Chapter 16
Economic Inequality
Economic Inequality in the United States
•Money income equals market income plus
cash payments to households by the
government.
•Market income = wages, interest, rent, and
profit earned by the household in factor
markets, before paying income taxes.
Economic Inequality in the United States
•The Distribution of
Income
•Figure 19.1 shows
the distribution of
income across the
117.5 million
households in the
United States in
2009.
Economic Inequality in the United States
•The mode income is the
most common income
and was about $22,000.
•The median income is
the level of income that
separates the population
into two groups of equal
size and was $49,777.
•The mean income is the
average income and was
$67,976.
Economic Inequality in the United States
•A distribution in
which the mean
exceeds the median
and the median
exceeds the mode is
positively skewed,
which means it has a
long tail of high values.
•The U.S. distribution
of income is positively
skewed.
Economic Inequality in the United States
A common way to summarize income inequality
is the quintile (by fifths) distribution of income
•Figure 19.2
shows the
distribution of
income shares
for the United
States in 2009.
Economic Inequality in the United States
In 2009:
•The poorest 20%
of households
received only
3.4% of the total
income.
•The middle 20%
received 14.6% of
total income.
•The richest 20%
received 50.2% of
total income.
Economic Inequality in the United States
•The Income Lorenz
Curve
•The income Lorenz
curve graphs the
cumulative
percentage of income
earned against the
cumulative
percentage of
households.
Economic Inequality in the United States
•The vertical axis
plots the cumulative
percentage of
income.
•The horizontal axis is
the cumulative
percentage of
households.
Economic Inequality in the United States
•If everyone has the
same income, the
income Lorenz curve
is a 45 degree line
from the lower left
corner to the upper
right corner.
•This line is called
the line of equality.
•The Lorenz curve
shows the
distribution of
income.
Economic Inequality in the United States
•The Distribution of
Wealth
•A household’s wealth
is the value of all the
things that it owns at
a point in time.
•The distribution of
wealth is another way
of examining the
degree of economic
inequality.
Economic Inequality in the United States
•A wealth Lorenz
curve measures
the distribution of
wealth.
•The distribution
of wealth is even
more unequally
distributed than
income.
Economic Inequality in the United States
•Wealth or Income?
–Wealth is a stock of assets at a point in time.
–Income is a flow of earnings over a period of
time .
–Because the distribution of wealth excludes
human capital, the distribution of income is a
more accurate measure of economic inequality.
Economic Inequality in the United States
•Trends in Inequality
Gini ratio = the ratio of blue area to the red area in
the two figures below.
Economic Inequality in the United States
•With perfect equality, the Lorenz curve is the
line of equality and the Gini ratio is zero.
Economic Inequality in the United States
•With the most extreme inequality—one person
has all the income—the Lorenz curve runs along
the axes and the Gini ratio is one.
Economic Inequality in the United States
•The closer the Gini ratio is to one, the more unequal is
the distribution of income.
•In 2009, the U.S. Gini ratio was a bit more than 0.46.
Economic Inequality in the United States
•Figure 19.5 shows the
U.S. Gini ratio from
1970 to 2009.
•The Gini ratio shows
that the distribution of
income in the United
States has become
more unequal.
•Despite the change in
the definition in 1992,
the trend is still visible.
Inequality in the World Economy
•Figure 19.6
illustrates some
extremes and the
U.S. Lorenz curves.
Inequality in the World Economy
Global Inequality and Its Trends
•The global distribution of income is much more
unequal than the distribution within any one
country.
•Of the world population:
–50 percent live on $2.50 a day or less; 30 percent live
on between $2.50 and $10 a day.
–That is, 80 percent of the world population is very
poor.
–The average American has $115 a day.
Inequality in the World Economy
World Gini Ratio
•The global distribution
of income is becoming
less unequal.
•Despite individual
countries are becoming
more unequal, incomes
in poorer countries are
rising faster than
incomes in rich
countries.
What caused economics inequality?
• No one actually distributes income in our
society
• The distribution of income is the product
of supply of and demand for productive
services
• An activity is productive if it enables
people to obtain something for which
they’re willing to pay
What caused economics inequality?
• The income that resource owners can
receive is created by the demand for the
services of those resources.
• Resources are scarce, but scarcity is not
the same as rarity.
• “People become wealthy by satisfying
others’ demand.”
What caused economics inequality?
• Income distribution depends fundamentally
on the ownership of productive resources
• “The distribution of income depends on the
prior distribution of wealth”
• The production of productive resources is
investment. Wealthy people have more
opportunities to invest, which generate
more income
Matthew Effect
“For whoever has will be given more, and they
will have an abundance. Whoever does not
have, even what they have will be taken from
them.”
—Matthew 25:29
The phenomenon where "the rich get richer
and the poor get poorer".
“Assortative mating” makes wealth more
concentrated.
Winner-Take-All Markets
Small differences in
performance give rise to
enormous differences in
reward.
Outcome: Important
professions like teaching
and engineering in aching
need of more talent.
What can we do?
• Human capital is an important component of
wealth
• The most readily portable form of wealth
• Explains why propsering ethnic minorities
often obtained high levels of education
• Increased demand for more highly skilled and
more extensively schooled workers imply the
importance of human capital
How to become rich?
1. Satisfy other people’s demand
2. Invest in human capital
Income Redistribution
Three main ways:
1. Progressive Income taxes
2. Income maintenance programs
– Social Security programs
– Unemployment compensation
– Welfare programs
3. Subsidized services
– Health care, education
Income Redistribution -- The Big Tradeoff
• Big tradeoff between equity and efficiency
• Three reasons for inefficiency:
1. Resources are used that could have otherwise
been used for producing goods and services.
2. Taxes generate a deadweight loss.
3. Decreases the incentives for taxpaying workers to
provide labor