Chapter 12
Income Distribution,
Poverty, and Discrimination
• Key Concepts
• Summary
• Practice Quiz
• Internet Exercises
©2002 South-Western College Publishing
1
What is the general
trend of income
distribution?
Since 1970, the percentage
of income received by
families in the lowest 20%
has fallen, while the
percentage received by
families in the 20% highest
income groups have risen
2
Division of the Total Annual
Money Income Among Families
% of Families
1980
1990
1999
Lowest 5th
Second-lowest 5th
Middle 5th
Second-highest 5th
Highest 5th
Highest 5%
5.1%
11.5
17.5
24.3
41.6
15.3
4.6% 4.3%
10.8
9.9
16.6 15.6
23.8 23.0
44.3 47.2
17.4 20.3
3
What is
median income?
50% of families earn less
than the median income
and 50% earn more
4
Median Income of Families, 1999
Characteristic
Median
Income
All families
$44,950
Headed by a male
$37,396
Headed by a female
$23,732
$43,309
With head aged 25-34
With head aged 65 and over
$33,148
Headed by a high school grad $42,995
Person with a bachelor’s degree $76,059
5
What are some
arguments against
income inequality?
• Wealthy can influence politics
• Wealthy have more
opportunities
• Wealthy can afford better
health care
6
What is an argument
for income inequality?
Income inequality gives
people an incentive to
become more productive
7
What is the
Lorenz Curve?
A graph of the actual
cumulative distribution
of income compared to
a perfectly equal
distribution of income
8
80%
60%
40%
% of income
Hypothetical
Lorenz
Curve
100%
Perfect Equality
Actual Income
% of families
20%
20%
40%
60% 80% 100%
9
Lorenz Curve 1929 & 1999
80%
60%
40%
% of income
100%
Perfect Equality
1999
20%
1929
20%
% of families
40% 60% 80% 100%
10
Lorenz Curve for Nations
80%
60%
40%
20%
% of income
100%
Perfect Equality
Russia
Brazil
U.S.
% of families
20% 40% 60% 80% 100%
11
What is the
poverty line?
The level of income
below which a person or
a family is considered to
be poor
12
Does the poverty
line consider cash
transfer income?
Yes; Social Security,
unemployment
compensation, and Aid to
Families of Dependent
Children are considered
13
What are
in-kind transfers?
Government payments
in the form of goods
and services, rather
than cash
14
Does the poverty line
consider in-kind
transfers?
Receipts from government
programs such as food
stamps, Medicaid, and
housing are not included
15
% of U.S. Persons below Poverty Level
Characteristic
%
Headed by married couple
5%
Headed by a male, no wife
12%
Headed by a female, no husband
28%
No high school diploma
23%
High school diploma, no college
10%
Bachelor’s degree or more
2%
16
What are examples
of cash transfer
programs?
• Social Security
• Unemployment Compensation
• Aid to Families with
Dependent Children
17
What are examples of
in-kind transfer
programs?
• Food stamps
• Medicaid
• Housing Assistance
18
What are major
criticisms of welfare?
• Work disincentives
• Inefficiencies
• Inequities
19
What are examples of
reform proposals?
• Negative income tax
• Workfare
20
What is a negative
income tax?
A plan under which families
below a certain break-even
level of income would
receive cash payments
that decrease as their
income increases
21
Negative Income Tax
$10
0
$-5
$-20
Tax Liability
$5
Positive Tax
Negative Tax
Family Income
$10
$20 $30 $40 $50
22
What is workfare?
Recipients of government
programs have to work
to receive the benefits
23
Can discrimination
effect people’s wage
rate?
Certain groups can
receive more or less
income if there is
discrimination in the
labor market
24
How does comparable
worth effect wages?
Employees who work for
the same employer
must be paid the same
wages when their jobs,
even if different, require
similar levels of
education, etc.
25
Key Concepts
26
Key Concepts
• What is median income?
• What are some arguments against income
inequality?
• What is an argument for income inequality?
• What is the Lorenz Curve?
• What is the poverty line?
• What are in-kind transfers?
• Does the poverty line consider in-kind
transfers?
27
Key Concepts cont.
• What are examples of cash transfer programs?
• What are examples of in-kind transfer
programs?
• What is a negative income tax?
• What is workfare?
• Can discrimination effect people’s wage rate?
• How does comparable worth effect wages?
28
Summary
29
The Lorenz curve is a measure of
inequality of income. Since 1947,
the share of money income for
each fifth of families ranked
according to their income has been
stable.
30
80%
60%
40%
% of income
100%
Hypothetical Lorenz Curve
Perfect Equality
Actual Income
% of families
20%
20%
40%
60% 80% 100%
31
The poverty line is a level of cash
income below which a family is
classified as poor. The poverty
income threshold is three times the
cost of a minimal diet for a family.
32
In-kind transfers are payments to
the poor in the form of goods
and services, rather than cash.
Calculation of the poverty line
counts cash income. On the
other hand, in-kind transfers,
such as food stamps, Medicaid,
and housing, do not count as
income for families classified as
officially poor.
33
Government cash transfers
counted in the poverty line include
payments from Social Security,
unemployment compensation, and
Aid to Families with Dependent
Children.
34
Welfare criticisms include three major
arguments: (1) Welfare reduces the
incentive to work for the poor and
taxpayers. (2) Welfare is inefficient
because much of the money covers
administrative costs, rather than
providing benefits for the poor. (3)
Because many antipoverty programs
are controlled by the state, welfare
benefits vary widely.
