Income Inequality and Poverty

1. Income Inequality and Poverty

2. Poverty in the US Picture a Poor Person What do you see? A man or a woman? female How old are they? a child from a rural area Where do they live? What race are they? white

3. 100 90 80 70 60 50 % Income 40 30 20 10 0 6 7 8 9 10 3 4 5 1 2 % Population

4. 100 90 80 70 60 50 Degree of income inequality % Income 40 30 20 10 0 6 7 8 9 10 3 4 5 1 2 % Population

5. 100 90 80 70 60 50 % Population 40 30 20 10 0 6 7 8 9 10 3 4 5 1 2 % Income

6. 100 90 80 70 60 50 1970 % Population 40 2007 30 20 10 0 6 7 8 9 10 3 4 5 1 2 % Income

7. Resource Prices and Income Differences • Individuals create income by supplying resources that are highly valued by others. • This provides the incentive to develop skills, talents, and resources others value. • The view that there is a fixed-size economic pie that can be sliced and divided among the citizenry is fallacious.

8. Income Inequality in the United States Top 20% of recipients Lowest 20% of recipients Fourthquintile Thirdquintile Secondquintile Familyincome before taxes 17.4 23.4 42.7 12.0 4.5 1950 17.8 12.2 24.0 41.3 4.8 1960 17.6 23.8 40.9 5.4 12.2 1970 11.6 17.5 24.3 41.6 5.1 1980 10.8 16.6 23.8 44.3 4.6 1990 22.8 4.3 9.8 15.5 47.4 2000 22.9 4.2 9.7 15.4 47.7 2001 47.9 23.0 4.0 9.6 15.4 2004 23.3 4.1 9.7 15.6 47.4 2007 Impact of taxes & transfers on 2006 household income 22.5 15.0 50.5 8.5 3.5 Before 9.7 15.0 22.7 48.3 4.3 After Household expenditures 24.1 13.2 7.1 18.2 37.4 1961 23.9 38.1 7.1 12.9 18.0 1972 24.1 38.2 6.8 12.8 18.1 1980 23.3 40.1 7.1 12.4 17.1 1990 12.9 17.5 23.4 38.8 7.4 1995

9. Factors Influencing Income Distribution • Differences in: • age, • education, • family size, • marital status, • number of earners in the family, and, • time worked. • Young, inexperienced workers, students, single-parent families, and retirees are over-represented among those with low incomes.

10. High and Low Income Families, 2007 Bottom 20% of income recipients Top 20% of income recipients Education of householder 31.0 2.0 Percent with less than high school 10.0 63.0 Percent with college degree or more Age of householder (percent distribution) 31.0 12.0 under 35 46.0 79.0 35 - 64 23.0 9.0 65 and over Family status 48.0 93.0 Married-couple family (% of total) 52.0 7.0 Single-parent family (% of total) 2.9 3.4 Persons per family 0.8 2.2 Earners per family % of married-couple families in which wife works full-time 12.0 64.0 % of total hours worked supplied by group 29.0 8.0 Source: http://www.census.gov and author calculations from the March 2008 Current Population Survey.

11. Why Has Income Inequality Increased? • greater share of single-parent families - • More dual-earner families + • Increased earnings differentials on the basis of skill and education • the number of “winner-take-all” markets – top heavy pay structures. • Tax changes require less “sheltering” of income for the high tax brackets

12. Income Mobility Percentage Distribution by Income Status of Family in 2004 Lowest paidquintile Next lowest paid quintile Top paidquintile Next highestquintile Middlequintile Income Status of Family in 1994 5.5 53.0 25.0 12.0 4.5 Highest quintile 23.0 32.5 24.0 14.0 6.5 Next highest quintile 14.0 22.5 28.0 24.0 12.0 Middle quintile 5.5 12.5 25.5 33.5 23.5 Next lowest-paid quintile 5.0 7.5 10.4 24.5 53.5 Lowest paid quintile The table above allows us to see how families in each income bracket in the U.S. fared 10 years later. Does it appear to you that there is a significant amount of income mobility in the U.S. economy?

