Chapter 21 Income Inequality, Poverty, and Discrimination Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution.

Chapter 21

Income Inequality, Poverty, and Discrimination

Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

21-2

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

LO1

21-3

Facts About Income Inequality

Lorenz curve and Gini ratio

20 40 60 80 100

20

40

60

80

100

0

Perfect Equality

Lorenz Curve(Actual Distribution)

Complete Inequality

A B

ab

c

d

e

f

Gini Ratio =Area A

Area A + Area B

Percentage of Households

Perc

enta

ge o

f Inc

ome

LO1

21-4

Causes of Income Inequality

• Ability• Education and training• Discrimination• Preferences and risks• Unequal distribution of wealth• Market power• Luck, connections, and misfortune

LO2

21-5

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

LO3

21-6

Income Inequality Over Time

LO3

21-7

Equality Versus Efficiency

• The case for equality • Maximizing total utility

• The case for inequality• Incentives and efficiency

• The equality-efficiency trade-off

LO4

21-8

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%

LO5

21-9

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

LO5

21-10

Poverty Trends

LO5

21-11

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

LO6

21-12

Public Assistance Programs

• Supplemental Security Income (SSI)• Temporary Assistance for Needy Families

(TANF)• Supplemental Nutrition Assistance Program

(SNAP)• Medicaid• Earned Income Tax Credit

LO6

21-13

Discrimination

• Inferior treatment• Taste-for-discrimination model• Prejudiced people receive disutility•Willing to pay to avoid• Discrimination coefficient• Prejudice and the market African-American

—White wage ratio• Competition and discrimination

LO7

21-14

Discrimination

• Statistical discrimination• Judged on average group characteristics• Labor market example• Profitable, undesirable, but not malicious

LO7

21-15

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

LO7

21-16

Occupational SegregationW

age

Rate

B BBM M

W

3 4 3 4 64

Dx Dy Dz

Occupation X Occupation Y Occupation Z

Quantity of Labor(Millions)

Quantity of Labor(Millions)

Quantity of Labor(Millions)

Crowding women into one occupation (Z)…

results in men enjoying higher wages in the other occupations (X and Y).

000

LO7

21-17

U.S. Family Wealth

Median and Average Family Wealth, Survey Years 1995-2010

(In 2010 Dollars)

199519982001200420072010

$84,00098,100

106,100107,200126,400

77,300

$307,900386,700487,000517,100584,600498,800

• Family wealth rose rapidly between 1995 and 2010

Year Median Average*

*The average greatly exceeds the medians because the averages are boosted by the multibillion dollar wealth of a relatively few families.

21-18

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

199519982001200420072010

32.2%31.430.230.428.523.3

34.6%33.932.733.433.835.4

67.8%68.669.869.571.576.7

Year Bottom 90% Top 1%Top 10%Percentage of Total Wealth by Group