The Distribution of
Income and Poverty
During The Following
Presentation...
Copy the table and sort out a series of comments into the
following sections based around poverty...
Causes
Effects
Solutions
Who Are the Rich And How
Rich Are They?
• The lowest fifth (lowest
quintile) of households is
considered poor, the top fifth
is considered rich, and the
three-fifths in between are
considered middle income.
• The income distribution in
the United States was less
equal (more unequal) in
1998 than in 1967.
SOURCE: U.S. Bureau of the Census.
Income Distribution, 1967 and 1998
SOURCE: U.S. Bureau of the Census.
Income Distribution and
Computers
•
•
Some people think that computers explain the
increasing income inequity.
Problems with this theory are:
1. The increasing income inequality precedes the use of
personal computers.
2. Just because income inequality and the use of
computers occur at about the same time, it does not
follow that one causes the other.
3. Some economists have found that wages and income
inequality increased with the use of pencils, but no
one is willing to make the case that pencils can shift
the income distribution.
Can All People Become Better
Off as the Income Distribution
Becomes More Equal?
• An increasingly unequal
income distribution is not
necessarily a sign of an
income group being worse off.
• It is possible for everyone to
be better off at the same time
that the income distribution
becomes more unequal.
The Income Distribution
Adjusted For Taxes And In-Kind
Transfer Payments
• Government can change the distribution of income
through the use of taxes and transfer payments.
• Ex ante distribution of income is the before tax
and/or transfer payment distribution of income.
• Ex post distribution of income is the after-tax-andtransfer-payment distribution of income.
• Transfer payments are payments to persons that
are not made in return for goods and services
currently provided.
The Effect of Age on the Income
Distribution
It is possible that a person in her late
twenties, thirties, or forties will have a
higher income than another person in her
early twenties or sixties, even though their
total lifetime income will be identical.
A Simple Equation
• Individual Income = Labor income + Asset
income + Transfer payments – Taxes
• Labor income is equal to the wage rate an
individual receives times the number of
hours he or she works.
• Asset income consists of such things as the
return to saving, the return to capital
investment, and the return to land.
Why Does Income Inequality
Exist?
Because people do not
receive the same labor
income, asset income,
and transfer payments,
or pay the same taxes.
Factors Contributing to Income
Inequality
• Innate Abilities and Attributes: Individuals are
not all born with the same abilities and qualities.
• Work and Leisure: There is a tradeoff between
work and leisure: More work means less leisure,
less work means more leisure.
• Education and Other Training: Generally, this
is human capital – the education, the development
of skills, and anything else that is particular to the
individual and increases his or her productivity.
Factors Contributing to Income
Inequality, Part II
• Risk Taking: Individuals have different attitude towards
risk.
• Luck: When individuals can’t explain why something
has happened to them, they often say it was the result of
good or bad luck. In the long run, such factors as innate
ability and attributes, education, and personal decisions
are more likely to have a larger sustained effect on
income than good or bad luck.
• Wage Discrimination: This exists when individuals of
equal ability and productivity, as measured by their
marginal revenue products, are paid different wage rates
by the same employer.
Poverty
• Poverty exists when the income of a family of four is
less than $10,000 per year.
• In relative terms, poverty exists when the income of a
family of four places it in the lowest 10 percent of
income recipients.
• The US Government defines poverty in absolute terms:
$16,600 per year for a family of four; $8,480 per year
for an individual under the age of 65; $7,818 per year
for an individual over the age of 65. This is called the
Poverty Income Threshold, commonly known as the
Poverty Line.
Limitations of the Official
Poverty Income Statistics
• The poverty figures are based solely on money
incomes. Many money-poor persons receive inkind benefits.
• Poverty figures are not adjusted for unreported
income, leading to an overestimation of poverty.
• Poverty figures are not adjusted for regional
differences in the cost of living, leading to both
overestimates and underestimates of poverty.
• Government counters are unable to find some poor
persons: illegal aliens and some of the homeless
which leads to an underestimation of poverty.
Poverty in Different Groups of the
Population.
All data are for 1998
SOURCE: U.S. Bureau of the Census.
Who Are The Poor?
• Although the poor are persons of all religions,
colors, genders, ages, and ethnic backgrounds,
some groups are represented in greater number
than others.
• A greater percentage of families headed by
females are impoverished, when compared to
percentages of families headed by males.
• Families with seven or more persons are more
likely to be impoverished than families with fewer
than seven members.
What is the Justification for
Government Redistributing Income?
• Some say a government should not play “Robin
Hood”. These people are against a government
using its powers to take from some and give to
others.
• Proponents of the Public Good – Free Rider
justification say:
• Most individuals in society would feel better if
there were little or no poverty; therefore, there is a
demand to reduce poverty.
Government Redistributing
Income? (Cont.)
• The reduction or elimination of poverty is a
nonexcludable public good, a good that if
consumed by one person can be consumed by
other persons to the same degree and the
consumption of which cannot be denied to anyone.
• If no one can be excluded from experiencing the
benefits of poverty reduction, then individuals will
not have any incentive to pay for what they can
get for free.
Social Insurance?
The Social Insurance
justification is a different
type of justification for
government welfare
assistance. Individuals
currently not receiving
welfare think they might
one day need welfare
assistance and thus are
willing to take out a form
of insurance for
themselves by supporting
welfare programs.