Lecture Economics (18th edition): Chapter 20 - McConnell, Brue, Flynn''s

Chapter 20
Income
Inequality,
Poverty, and
Discrimination
McGraw­Hill/Irwin

        Copyright © 2009 by The McGraw­Hill Companies, Inc. All rights reserved.


Chapter Objectives
•
•
•
•

Income inequality in the U.S.
Sources of income inequality
Income inequality since 1970
Economic arguments regarding
income inequality
• Poverty measurement and
incidence
• The U.S. income-maintenance
program
• Labor market discrimination
20-2


Facts About Income Inequality
• Average household income

– $66,570 in 2006
– Among highest in the world

• Distribution by quintiles
• Income mobility
– People change quintiles

• Government redistribution
– Taxes and transfers

20-3


Facts About Income Inequality
Distribution by Quintiles, 2006
(1)
Quintile

(2)
Percentage of
Total Income

(3)
Upper
Income Limit

Lowest 20%

3.4

$20,035

Second 20%

8.6

37,774

Third 20%

14.5

60,000

Fourth 20%

22.9

97,032

Highest 20%

50.5

No Limit

Total

100.0

Source: Bureau of the Census
20-4


Income Inequality
• Lorenz Curve and Gini Ratio
e

100

Lorenz Curve
Percentage of Income

80

(Actual Distribution)

Perfect Equality
60

A

d

B

40
c
20
b

0

Complete
Inequality

a
20
40
60
80
Percentage of Households

Gini Ratio =

f
100

Area A
Area A + Area B
20-5


Government Redistribution
100

Percentage of Income

80
60

Lorenz Curve

After Taxes and
Transfers

40
20

0

Lorenz Curve

Before Taxes and
Transfers
20
40
60
80
100
Percentage of Households

Impact of Government Taxes and Transfers
20-6


Causes of Income Inequality
•
•
•
•

•
•
•

Ability
Education and training
Discrimination
Preferences and risks
Unequal distribution of wealth
Market power
Luck, connections, and
misfortune
20-7


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
20-8


Income Inequality
Percentage Total Income Received by Top OneTenth of Receivers, Selected Nations 2007
0

10

20

30

40

50

Columbia
Brazil
South Africa
Guatemala
Mexico
United
States
Italy
Japan
Sweden
Germany
Source: United Nations, Human Development Report, 2007/2008
20-9


Equality Versus Efficiency
• The case for equality
– Maximizing total utility

• The case for inequality
– Incentives and efficiency

• The equality-efficiency tradeoff

20-10


Equality Versus Efficiency
Brooks’ Marginal
Utility From Income

Utility Gain

(Entire Blue Area)

a

Utility Loss

(Entire Red Area)

b’

a’

MUA
0

Marginal Utility

Marginal Utility

Anderson’s Marginal
Utility From Income

$2500 $5000

Income

b

0

MUB
$5000 $7500

Income

The Utility-Maximizing Distribution of Income
20-11


The Economics of Poverty
• Definition of poverty 2006
– Single person < $9,800
– Family of 4 < $20,000
– Family of 6 < $26,800
– 36.5 million Americans
– Poverty rate 12.3%

20-12


Incidence of Poverty
Poverty Rates Among Selected Population
Groups, 2006
0
10
20

30

Female Householders
African Americans
Hispanics
Foreign-Born (Not Citizens)
Children Under 18
Women
Total Population
Asians
Whites
Men
Persons 65 or Over
Married-Couple Families
Full-Time Workers
20-13
Source: Bureau of the Census, www.census.gov

The Economics of Poverty
• Poverty rate trends
– Significant decline 1959-1969
– Stable in 11-13% range since
– Rises with recession

• Measurement issues
– Arbitrary threshold
– Consumption vs. income
20-14


Income-Maintenance System
• Entitlement programs
– All those eligible receive aid

• Social insurance programs
– Social security and Medicare
– Unemployment compensation

• Public assistance programs
– Welfare
20-15


Public Assistance Programs
• Supplemental security income
• Temporary assistance for needy
families
• Food stamp program

• Medicaid
• Earned Income Tax Credit

20-16


Discrimination
• Inferior treatment
• Taste-for-discrimination model
– Prejudice people receive disutility
– Willing to pay to avoid
– Discrimination coefficient
– Prejudice and the market AfricanAmerican-White wage ratio
– Competition and discrimination
20-17


African-American Wage Rate
(Dollars)

Taste for Discrimination Model
Less
Discrimination

S

More
Discrimination
$9
8

6
D1

D3

D2
0

12
16 18
African-American Employment (Millions)
20-18


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

20-19


Discrimination
• Occupational segregation
– The crowding model
– Crowd certain groups into less
desirable occupations

– Effects of crowding
– Elimination of crowding

20-20


Occupational Segregation
By crowding women into one occupation (Z)…

Wage Rate

Occupation X

Occupation Y

M
B

M
B

Occupation Z

B
W

0

34
Quantity of Labor

(Millions)

Dz

Dy

Dx

0

34
Quantity of Labor
(Millions)

0

4 6
Quantity of Labor
(Millions)

Men enjoy higher wages in the other
occupations (X and Y)
20-21


U.S. Family Wealth
• Family wealth rose rapidly 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
20-22


U.S. Family Wealth
• Family wealth became more unequal
between 1995 and 2004
Percentage of Total Family
Wealth Held by Different
Percentile Groups, 1995-2004
Year

1995
1998
2001
2004

Percentile of Wealth Distribution
Bottom 90%
Bottom 10%
Top 1%

32.2%
31.4
30.2
30.5

67.8%
68.6
69.8
69.5

34.6%
33.9
32.7
33.4
20-23


Key Terms
• income inequality

• Lorenz curve
• Gini ratio
• income mobility
• noncash transfers
• equality-efficiency tradeoff
• poverty rate

• public assistance programs
• Supplemental Security Income
(SSI)
• Temporary Assistance for
Needy Families (TANF)
• food-stamp program
• Medicaid
• earned-income tax credit

• Discrimination (EITC)
• entitlement programs
• social insurance programs • taste for discrimination model
• discrimination coefficient
• Social Security
• statistical discrimination
• Medicare
• Unemployment
compensation

• occupational segregation
20-24

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The Economics
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20-25