AP Economics
Mr. Bernstein
Module 78:
Income Distribution and Income Inequality
December 22, 2014
AP Economics
Mr. Bernstein
Poverty
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First arbitrary definition attempted in 1960’s
Rises and falls with changes in economy
No trend line – poverty higher in 2009 than 1973
Not spread evenly across population demographics
Caused by anything creating a barrier to full-time job
with decent pay
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Education or training opportunities
Language
Discrimination
Bad Luck
• Consequences for Health, Learning
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AP Economics
Mr. Bernstein
Poverty
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AP Economics
Mr. Bernstein
Income Inequality: Quintile Analysis
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AP Economics
Mr. Bernstein
Income Inequality: Gini Coefficient
• Developed by Corrado Gini in 1912
• Gini Coefficient = 0, income is distributed equally, as
in column 3
• Gini Coefficient = 1, all income goes to one person (!)
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AP Economics
Mr. Bernstein
Income Inequality: Gini Coefficient
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AP Economics
Mr. Bernstein
Income Inequality: Gini Coefficient
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AP Economics
Mr. Bernstein
Economic Insecurity and Antipoverty Programs
• To avoid families falling into poverty, welfare state
provides temporary assistance programs
• Means-tested programs
• Criteria determines eligibility for benefits (ie income)
• Social Security, Unemployment Insurance
• Progressive Taxes + Welfare System
• Redistributes income (reduces Gini Coefficient)
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AP Economics
Mr. Bernstein
The Debate Over Income Redistribution
• Is this a legitimate role of the government?
• Higher taxes to fund programs create DWL
• Means-tested programs and “The Notch”
• Example: Single Mom earns $5,000 in benefits if income <
$15,000 and zero benefits if >$15,000
• If she currently earns $14,900, will she work overtime and
earn an additional $1,000?
• Phase-out levels reduce Notch effects
• Are disincentives larger than consequences of
poverty?
• Economics can help calculate numbers but it often winds up
being a question of values and philosophy (Normative)
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