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
END
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