13. 0.1 10.6 6.8 4.1 23.9 24.8 4.9 4.0 13.4 17.5 14.4 9.1 6.2 8.2 37.9 28.6 19.1 7.8 7.9 12.6 Lowest paidquintile Next lowest paid quintile Top paidquintile Next highestquintile Middlequintile 1985 -1995 78.4 Top-paid quintile 42.4 Next-highest-quintile 45.6 Middle-quintile Next-lowest-paid quintile 25.4 46.3 Lowest-paid quintile 1988-1998 5.7 53.2 23.2 14.9 3.0 Highest quintile 25.8 31.1 23.7 12.9 6.5 Next-highest-quintile 12.6 27.5 28.3 20.7 10.9 Middle-quintile 4.3 11.0 22.6 36.3 25.7 Next-lowest-paid quintile 4.3 6.4 12.4 23.6 53.3 Lowest-paid quintile 1994-2004 5.5 53.0 25.0 12.0 4.5 Highest quintile 32.5 23.0 24.0 14.0 6.5 Next highest quintile 28.0 14.0 22.5 24.0 12.0 Middle quintile 5.5 12.5 25.5 33.5 23.5 Next lowest-paid quintile 5.0 7.5 10.4 24.5 53.5 Lowest paid quintile

14. Household Expenditures and Inequality • Differences in household expenditures may be a more accurate indicator of economic status than income. • current expenditures reflect long-term economic status. • In contrast with the annual income data, household expenditure data do not indicate that there has been a major change in U.S. economic inequality.

15. Poverty in the United States

16. Changing Composition of the Poor 2005 2000 2003 1976 1959 2007 7.6 Number of poor families (millions) 5.3 7.6 7.7 8.3 6.2 Percent of poor families headed by a: 53 48 23 Female 50 51 53 27 30 Black 26 27 27 27 9 14 22 Elderly person (aged 65+) 10 10 9 48 55 70 48 61 53 Person who worked at least some during the year Poverty rate (%) 9.8 10.1 18.5 10.0 All families 9.9 8.6 4.9 7.2 Married-couple families 15.8 4.7 5.4 5.1 28.3 32.5 42.6 28.0 Female-headed families 28.7 24.7 11.7 12.6 22.4 12.5 All individuals 10.5 9.1 10.5 10.6 18.1 9.4 Whites 24.5 31.1 24.4 24.9 55.1 Blacks 22.0 16.0 18.0 27.3 17.6 17.6 16.1 Children (under age 18) Sources: U.S. Dept. of Commerce, Characteristics of the Population Below the Poverty Line: 1982, Table 5; and Poverty in the United States: 2000, p. 60-214.

17. Poverty Rate of Persons & Families in the United States 1947-2000 Poverty rate % Persons Families Year 1947 n.a. 32.0 1960 22.2 18.1 1970 12.6 10.1 1980 13.0 10.3 13.5 10.7 1990 2000 11.3 8.7 2005 9.9 Sources: Bureau of the Census, Current Population Reports, Series P60-210, Poverty in the United States, 2000; and Economic Report of the President, 1964, Table 7. • During the 1950s and 1960s, the poverty rate declined substantially. • After rising slightly during the 1970s and 1980s, the official poverty rate has fallen modestly during the economic expansion of the 1990s.

18. Transfer Payments and the Poverty Rate • Income transfers expanded rapidly over the past several decades. • largely ineffective at reducing the poverty rate. • Though per capita income has increased substantially over time (109% since 1965), the poverty rate of working-age Americans has stayed about the same.

19. 32.0 18.5 13.9 10.7 10.3 10.0 9.8 9.9 9.7 8.7 Poverty Rate, 1947-2007 Povertyrate 2007 1947 1959 1965 1968 1975 1980 1990 2000 2005 Sources: U.S. Dept. of Commerce, Characteristics of the Population Below the Poverty Level: 1982, Table 5; and http://www.census.gov. The official poverty rate of families declined sharply during he 1950’s and 60’s … but has been relatively constant at about 10 percent since 1968.

20. Poverty Rate, 1947-2007 32.0 Povertyrate 18.5 13.9 10.7 10.3 10.0 9.9 9.7 9.8 8.7 1947 1959 1965 1968 1975 1980 1990 2000 2005 2007 Sources: U.S. Dept. of Commerce, Characteristics of the Population Below the Poverty Level: 1982, Table 5; and http://www.census.gov. The orange shaded part of the bars indicate the drop in the poverty rate when non-cash benefits are counted as income. With non-cash benefits added, the poverty rate during most of the period since 1968 has ranged from 7% to 8%.

