTION PROGRAMS: TAXES

Redistribution always involves those who end up with less and those who end up with more.Because redistributional programs are financed by tax dollars, it is important to know who the donors and recipients are—who pays the taxes and who receives the benefits of those taxes.

All people pay about the same percentage of their income in total taxes.

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TABLE 16.6 Effective Rates of Federal, State, and Local Taxes, 2000 (Taxes as a Percentage of Total Income)

FEDERAL TOTAL

Bottom 20% 5.9 28.1

Second 20 11.7 26.3

Third 20 17.4 29.2

Fourth 20 20.1 32.6

Top 20 24.6 33.9

Top 10 25.7 34.5

Top 5 26.6 34.9

Top 1 29.1 37.0

Source: Julie-Anne Cronin, US Department of the Treasury, OTA Paper 85 and authors’ estimate.

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EXPENDITURE PROGRAMS

Social Security

Social Security system The federal system of social insurance programs. It includes three separate programs that arefinanced through separate trust funds: the Old Age and Survivors Insurance (OASI) program, the Disability Insurance (DI) program, and the Health Insurance (HI, orMedicare) program.

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Public Assistance

public assistance, or welfare Government transfer programs that provide cash benefits to (1) families with dependent children whose incomes and assets fall below a very low level and (2) the very poor regardless of whether or not they have children.

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Supplemental Security Income

The Supplemental Security Income program (SSI) is a federal program that was set up under the Social Security Administration in 1974.

Unemployment Compensation

unemployment compensation A stategovernment transfer program that pays cash benefits for a certain period of time to laid-off workers who have worked for aspecified period of time for a covered employer.

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Medicaid and Medicare

Medicaid and Medicare In-kind government transfer programs that provide health and hospitalization benefits: Medicare to the aged and their survivors and to certain of the disabled, regardless of income, and Medicaid to people with lowincomes.

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Food Stamps

food stamps Vouchers that have a face value greater than their cost and that can be used to purchase food at grocery stores.

Housing Programs

The Earned Income Tax Credit

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HOW EFFECTIVE ARE ANTIPOVERTY PROGRAMS?

Some say economic growth is the best way to cure poverty.

The opposite view is that poverty would be much more widespread without antipoverty programs.

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GOVERNMENT OR THE MARKET? A REVIEW

Remember that government is not a cure for all economic woes. There is no guarantee that public-sector involvement will improve matters. Many argue that government involvement may bring about even more inequity and inefficiency because bureaucratsare often driven by self-interest, not public interest.

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compensating differentialseconomic incomeequityfood stampsGini coefficienthuman capitallabor theory of valueLorenz curveMedicaid and Medicareminimum wage

REVIEW TERMS AND CONCEPTS

money income

poverty line

property income

public assistance, or welfare

Rawlsian justice

Social Security system

transfer payments

unemployment compensation

utilitarian justice

utility possibilities frontier

Case Econ08 Ppt 16

Technology

income distribution

salaries income

distribution of income

distribution of total

sources of economic

distribution of income

sources of inequality

distribution of wealth