Transcript Document

Income Distribution and
Poverty
CHAPTER
18
© 2003 South-Western/Thomson Learning
1
Distribution of Household Income
In a market economy, income depends
primarily on earnings, which depend on
the productivity of one’s resources
The problem with allocating income
according to productivity is that some
people have difficulty earning income
Some have mental and physical disabilities
Others may face limited job choices and
reduced wages because of age, poor
education, discrimination, bad luck, or the
demands of caring for small children
2
Income Distribution
Consider the distribution of income and
see how it has changed over time,
focusing on the household as the unit of
measure
3
Lorenz Curve
The Lorenz curve is another way to
picture the distribution of income in an
economy
The Lorenz curve shows the percentage
of total income received by any given
percentage of households when
incomes are arrayed from smallest to
largest
4
A College Education Pays More
Contributing to the dominance of the top
group is a growing premium paid those
with a college education for a number of
reasons
Trends such as industry deregulation,
declining unionization, and freer international
trade have reduced the demand for workers
with less education
New computer-based information technologies
have reduced the demand for low-skilled
clerical workers
The supply of less-educated workers increased
more than the supply of more-educated
workers
5
Problems with Distribution Benchmarks
First is that there is no objective standard
for evaluating income distributions
The usual assumption is that a more equal
distribution is more desirable, but is a perfectly
even distribution most preferred?
A second problem is that most distributions
measure money income after cash transfers
but before taxes, it omits the effects of
taxes and in-kind transfers such as food
stands and free medical care  understates
the share of income going to lower income
groups
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Problems with Distribution Benchmarks
Third, focusing on the share of income
going to each income quintile overlooks
the fact that household size differs
across quintiles
Households in the bottom quintile contain
39 million people
The top quintile contains 64 million people
So households at the top average two-thirds
larger than those at the bottom
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Problems with Distribution Benchmarks
Fourth, the two exhibits presented here
include only reported sources of income
Finally, a better measure of household
welfare might be the distribution of
expenditures
Evidence on expenditures indicates that
spending by quintiles is much more evenly
distributed than income
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Why Do Household Incomes Differ?
The median income of all households is
the middle income when all incomes are
ranked from lowest to highest
Thus, one reason household incomes
differ is that the number of household
members who are working differ
For example, over two-thirds of households
in the bottom 20% are headed by
unmarried females
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Why Do Household Incomes Differ?
Incomes also differ for all the reasons
labor incomes differ, such as differences
in education, ability, job experience,
and so on
Differences in earnings based on age
and education reflect a normal life-cycle
pattern of income
In fact, most income differences across
households reflect the normal workings of
resource markets, whereby workers are
rewarded according to their productivity
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Poverty and the Poor
Since poverty is such a relative concept,
how do we measure it objectively and
how do we ensure that our measure can
be applied with equal relevance over
time?
The benchmark for poverty analysis is
based on the assumption that the poor
spend about one-third of their income
on food  the U.S. Department of
Agriculture estimates the cost of a
nutritionally adequate diet
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Poverty and the Poor
This nutritionally adequate diet is then
multiplied by three to generate the U.S.
official poverty level
The poverty definition is based on
pretax money income, including cash
transfers, but it excludes the value of
noncash transfers such as food stamps,
Medicaid, subsidized housing, or
employer provided health insurance
12
Programs to Help the Poor
What should society’s response to
poverty be?
