Poverty and the Income
Distribution
Wendy A. Stock, Ph.D.
Professor and Department Head
Department of Agricultural Economics and Economics
1
Income Distribution Questions
• How much $$ does it take to be
“rich” in the U.S.?
• How much $$ does it take to be
in the top 1/2 of households in
earnings?
• How much $$ does it take to be in the top
1/5 of households in earnings?
2
Income Distribution Questions
• How equally do we share
our earnings?
• Are the rich getting richer
and the poor getting
poorer?
3
Poverty Questions
• What does it mean to be “living
in poverty”?
• Is poverty worse now than it
was 20-50 years ago?
• Why are some people and
countries poor and others not?
4
Income Distribution
Income Distribution shows the levels of income in
an economy and the percentage of households
earning those income levels.
Course Grades
50
40
30
20
10
0
"A"
"B"
"C"
"D"
"F"
5
Income Distribution Questions
• How much $$ does it take to be
“rich” in the U.S.?
• How much $$ does it take to be
in the top 1/2 of households in
earnings?
• How much $$ does it take to be in the top
1/5 of households in earnings?
6
US Median Household Income
70,000
60,000
50,303
50,000
40,000
30,000
20,000
10,000
0
20
20
20
19
19
19
19
19
19
19
10
05
00
95
90
85
80
75
70
65
Values are adjusted for inflation to reflect 2008 dollars
7
Income Distribution Questions
• How much $$ does it take to be
“rich” in the U.S.?
• How much $$ does it take to be
in the top 1/2 of households in
earnings?
• How much $$ does it take to be in the top
1/5 of households in earnings?
8
Median U.S. Household Income by
Quintile, 2012
Top 5%
Top Quintile
Upper-Middle Quintile
Highest Income
Middle Quintile
Lowest Income
Lower-Middle Quintile
Lowest Quintile
200000
175000
150000
125000
100000
75000
50000
25000
0
9
Income Distribution Questions
• How equally do we share
our earnings?
• Are the rich getting richer
and the poor getting
poorer?
10
U.S. Household Annual Income by Quintile
3%
9%
Bottom 5th
($11,352)
15%
Lower Middle
($28,777)
Middle ($48,223)
50%
Upper Middle
($76,329)
Top 5th
($168,170)
23%
Numbers in parentheses show
average household incomes for
each quintile
11
How Equally do We Share our Wealth?
Ideal, Perceived, and Actual Wealth Distribution in the U.S.
Top 20%
2nd 20%
Middle 20%
4th 20%
Bottom 20%
Ideal (Men)
Ideal (Women)
Ideal (Democrat)
Ideal (Republican)
Ideal (>$100K)
Ideal (<$50K)
Perceived
Actual
0%
20%
40%
60%
Percent of Wealth Owned
Source: Michael Norton and Dan Ariely, "Building a Better America - One Wealth Quintile At A Time"
80%
100%
12
How is income
distributed in
other
countries?
13
Figure 7: Countries' Income Inequality Over Time
0.65
Brazil
0.6
Mexico
Coefficient Value
0.55
China
0.5
United States
India
0.45
United Kingdom
0.4
Japan
0.35
Sweden
0.3
0.25
1960
1970
1980
1990
2000
2010
Year
An index value of 0 represents perfect equality. A value of 1 represents perfect inequality (i.e., one person has all the income). Brazil and Mexico are among countries with the most income
inequality. Sweden and Japan have more equal distributions of income. The income inequality in the US has increased since the 1970s. Source: Authors compilation of World Bank data and
14
How is world
income shared
across
countries?
15
Global Income Distribution
16
Global Income Distribution
U.S., 22.5
All Other, 31.7
China, 9.7
Mexico, 2.1
Spain, 2.2
Japan, 7
Brazil, 2.9
Italy, 3
FSU, 3.1
Germany, 4.6
France, 3.4 UK, 3.5
India, 4.3
17
Income Distribution Questions
• How equally do we share
our earnings?
• Are the rich getting richer
and the poor getting
poorer?
18
Are the Rich getting Richer?
U.S. Household Annual Income by Quintile
2007
1967
4%
3% 9%
15%
50%
23%
Bottom Fifth
2nd Fifth
Middle
4th Fifth
Top Fifth
11%
44%
17%
24%
19
Are Rich Countries Getting Richer?
0.9
0.8
Mean Logarithmic Deviation
0.7
0.6
within-country
0.5
between country
0.4
total inequality
0.3
0.2
0.1
0
1820
1840
1860
1880
1900
Year
1920
1940
1960
1980
20
Poverty
21
Poverty Questions
• What does it mean to be “living
in poverty”?
