Income Inequality and Poverty

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Income Inequality and Poverty
2
If it were true, on average, that incomes in poor
countries grew faster between 1980 and 2000 than
incomes in rich countries, then the points in
chart 1 would tend to lie on a downward-sloping
line. In that case, one would say that the poor
countries were on average catching upand that
global inequality measured across countries was
trending downwards. In fact, as the first chart
shows, poor countries are not on average catching
up. A line of best fit drawn through the points
actually slopes upwards, implying that the poor
are falling behind, and that cross-country
inequality is getting worse.
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But now look at chart 2. This plots the same
countries as circles with areas drawn in
proportion to population. India and China stand
out, both by virtue of their vast populations and
also because their growth record in the 1980s and
1990s was so much better than the poor-country
average. A population-weighted line of best fit
drawn through this second chart would indeed
slope downwards, implying both catch-up and
narrowing inequality.
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America and Europe differ in their willingness to
use government to redistribute income from rich
to poor

• Government spending in the United States is about
  30 of GDP in continental Europe, where it
  includes most health-care spending, it is about
  45. Almost two-thirds of this spending is on
  welfare.
• Americans, by contrast, are much more likely to
  give money privately. They appear to have given
  691 per head in charitable donations in 2000,
  compared with contributions of 141 in Britain
  and a mere 57 in Europe as a whole.

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The prevalence of three beliefs

• The poor are trapped in poverty
• Luck determines income
• The poor are lazy.

The poor are trapped is held by 29 of Americans
but by 60 of citizens of the European Union
Luck determines income, by 30 of Americans and
54 of Europeans The poor are lazy, by 60 of
Americans and 24 of Europeans.
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• Income Inequality
• in the United States

8
Share of Money Income by Quintile
Top 20 of recipients
Lowest 20 of recipients
Secondquintile
Thirdquintile
Fourthquintile
Family income before taxes
23.4
42.7
17.4
4.5
12.0
1950
12.2
17.8
4.8
24.0
41.3
1960
5.4
12.2
23.8
40.9
17.6
1970
11.6
24.3
41.6
17.5
5.1
1980
10.8
16.6
4.6
23.8
44.3
1990
22.8
4.3
9.8
47.4
15.5
2000
Impact of taxes transfers on 2000 household
income
23.0
14.8
3.7
9.0
49.5
Before
4.6
10.3
22.7
46.7
15.7
After
Household expenditures
24.1
7.1
13.2
37.4
18.2
1961
7.1
12.9
23.9
38.1
18.0
1972
6.8
12.8
24.1
38.2
18.1
1980
7.1
12.4
23.3
40.1
17.1
1990
12.9
7.4
23.4
38.8
17.5
1995
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Factors Influencing Income Distribution

• A high portion of annual income inequality is due
  to differences in
• age,
• education,
• family size,
• marital status,
• number of earners in the family, and,
• time worked.
• Young, inexperienced workers, students,
  single-parent families, and retirees are
  over-represented among those with low incomes.

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High and Low Income Families, 2001
Bottom 20 of income recipients
Top 20 of income recipients
Education of householder
34.0
3.0
Percent with less than high school
8.0
58.0
Percent with college degree or more
Age of householder (percent distribution)
31.0
13.0
under 35
44.0
79.0
35 - 64
25.0
8.0
65 and over
Family status
51.0
94.0
Married-couple family ( of total)
49.0
6.0
Single-parent family ( of total)
2.9
3.4
Persons per family
0.8
2.2
Earners per family
of married couple families in which wife
works full-time
13.0
63.0
of total hours worked supplied by
group
9.0
26.0
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Why Has Income Inequality Increased?

• Income inequality in the U.S. has increased due
  to the growth of
• the share of families that are either
  single-parent or dual-earner
• earnings differentials on the basis of skill and
  education
• the number of winner-take-all markets
• the reported income of those in the top tax
  bracket due to lower marginal tax rates

12

• Income Mobility and
• Inequality in Economic Status

13
Income Mobility

• Annual income data hide the movement of people up
  and down the distribution over time.
• Tracking of household income over time shows
  there is considerable movement both up and down
  the income spectrum.