Families with a full-time worker are
nine times more likely to escape poverty
than are families with no workers  a
healthy economy remains the first line
of defense in fighting poverty
However, even when the unemployment
rate is low, some people remain poor
13
Programs to Help the Poor
Since the mid-1960s, social welfare
expenditures at all levels of government
have increased significantly
These programs can be divided into two
broad categories
Social Insurance
Income assistance
14
Social Insurance
Social insurance programs are designed
to help make up for the lost income of
those who worked but are now retired,
temporarily unemployed, or unable to
work because of disability or workrelated injury
Social Security is designed to supplement
retirement income of those with a work
history and a record of contributing to the
program
Medicare provides health insurance for
short-term medical care, mostly to the
elderly, regardless of income
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Social Insurance
Other social programs include
unemployment insurance and worker’s
compensation which supports workers
injured on the job
Both programs require that beneficiaries
have a prior record of employment
The social insurance system deducts
insurance premiums from workers’ pay
to provide benefits to others. However,
most current Social Security
beneficiaries receive far more than they
paid into the system
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Income Assistance
Income assistance programs – what we
usually call “welfare” programs –
provide money and in-kind assistance to
the poor
Do not require the recipient to have a
history of work or have contributed to
the program
Income assistance programs are
normally means tested
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Income Assistance
Means-tested programs require that a
household’s income and assets must fall
below a certain level to qualify for
benefits
Federal government funds two-thirds of
welfare spending, and state and local
governments the remaining one-third
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Income Assistance
The two primary cash transfer programs
which vary inversely with income are:
Temporary Assistance for Needy Families
(TANF) which provides cash to poor families
with dependent children, replaced Aid for
Families with Dependent Children (AFDC)
• Controlled by each state and carries no federal
entitlement
• Each state given a fixed grant program to help
fund TANF programs
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Income Assistance
Supplemental Security Income (SSI) provides cash to
the elderly poor and the disabled
• Is the fastest-growing cash transfer program with
outlays quadrupling from $8 billion in 1980 to
nearly $32 billion in 2000
• SSI coverage has been broadened to include those
addicted to drugs and alcohol, children with
learning disabilities, and, in some cases, the
homeless
• The federal portion of this program is uniform
across states, but states can supplement federal aid
• Most states also offer General Assistance aid to
those who are poor but do not qualify for TANF or
SSI
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Income Assistance
The federal government also provides
an earned-income tax credit which
supplements wages of the working poor
In addition to cash transfer programs, a
variety of in-kind transfer programs
provide health care, food stamps, and
housing assistance to the poor
21
Income Assistance
Medicaid pays for medical care for those
with incomes below a certain level; by
far the largest welfare program costing
twice as much as all cash transfer
programs combined
It has grown more than any other
poverty program, quadrupling in the
last decade and accounting for nearly a
quarter of the typical state’s budget
Qualifying level of income set by each state
Proportion of poor covered varies by state
22
Income Assistance
Food stamps are vouchers that can be
redeemed for food
Funded by the federal government
Uniform across states and is aimed at
reducing hunger and providing nutrition to
poor families
Housing assistance programs include
direct assistance for rental payments
and subsidized low-income housing
Has more than doubled since 1990
23
Income Assistance
Exhibit 4: In 1959, the elderly were the poorest
group, with a poverty rate of 35%. Since then,
poverty among the elderly has declined to a record
low of 9.7% in 2000.
This decline stems from tremendous growth in
spending for Social Security and Medicare.
In real terms those two programs grew tenfold from $62
billion in 1959 to over $620 billion in 2000, measured in
2000 dollars.
Thus, while not welfare programs in a strict sense, Social
Security and Medicare have been extremely successful in
reducing poverty among the elderly.
24
Poverty and Public Choice
In a democracy, public policies depend
very much on the political power of the
interest groups involved
In recent years, the elderly have
become a powerful political force
Voter participation rate of those 65 and over
is higher than that of any other age group
For example, they show up at the polls at
triple the rate of those between 18 and 24
and four times that of welfare recipients
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Poverty and Public Choice
Unlike most interest groups, this is a group
we all expect to join one day
The elderly are actually represented by five
constituencies
The elderly themselves
Those under 65 who are concerned about the
current benefits to their parents & other elderly
relatives
Those under 65 who are concerned about their
benefits in the future
Those who earn a living by caring for the elderly
Those running for office who want the votes the
elderly deliver
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Feminization of Poverty
One way of classifying the incidence of
poverty is by age
Another way is based on the marital
status and race of the household head
27
Feminization of Poverty
While the exhibit shows the poverty
rate among female householders, it
doesn’t show the growth in the number
of such households
The number of families headed by
women has nearly tripled since 1960,
while married-couple households grew
just 40 percent
The percentage of births to unmarried
mothers is five times greater today than
in 1960
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Feminization of Poverty
Today, one in ten children lives with a
single parent who has never married
The United States has the highest
teenage pregnancy rate in the
developed world
Since the father in such cases typically
assumes little responsibility for child
support, children born outside of
marriage are likely to be poorer than
other children
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Feminization of Poverty
The divorce rate has also increased 
even children born to married couples
now face a greater likelihood of living in
a one-parent household before they
grow up
Thus, the growth in the number of poor
families since 1969 resulted
overwhelmingly from a growth in the
number of female householders
30
Feminization of Poverty
Families with a female head are in the
worst position to take advantage of job
growth  children of female
householders are five times more likely
to live in poverty than are other children
Young, single motherhood is a recipe for
poverty
Often the young mother drops out of school,
which reduces her future earning
possibilities when and if she seeks work
outside the home
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Feminization of Poverty
Worse yet, young, single mothers-to-be are
less likely to seek adequate medical care 
a higher proportion of premature,
underweight babies
The lack of education and limited job skills
leads to the fact that most unwed mothers
go on welfare
Poverty has therefore become increasingly
feminized, mostly because female
householders have become more common
32
Poverty and Discrimination
To what extent has racial discrimination
limited job opportunities and increased
poverty among minorities?