35
The negative income tax is a plan
to set an income guarantee for all
families. As a low-income family
earns income, government
payments (negative income tax)
are phased out. After reaching a
break-even income, families
become taxpayers instead of being
on the welfare rolls.
36
Negative Income Tax
$10
0
$-5
$-20
Tax Liability
$5
Positive Tax
Negative Tax
Family Income
$10
$20 $30 $40 $50
37
Comparable worth is the theory
that workers in jobs determined to
be of equal value by means of
point totals should be paid equally.
Instead of allowing labor markets to
set wages, independent
consultants award points to
different jobs on the basis of such
criteria as knowledge, experience,
and working conditions
38
Chapter 12 Quiz
©2002 South-Western College Publishing
39
1. In 1997, the wealthiest 5 percent of all
U.S. families earned what percentage of
total annual money income among
families?
a. More than 20 percent.
b. Less than 10 percent.
c. More than 25 percent.
d. More than 50 percent.
A.
40
Division of the Total Annual
Money Income Among Families
% of Families
1980
1990
1999
Lowest 5th
Second-lowest 5th
Middle 5th
Second-highest 5th
Highest 5th
Highest 5%
5.1%
11.5
17.5
24.3
41.6
15.3
4.6% 4.3%
10.8
9.9
16.6 15.6
23.8 23.0
44.3 47.2
17.4 20.3
41
2. A figure that measures the relationship
between the cumulative percentage of
money income on the vertical axis and
the cumulative percentage of families
on the horizontal axis is called the
a. family-income curve.
b. Washington curve.
c. Lorenz curve.
d. Gini curve.
C.
42
The Lorenz Curve
100%
Perfect Equality
60%
40%
20%
% of income
80%
Inequality
20%
% of families
40% 60% 80% 100%
43
Exhibit 11
Lorenz Curve
80%
60%
40%
20%
% of income
100%
Y
Perfect Equality
X
Z
W
Cumulative % of families
20%
40%
60% 80% 100%
44
3. As shown in Exhibit 11, the perfect
equality line is drawn between points
a. W and Y along the curve.
b. X and Z.
c. W and Y along the straight line.
d. W and X.
C.
45
4. As shown in Exhibit 11, 20 percent of
families earned a cumulative share of
about _______ percent of income.
a. 5.
b. 10.
c. 30.
d. 50.
A.
46
5. As shown in Exhibit 11, 40 percent of
families earned a cumulative share of
about _______ percent of income.
a. 5.
b. 15.
c. 30.
d. 40.
B.
47
6. Since 1929, the overall income
distribution in the United States has
become
a. much more unequal.
b. much less unequal.
c. slightly more unequal.
d. slightly more equal.
D.
48
Lorenz Curve 1929 & 1999
80%
60%
40%
% of income
100%
Perfect Equality
1999
20%
1929
20%
% of families
40% 60% 80% 100%
49
7. Comparing the family income
distributions of the United States,
Russia, and Brazil, the conclusion is that
income is distributed
a. most equally in Brazil.
b. most equally in the United States.
c. about the same in all three countries.
d. most equally in Russia.
D.
50
Lorenz Curve for Nations
80%
60%
40%
20%
% of income
100%
Perfect Equality
Russia
Brazil
U.S.
% of families
20% 40% 60% 80% 100%
51
8. In order to establish the poverty line
that divides poor and nonpoor families,
the government
a. multiplies the cost of a minimal diet
by 3.
b. multiplies the cost of a minimal diet
by 5.
c. adds 50 percent to cost of a minimal
diet.
d. adds 100 percent to cost of a minimal
diet.
A. Absolute poverty can be defined in
dollars to purchase some minimum
amount of goods and services
essential to meeting a person or
52
family’s basic needs.
9. The poverty line
a. is defined as one-half average family
income.
b. includes in-kind transfers.
c. includes Medicaid benefits.
d. has been attacked for overstating
poverty.
D. The poverty line does not include
non-cash transfers, such as food
stamps and Medicaid.
53
10. Which of the following is an in-kind
transfer?
a. Social Security payments.
b. Unemployment compensation.
c. Food stamps.
d. Welfare payments.
C. Social Security payments,
unemployment compensation and
welfare payments are cash transfer
payments included in the poverty
line.
54
11. Which of the following is a cash
assistance (not an in-kind transfer)
program?
a. Aid to Families with Dependent
Children.
b. Medicare.
c. Medicaid.
d. Food stamps.
A. Medicare and Medicaid provide
medical care services and food stamps
are used for food. AFDC provides cash
that can be used to purchase goods and
services chosen by recipient.
55
12. The negative income tax (NIT) is a
plan under which families
a. above a level of income pay no tax.
b. pay the same tax rate except for the
poor.
c. below a level of income pay no tax.
d. below a level of income receive a
cash payment.
D.
56
$10
Negative Income Tax
$5
0
$-5
$-20
Tax Liability
Positive Tax
Negative Tax
Family Income
$10
$20 $30 $40 $50
57
13. Which of the following might
decrease the supply curve of labor?
a. Discrimination against blacks.
b. Discrimination against women.
c. Difficult licensing requirements.
d. All of the above.
D. Discrimination against blacks and
women and different licensing
requirements reduce the number of
workers who are willing to work at
various possible wage rates.
58
END
59