Income Inequality and Poverty
Income Mobility
• Income mobility
– The ability to move up and down the economic ladder
over time
• Higher levels of income mobility?
– Give workers an incentive to improve human capital
and work harder
– Workers have increased change of rewards
– Poverty may be only temporary
Income Mobility in United States
Income Mobility
• Marginal poor
– Poor at a point in time, but have skills to move up the
ladder
– Low earnings are the exception
– Willing to borrow to make a big purchase
– Fit well into life-cycle theory model
– Student straight out of college
• Long-term poor
– People who lack the skills to advance to higher
income levels
Poverty Policy
• Many policies (each with their costs and benefits)
have been designed to address poverty
• Two conflicting motivations
– We want to give generously
– We want the poor to become self-sufficient
• Policies
– Welfare
– In-kind transfers
– Earned income
tax credit (EITC)
– Minimum wage
Welfare
• Not a government program but a series of
initiatives
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Monetary payments
Subsidies and vouchers
Health services, housing
Examples: TANF, SSI, SNAP
• Who receives this?
– Unemployed, disabled, veterans, dependent children
– Eligibility is often limited by time and only if income is
below a cutoff amount
In-Kind Transfers
• Direct assistance in the form of goods
and services
– Food banks, housing shelters, private
charities, health care through Medicaid
• Why give goods and services rather than
cash?
– Mainly to prevent the misuse of funds
– Possibility of cash transfers going to alcohol,
gambling addictions, or expensive clothes
– In-kind transfers can be targeted at essential
services
Earned Income Tax Credit
• The EITC is a refundable tax credit designed to
encourage low-income people to work more
– Can lower taxes as much as $6,000 per year
– Helps over 20 million families, making it the largest
poverty-fighting policy
– Benefits are phased out over higher incomes, so there
is no sizeable work disincentive at a specific cutoff
• The EITC is a form of a negative income tax
– This is a tax credit that is paid to poor households out
of taxes collected from middle- and upper-income
taxpayers
A Negative Income Tax
Minimum Wage
• Discussed previously—a price floor on wages in
labor markets
• However, the same problems can be discussed
– Low-skill people may be less productive
– Firms may hire less low-skill workers
– Minimum wage doesn’t guarantee employment