Income Inequality and Poverty

20: Income Inequality and Poverty
1) Income Inequality and Poverty
A person’s earnings depend on the supply and demand for that person’s labor, which in turn depend on natural ability, human capital, compensating differentials, discrimination, and so on.
2) THE MEASUREMENT OF INEQUALITY
How much inequality is there in our society?
How many people live in poverty?
What problems arise in measuring the amount of inequality?
How often do people move among income classes?
3) Table 1 The Distribution of Income in the United States: 2000

4) Philippines

5) Poor Employed

6) Income Gap

7) U.S. Income Inequality
Imagine that you. . . lined up all of the families in the economy according to their annual income. divided the families into five equal groups (bottom fifth, second fifth, etc.) computed the share of total income that each group of families received.
8) Table 2 Income Inequality in the United States
9) U.S. Income Inequality
Reasons for Recent Increase in Income Inequality
The following have tended to reduce the demand for unskilled labor and raise the demand for skilled labor:
Increases in international trade with low-wage countries
Changes in technology
Therefore, the wages of unskilled workers have fallen relative to the wages of skilled workers.
This has resulted in increased inequality in family incomes.
10) CASE STUDY: Income Equality around the World
11) The Poverty Rate
The poverty rate is the percentage of the population whose family income falls below an absolute level called the poverty line.
12) Problems in Measuring Inequality
The Poverty Line
The poverty line is an absolute level of income set by the federal government for each family size below which a family is deemed to be in poverty.

13) Figure 1 The Poverty Rate
14) Problems in Measuring Inequality
The Poverty Line and Income Inequality
As economic growth pushes the entire income distribution upward, more families are pushed above the poverty line because the poverty line is an absolute rather than a relative standard.
Despite continued economic growth in average income, the poverty rate has not declined.
Although economic growth has raised the income of the typical family, the increase in inequality has prevented the poorest families from sharing in this greater economic prosperity.
15) Table 4 Who Is Poor?
16) Problems in Measuring Inequality
Three Facts About Poverty
Poverty is correlated with race.
Poverty is correlated with age.
Poverty is correlated with family composition.
17) Problems in Measuring Inequality
Data on income distribution and the poverty rate give an incomplete picture of inequality in living standards because of the following: In-kind transfers Life cycle Transitory versus permanent income
18) Problems in Measuring Inequality
In-Kind Transfers
Transfers to the poor given in the form of goods and services rather than cash are called in-kind transfers.
Measurements of the distribution of income and the poverty rate are based on families’ money income.
The failure to include in-kind transfers as part of income greatly affects the measured poverty rate.
19) Problems in Measuring Inequality
The Economic Life Cycle
The regular pattern of income variation over a person’s life is called the life cycle.
A young worker has a low income at the beginning of his or her career.
Income rises as the worker gains maturity and experience.
Income peaks at about age 50.
Income falls sharply at retirement, around age 65.
20) Problems in Measuring Inequality
Transitory versus Permanent Income
Incomes vary because of random and transitory forces.
Acts of nature
Temporary layoffs due to illness or economic conditions, etc.
A family’s ability to buy goods and services depends largely on its permanent income, which is its normal, or average, income.
Permanent income excludes transitory changes in income.
21) Economic Mobility
The movement of people among income classes is called economic mobility.
Economic mobility is substantial in the U.S. economy.
Movements up and down the income ladder can be due to:
Good or bad luck.
Hard work or laziness.
Persistence of economic success from generation to generation.
22) POLITICAL PHILOSOPHY OF REDISTRIBUTING INCOME
What should the government do about economic inequality?
Economic analysis alone cannot give us the answer.
The question is a normative one facing policymakers.
Three Political Philosophies
Utilitarianism
Liberalism
Libertarianism
23) Utilitarianism
Utilitarianism is the political philosophy according to which the government should choose policies to maximize the total utility of everyone in society.
The founders of utilitarianism are the English philosophers Jeremy Bentham and John Stuart Mill.
The utilitarian case for redistributing income is based on the assumption of diminishing marginal utility. An extra dollar of income to a poor person provides that person with more utility, or well-being, than does an extra dollar to a rich person.
24) Liberalism
Liberalism is the political philosophy according to which the government should choose policies deemed to be just, as evaluated by an impartial observer behind a “veil of ignorance.”
This view was originally developed by the philosopher John Rawls.
Public policy should be based on the maximin criterion, which seeks to maximize the utility or well-being of the worst-off person in society.
That is, rather than maximizing the sum of everyone’s utility, one should maximize the minimum utility.
This idea would allow for the consideration of the redistribution of income as a form of social insurance.
25) Libertarianism
Libertarianism is the political philosophy according to which the government should punish crimes and enforce voluntary agreements, but should not redistribute income.
Libertarians argue that equality of opportunity is more important than equality of income.
26) POLICIES TO REDUCE POVERTY
Minimum-wage laws
Welfare
Negative income tax
In-kind transfers

27) Minimum-Wage Laws
Advocates view the minimum wage as a way of helping the working poor.
Critics view the minimum wage as hurting those it is intended to help.
The magnitude of the effects of the minimum wage depends on the elasticity of the demand for labor.
Advocates argue that the demand for unskilled labor is relatively inelastic, so that a high minimum wage depresses employment only slightly.
Critics argue that labor demand is more elastic, especially in the long run when firms can adjust employment more fully.
28) Welfare
The government attempts to raise the living standards of the poor through the welfare system.
Welfare is a broad term that encompasses various government programs that supplement the incomes of the needy.
Temporary Assistance for Needy Families (TANF)
Supplemental Security Income (SSI)
29) Negative Income Tax
A negative income tax collects tax revenue from high-income households and gives transfers to low-income households.
High-income families would pay a tax based on their incomes.
Low-income families would receive a subsidy—a “negative tax.”
Poor families would receive financial assistance without having to demonstrate need.