• Is poverty worse now than it
was 20-50 years ago?
• Why are some people and
countries poor and others not?
22
Poverty Threshold or Poverty Line
specific level of income, below which a person is in
poverty - varies by time, place, and family size
U.S. poverty line 2012
single householder: $11,170
family of four: $23,050
Would that
provide a
comfortable
lifestyle?
23
Poverty Rate
% living below the poverty threshold
24
What about
world
poverty?
25
Percentage of Population Living on Less Than $1.25 Per Day,
2007-2008
•
Source: http://en.wikipedia.org/wiki/File:Percentage_population_living_on_less_than_1_dollar_day_2007-2008.png From
UN Human Development Statistics, licensed under the Creative Commons Attribution ShareAlike 3.0 license
26
Poverty Questions
• What does it mean to be “living
in poverty”?
• Is poverty worse now than it
was 20-50 years ago?
• Why are some people or
countries poor and others not?
27
Causes of Individual Poverty
• Individual-level
– Demographics
– Skills, motivation, intelligence
– Restricted opportunities
educational quality, discrimination,
health status
28
U.S. Poverty Rates by Demographic Characteristics, 2011
Group
All people
All families
Married couples
Female householder families,
no husband
Male householder families, no
wife
Poverty
Group
Rate
15.0 Education
Less than high
13.1
5.8
31.6
15.8
Age
Under 18
Age 18-64
Age 65+
Disabled
school
High school diploma
Some college
Four year degree or
more
Poverty
Rate
24.9
22.6
15.5
6.5
Race & Ethnicity
21.9
13.7
8.7
28.8
White, non-Hispanic
Black, non-Hispanic
Asian
Hispanic
Nondisabled
9.8
27.6
12.3
25.3
12.5
29
Causes of Individual Poverty
• Structural or Macro-level
– Recessions
– Resource availability
clean water, land, rainfall,
animal health, roads, conflict
30
Causes of Country Poverty
& Economic Growth
Proximate Causes
1. Physical Capital
Fundamental Causes
1. Geography
climate, soil quality
2. Human Capital
2. Culture
Slow v. rapid change in religious beliefs,
nationalistic ideas, etc.
3. Technology
3. Institutions
rule of law, property rights
Source: Daron Acemoglu, MIT, “Why Nations Fail” http://economics.mit.edu/files/7850
31
How do we
combat
poverty?
32
U.S. Poverty Policy
• Many Approaches
–
–
–
–
–
Direct payments
Food, health, and housing
Training and education
Tax policy (EITC)
Regulation (Minimum Wage)
33
Global Poverty Policy
• UN Millennium Development Goals:
–
–
–
–
–
Combat global poverty
Combat global disease (AIDS, TB, Malaria)
Increase educational attainment
Improve women’s status
Promote environmental sustainability
34
Is poverty
policy effective?
35
Poverty Policy Effectiveness?
36
Poverty Policy Effectiveness?
Percentage of people living on less than $1.25/day,
1990, 1999, 2005
5
4
Northern Africa
3
3
8
Former Soviet Union
5
2
4
Western Asia
6
11
11
Latin America & the Caribbean
1990
8
1999
60
Eastern Asia
2005
36
16
39
South-Eastern Asia
35
19
49
Southern Asia
42
39
57
58
Sub-Saharan Africa
51
0
10
20
30
40
50
60
70
37
Discussion Questions
What are the costs and benefits of having an unequal
income distribution?
What are the tradeoffs associated with providing
income support to the poor?
38
Discussion Questions
Suppose that a direct payment anti-poverty program
provides a base payment of $10,000 per year to poor
families. At the same time, however, the value of the
base payment is reduced by $1.00 for every $1.00 of
income the family earns. How would such a program
affect a household’s incentive to work? Would the
effect on work incentives be different if the base
payment were reduced by only $0.50 for each dollar
of income earned?
39
Other Sources for Discussion
The PBS program, “The New Heroes” highlights social entrepreneurs,
including those focused on problems of global poverty and disease.
http://www.pbs.org/opb/thenewheroes/whatis/
Ehrenreich, Barbara (2001) Nickel and Dimed: On (Not) Getting By in
America. New York, NY: Henry Holt and Company
http://www.henryholt.com/holt/nickelanddimed.htm describes the author’s
experience with living on the minimum wage for one year
40
Poverty and the Income
Distribution
Wendy A. Stock, Ph.D.
Professor and Department Head
Department of Agricultural Economics and Economics
41