Chapter 12
Income Distribution,
Poverty, and Discrimination
• Key Concepts
• Summary
• Practice Quiz
• Internet Exercises
©2000 South-Western College Publishing
1
In this chapter, you will
learn to solve these
economic puzzles:
What
is
the
effect
on
labor
Could
the
rich
become
How
can
a
negative
markets
of
laws
that
richer
in
the
1980’s
and
income
tax solve
the
protect
women
from
jobs
other
income
groups
“welfare
mess”?
deemed
“too
strenuous”
also become better off?
or “too dangerous”?
2
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
3
Division of the Total Annual Money
Income Among Families
% of Families
1980
1990
1997
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% 4.2%
10.8
9.9
16.6 15.7
23.8 23.0
44.3 47.2
17.4 20.7
4
What is Median Income?
50% of families earn less
than the median income
and 50% earn more
5
Median Income of Families, 1994
Characteristic
Median
Income
All families
Headed by a male
Headed by a female
With head aged 25-34
With head aged 65 and over
Headed by a high school grad
Person with a bachelor’s degree
$44,568
$32,960
$21,023
$39,979
$30,660
$40,040
$67,230
6
What are some
arguments against
income inequality?
• Wealthy can influence politics
• Wealthy have more
opportunities
• Wealthy can afford better
health care
7
What is an argument
for income inequality?
Income inequality gives
people an incentive to
become more productive
8
What is the
Lorenz Curve?
A graph of the actual
cumulative distribution
of income compared to
a perfectly equal
distribution of income
9
80%
60%
40%
% of income
Hypothetical
Lorenz
Curve
100%
Perfect
Equality
Actual
% of familiesIncome
20%
20%
40%
60%
80% 100%
10
Lorenz Curve 1929 & 1997
100%
Perfect Equality
60%
40%
% of income
80%
1997
20%
1929
20%
% of families
40% 60% 80% 100%
11
Lorenz Curve for Nations
100%
Perfect Equality
60%
40%
% of income
80%
Russia
Brazil
20%
20%
U.S
% of families
.
40% 60% 80% 100%
12
What is the
Poverty Line?
The level of income below
which a person or a family
is considered to be poor
13
Does the Poverty
Line consider Cash
Transfer Income?
Yes; Social Security,
unemployment
compensation, and Aid to
Families of Dependent
Children are considered
14
What are
In-kind Transfers?
Government payments in
the form of goods and
services, rather than cash
15
Does the Poverty
Line consider Inkind transfers?
Receipts from government
programs such as food
stamps, Medicaid, and
housing are not included
16
22%
13% 12% 13% 14% 14%
13%
1959 1970 1975 1980 1985 1990 1997
17
% of U.S. Persons below Poverty Level
Characteristic
Headed by married couple
Headed by a male, no wife
Headed by a female, no husband
No high school diploma
High school diploma, no college
Bachelor’s degree or more
%
5%
13%
32%
24%
10%
2%
18
What are examples of
Cash Transfer Programs?
• Social Security
• Unemployment Compensation
• Aid to Families with
Dependent Children
19
What are examples of Inkind Transfer Programs?
• Food stamps
• Medicaid
• Housing Assistance
20
What are major
criticisms of Welfare?
• Work disincentives
• Inefficiencies
• Inequities
21
What are examples of
Reform Proposals?
• Negative income tax
• Workfare
22
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
23
Negative Income Tax
$10
0
$-5
Tax Liability
$5
Positive Tax
Negative Tax
$-20
Family Income
$10
$20
$30 $40
$50
24
What is Workfare?
Recipients of government
programs have to work to
receive the benefits
25
Can Discrimination effect
People’s wage rate?
Certain groups can receive
more or less income if
there is discrimination in
the labor market
26
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.
27
Key Concepts
28
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?
29
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?
30
Summary
31
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. Also, the
degree of income inequality among
families in the United States has
changed little since 1929. During the
1980’s, the richest families did
become richer; however, the median
income of all groups increased.
32
80%
60%
40%
% of income
Hypothetical
Lorenz
Curve
100%
Perfect
Equality
Actual
% of familiesIncome
20%
20%
40%
60%
80% 100%
33
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. Today, about
12 percent of the U.S. population is
officially classified as poor.
34
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.
35
Government cash transfers
counted in the poverty line include
payments from Social Security,
unemployment compensation, and Aid
to Families with Dependent Children.
36
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.
37
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.
38
Negative Income Tax
$10
0
$-5
Tax Liability
$5
Positive Tax
Negative Tax
$-20
Family Income
$10
$20
$30 $40
$50
39
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
40
Chapter 12 Quiz
©2000 South-Western College Publishing
41
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.
42
Division of the Total Annual Money
Income Among Families
% of Families
1980
1990
1997
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% 4.2%
10.8
9.9
16.6 15.7
23.8 23.0
44.3 47.2
17.4 20.7
43
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.
44
The Lorenz Curve
100%
Perfect Equality
60%
40%
% of income
80%
Inequality
20%
20%
% of families
40% 60% 80% 100%
45
Exhibit 11
Lorenz Curve
100%
60%
40%
20%
% of income
80%
Y
Perfect Equality
X
Z
W
Cumulative % of families
20%
40%
60%
80% 100%
46
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.
47
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.
48
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.
49
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.
50
Lorenz Curve 1929 & 1997
100%
Perfect Equality
60%
40%
% of income
80%
1997
20%
1929
20%
% of families
40% 60% 80% 100%
51
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.
52
Lorenz Curve for Nations
100%
Perfect Equality
60%
40%
% of income
80%
Russia
Brazil
20%
20%
U.S
% of families
.
40% 60% 80% 100%
53
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 family’s basic needs.
54
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
noncash transfers, such as food stamps
and Medicaid.
55
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.
56
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.
57
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.
58
Negative Income Tax
$10
0
$-5
Tax Liability
$5
Positive Tax
Negative Tax
$-20
Family Income
$10
$20
$30 $40
$50
59
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.
60
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END
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