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Income Mobility
Income Status of Individual in 1995
Income Status of Individual in 1985
Next lowest paid quintile
Lowest paidquintile
Top paidquintile
Next highestquintile
Middlequintile
78.4
Top-paid quintile
42.4
Next-highest-quintile
45.6
Middle-quintile
Next-lowest-paid quintile
25.4
46.3
Lowest-paid quintile

• The table above allows for us to see how
  individuals in each income bracket in the
  U.S. fared 10 years later.

• Does it appear to you that there is a
  significant amount of income mobility in the
  U.S. Economy?

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Household Expenditures and Inequality

• Differences in household expenditures are
  probably a more accurate indicator of economic
  status than income.
• To a large degree, current expenditures reflect
  long-term economic status.
• Household expenditure data do not indicate that
  there has been a major change in U.S. economic
  inequality.

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Questions for Thought
1. Do you think the current distribution of
income in the United States is too unequal?
2. Indicate three factors that have contributed
to an increase in income inequality in the United
States during the last two decades.
3. (Which of the following is true?) Data on
income inequality in the U.S. indicate a. rich
families stay rich poor families stay poor. b.
there is substantial movement among income
groupings in the United States.
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• Poverty in the United States

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Poverty Rate of Persons Families in the United
States 1947-2000
Poverty rate
Persons
Families
Year
n.a.
1947
32.0
22.2
1960
18.1
12.6
1970
10.1
13.0
1980
10.3
1990
13.5
10.7

11.3
2000
8.6

• During the 1950s and 1960s, the poverty rate
  declined substantially.

• After rising slightly during the 1970s and
  1980s, the official poverty rate has fallen
  modestly during the economic expansion of the
  1990s.

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Changing Composition of the Poor
2000
1959
1976
Number of poor families (millions)
5.3
8.3
6.2
Percent of poor families headed by a
48
Female
50
23
30
Black
26
27
14
22
Elderly person (aged 65)
10
55
70
53
Person who worked at least some during
the year
Poverty rate ()
10.1
All families
8.6
18.5
7.2
Married-couple families
15.8
4.7
32.5
42.6
Female-headed families
24.7
9.1
18.1
9.4
Whites
31.1
Blacks
55.1
22.0
16.0
27.3
16.1
Children (under age 18)
.
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Transfer Payments and the Poverty Rate

• Income transfers expanded rapidly over the past
  several decades.
• These transfers have been largely ineffective at
  reducing the poverty rate for working-age
  Americans.
• Though per capita income has increased
  substantially over time (109 since 1965), the
  poverty rate of working-age Americans has stayed
  about the same.

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Poverty Rate, 1947-2000
Povertyrate
1947
1959
1965
1968
1975
1980
1985
1990
2000

• The official poverty rate of families declined
  sharply during the 1950s and 60s

changed
little during the 70s
and increased slightly during
the 80s.

• It has fallen since the mid 1980s, and is now
  at its lowest recorded level since 1947.

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Poverty Rate, 1947-2000
32.0
Povertyrate
18.5
13.9
11.4
10.7
10.3
10.0
9.7
8.6
1947
1959
1965
1968
1975
1980
1985
1990
2000

• The orange shaded part of the bars indicate the
  drop in the poverty rate when non-cash
  benefits are counted as income.

• In 1990, the poverty rate adjusted for non-cash
  benefits was 8.4 (compared to 10.7
  unadjusted). In 2000, it was 6.4 (compared
  to 8.6 unadjusted).

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Poverty Rates for Elderly Families
Povertyrate
1959
1965
1968
1975
1980
1985
1990
2000

• The official poverty rate for elderly families
  has declined sharply since 1959.

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Poverty Rates for Non-Elderly Families
Povertyrate
1959
1965
1968
1975
1980
1985
1990
2000

• In contrast, the official poverty rate for
  non-elderly families was been higher in the
  1990s that it was in the late 1960s.

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Income Transfer Effects

• Income supplements large enough to significantly
  increase the economic status of poor people
  could
• encourage behavior that increases the risk of
  poverty
• create high implicit marginal tax rates that
  reduce the recipients incentive to earn.

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Questions for Thought
1. What impact did the expansion in government
income transfers during the 1960s have on the
poverty rate? Was the War on Poverty successful?
Why or why not?
2. Individuals have a property right to income
they acquire from market transactions, Is it a
proper function of government to tax some people
in order to provide benefits to others?
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Questions for Thought
3. What determines whether a distribution of
income is fair? Do you think that the major
income transfer programs of the U.S. more fair?
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End Chapter 27