21. 30.0 22.8 17.0 9.1 8.9 7.0 6.3 5.4 Poverty Rates for Elderly Families Povertyrate 1959 1965 1968 1975 1980 1985 1990 2000 Sources: Derived from Dept. of Commerce, Money Income in the United States: 2000; Poverty in the United States: 1990; and Measuring the Effects of Benefits and Taxes on Income and Poverty, 1990 and 1992. See also James Gwartney and Thomas S. McCaleb, “Have Antipoverty Programs Increased Poverty?” The Cato Journal (spring/summer, 1985). • The official poverty rate for elderly families has declined sharply since 1959.

22. 16.6 12.2 11.5 10.9 10.5 9.8 9.2 9.0 Poverty Rates for Non-Elderly Families Povertyrate 1959 1965 1968 1975 1980 1985 1990 2000 Sources: Derived from Dept. of Commerce, Money Income in the United States: 2000; Poverty in the United States: 1990; and Measuring the Effects of Benefits and Taxes on Income and Poverty, 1990 and 1992. See also James Gwartney and Thomas S. McCaleb, “Have Antipoverty Programs Increased Poverty?” The Cato Journal (spring/summer, 1985). • In contrast, the official poverty rate for non-elderly families was been higher in the 1990’s that it was in the late 1960’s.

23. Income Transfer Effects • Income supplements large enough to significantly increase the economic status of poor people will: • encourage behavior that increases the risk of poverty • Provides a safety net? • create high implicit marginal tax rates that reduce the recipient’s incentive to earn. • As income goes up, benefits drop off.

24. 1. In 2000, high-income families (the top 20 percent) in the United States earned approximately _________ percent of the total before-tax income. a. 34 b. 47. c. 62 d. 79 • Imagine two cities, Engelgrad and Legreeville, where the rich, middle, and poor income recipients in one city have annual incomes identical to their counterparts’ incomes in the other city. In Engelgrad, the poorest families one year almost always end up as the richest families the next year and become middle-income families the year after that. In Legreeville, however, the poor remain poor and the rich remain rich. Which of the following is true about the two cities? a. Annual data on the distribution of income will indicate that the degree of income inequality in the two cities is identical. b. The degree of lifetime income inequality in the two cities is identical c. The income mobility of people in the two cities is identical d. The distribution of annual income is more unequal in Legreeville

25. 3. Compared to low-income families, a larger proportion of high-income families a. is headed by a person with a college degree b. has both a husband and a wife who work full time c. is headed by a person between the ages of 35 and 64 d. is all of the above. 4. During 1970 – 2000, the official poverty rate of non-elderly families a. fell modestly b. fell substantially c. steadily rose. d. rose until 1985 and fell modestly since then.

26. 5. When a person who receives welfare benefits earns income, those benefits are reduced as earned income rises. This is referred to as a. an implicit marginal tax. b. the opportunity cost of income c. the work-leisure trade-off d. reverse discrimination 6. According to the official measure of poverty, in 2000 the poverty rate of families in the US was a. 4.2% b. 8.6%. c. 18.5% d. 22%

27. 7. The poverty threshold level defines poverty by finding the cost of feeding a family and multiplying by a. two b. three. c. four • five 8. Which of the following would cause the poverty threshold income level for a given family to increase by 20 percent from one year to another? a. a 20 percent increase in the family’s income b. a 20 percent decrease in the family’s income c. a 20 percent increase in the general level of prices. d. a 20 percent increase in real national income

28. 9. Which of the following best explains why so many persons with incomes below the poverty threshold income level work very little or not at all? a. They confront high implicit marginal tax rates. b. They do not enjoy income as much as other people. c. There are no jobs for low-skill workers. d. They often face very low explicit marginal tax rates. 10. (I) Positive economics cannot determine how much income inequality should be present in a country. (II) Critics of government action to reduce income inequality argue that modifying the market process of income determination may create perverse incentives and hurt wealth creation. a. Both I and II are true. b. Both I and II are false. c. I is true; II is false. d. I is false; II is true.