Income Distribution, Poverty, and Discrimination

1. Income Distribution, Poverty, and Discrimination • Key Concepts • Summary ©2005 South-Western College Publishing

2. What will I learn in this chapter? In this chapter, we turn our attention to the distribution of income, poverty, and discrimination, which are important topics related to labor market wage decisions

3. What is the general trend of income distribution? Since 1970, the percentage of income received by families in the lowest 20% has fallen, while the percentage received by families in the 20% highest income groups have risen

4. Division of the Total Annual Money Income Among Families % of Families 1980 1990 2001 4.6% 5.2% Lowest 5th 4.2% 11.5 Second-lowest 5th 10.8 9.7 17.5 15.4 Middle 5th 16.6 24.3 23.8 22.9 Second-highest 5th Highest 5th 41.6 44.3 47.7 Highest 5% 15.3 17.4 21.0

5. What ismedian income? 50% of families earn less than the median income and 50% earn more

6. Median Income of Families, 2001 Median Income Characteristic All families $51,407 Headed by a male $36,590 Headed by a female $25,745 $46,272 With head aged 25-34 With head aged 65 and over $33,816 Headed by a high school grad $43,870 Person with a bachelor’s degree $78,518

7. What conclusion can be drawn from the previous graphs? Measured by distribution of family money income, the richest families have become a little richer and the rest of the family groups a little poorer

8. What are some arguments against income inequality? • Wealthy can influence politics • Wealthy have more opportunities • Wealthy can afford better health care

9. What is an argument for income inequality? Income inequality gives people an incentive to become more productive

10. What is theLorenz Curve? A graph of the actual cumulative distribution of income compared to a perfectly equal distribution of income

11. Hypothetical Lorenz Curve 100% Perfect Equality 80% 60% % of income 40% Actual Income 20% % of families 20% 40% 60% 80% 100%

12. Lorenz Curve 1929 & 2001 100% Perfect Equality 80% 60% 2001 % of income 40% 20% 1929 % of families 20% 40% 60% 80% 100%

13. Lorenz Curve for Nations 100% Perfect Equality 80% 60% Russia % of income 40% Brazil 20% U.S. % of families 20% 40% 60% 80% 100%

14. What is the poverty line? The level of income below which a person or a family is considered to be poor

15. Does the poverty line consider cash transfer income? Yes; Social Security, unemployment compensation, and Aid to Families of Dependent Children are considered

16. What arein-kind transfers? Government payments in the form of goods and services, rather than cash

17. Does the poverty line consider in-kind transfers? Receipts from government programs such as food stamps, Medicaid, and housing are not included

18. Characteristic % Headed by married couple 6% Headed by a male, no wife 12% Headed by a female, no husband 26% 20% No high school diploma 10% High school diploma, no college 2% Bachelor’s degree or more % of U.S. Persons below Poverty Level 2002

19. What are examples of cash transfer programs? • Social Security • Unemployment Compensation • Aid to Families with Dependent Children

20. What are examples of in-kind transfer programs? • Food stamps • Medicaid • Housing Assistance

21. What are major criticisms of welfare? • Work disincentives • Inefficiencies • Inequities

22. What are examples of reform proposals? Negative income tax Workfare

23. What is a negative income tax? A plan under which families below a certain break-even level of income would receive cash payments that decrease as their income increases

24. Negative Income Tax $10 Positive Tax $5 0 Tax Liability $-5 Negative Tax $-20 Family Income $10 $20 $30 $40 $50

25. What is workfare? Recipients of government programs have to work to receive the benefits

26. Can discrimination effect people’s wage rate? Certain groups can receive more or less income if there is discrimination in the labor market

27. How does comparable worth effect wages? Employees who work for the same employer must be paid the same wages when their jobs, even if different, require similar levels of education, etc.

28. Key Concepts

29. What is median income? • What are some arguments against income inequality? • What is an argument for income inequality? • What is the Lorenz Curve? • What is the poverty line? • What are in-kind transfers? • Does the poverty line consider in-kind transfers?

30. What are examples of cash transfer programs? • What are examples of in-kind transfer programs? • What is a negative income tax? • What is workfare? • Can discrimination effect people’s wage rate? • How does comparable worth effect wages?

31. Summary

32. The Lorenz curve is a measure of inequality of income. Since 1947, the share of money income for each fifth of families ranked according to their income has been stable.

33. Hypothetical Lorenz Curve 100% Perfect Equality 80% 60% % of income 40% Actual Income 20% % of families 20% 40% 60% 80% 100%

34. The poverty line is a level of cash income below which a family is classified as poor. The poverty income threshold is three times the cost of a minimal diet for a family.

35. In-kind transfers are payments to the poor in the form of goods and services, rather than cash. Calculation of the poverty line counts cash income. On the other hand, in-kind transfers, such as food stamps, Medicaid, and housing, do not count as income for families classified as officially poor.

36. Government cash transfers counted in the poverty line include payments from Social Security, unemployment compensation, and Aid to Families with Dependent Children.

37. Welfare criticisms include three major arguments: (1) Welfare reduces the incentive to work for the poor and taxpayers. (2) Welfare is inefficient because much of the money covers administrative costs, rather than providing benefits for the poor. (3) Because many antipoverty programs are controlled by the state, welfare benefits vary widely.

38. The negative income tax is a plan to set an income guarantee for all families. As a low-income family earns income, government payments (negative income tax) are phased out. After reaching a break-even income, families become taxpayers instead of being on the welfare rolls.

39. Negative Income Tax $10 Positive Tax $5 0 Tax Liability $-5 Negative Tax $-20 Family Income $10 $20 $30 $40 $50

40. Comparable worth is the theory that workers in jobs determined to be of equal value by means of point totals should be paid equally. Instead of allowing labor markets to set wages, independent consultants award points to different jobs on the basis of such criteria as knowledge, experience, and working conditions

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