Discrimination can occur in many ways:
in school funding, in housing, in
employment, in career advancement
Also, discrimination in one area can
affect opportunities in another, e.g,
housing discrimination may reduce job
opportunities
33
Poverty and Discrimination
Consider the difference between the
earnings of white and nonwhite workers
After adjusting for a variety of factors
that could affect the wage – education
and work experience – research shows
that whites earn more than blacks, but
the gap between the two has narrowed
Some research suggests that black
workers received a lower quality of
schooling than white workers
34
Poverty and Discrimination
Direct evidence of discrimination comes
from audit studies where otherwise
similar white and minority candidates
are sent to the same source to seek
jobs, rent apartments, or apply for
mortgages
These studies find that employers are
less likely to interview or offer a job to
minority applicants and minority
applicants tend to be treated less
favorably by real estate agents and
lenders
35
Affirmative Action
The Equal Employment Opportunity
Commission, established by the Civil
Rights Act of 1964, monitors cases
involving unequal pay for equal work
and unequal access to promotion
Research suggests that civil-rights
legislation has played a role in
narrowing the black-white earnings gap
State and local governments have also
introduced set-aside programs to
guarantee minorities a share of
contracts
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Affirmative Action
Since 1993 the median income of black
families has risen faster than that of
white families
The proportion of black families living
below the poverty line has fallen to a
record low
There is also a growing middle class
among black householders
37
Unintended Consequences
On the plus side, antipoverty programs
increase the consumption possibilities
of poor families which is especially
significant since children are the largest
poverty group
But programs to assist the poor may
have secondary effects that limit their
ability to reduce poverty
38
Disincentives
Society, through government, tries to
provide families with an adequate
standard of living, but society also wants
to ensure that only those in need receive
benefits
Income assistance consists of a
combination of cash and in-kind transfer
programs, the benefits of which vary
inversely with income from other sources
 transfers decline sharply as earned
income increases  high marginal tax
rate on earned income
39
Disincentives
Over certain income ranges, the welfare
recipient may lose more than $1 in
transfer benefits for each additional $1
in earnings  the marginal tax rate on
earned income could exceed 100%
Since holding even a part-time job
involves additional expenses, the high
marginal tax rate discourages
employment and self-sufficiency
40
Disincentives
The longer people are out of the labor
force, the more their job skills
deteriorate  when they do look for
work, their productivity and their pay
are lower than when they were last
employed
Some argue that in this way, welfare
benefits can lead to long-term
dependency  unfavorable
consequences both for the family and
for society
41
Disincentives
Welfare programs can cause other
disincentives
For example, children may be eligible
for Supplemental Security Income if
they have a learning disability and there
is some evidence that low-income
parents encouraged poor behavior in
school so their children would qualify
for this program
42
Does Welfare Cause Dependency?
How could we examine such a question?
A relatively brief average stay on
welfare would be evidence of little
dependency
If, however, the same families were
found on welfare year after year, this
would be a matter of concern
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Does Welfare Cause Dependency?
A University of Michigan study tracked
5,000 families over a number of years,
paying particular attention to economic
mobility from year to year, or
dependency within a generation
It found that most recipients received
welfare for less than a year, but about
30 percent remained on welfare for at
least eight years  a core of long-term
recipients
44
Does Welfare Cause Dependency?
A second and more serious concern is
whether the children of the poor end up
in poverty as well
Is there a cycle of poverty?
Why might we expect one?
Children in welfare households may
learn the ropes about the welfare
system and may come to view welfare
as a normal way of life rather than as a
temporary bridge
45
Does Welfare Cause Dependency?
Research indicates that daughters from
welfare families are more likely than
daughters in other families to
participate in the welfare system
themselves and are more likely to have
premarital births
The evidence is weaker when it comes
to sons from welfare families
46
Welfare Reform
There has been much dissatisfaction
with the welfare system, both among
those who pay for the programs and
among direct beneficiaries
Some analysts believe that one way to
reduce poverty is to provide welfare
recipients with job skills and make them
find jobs  workfare programs
Where tried these state programs indicate
that they do save some money because
those in the welfare-to-work left welfare
rolls sooner
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Welfare Reform
Reforms at the state level set the stage
for federal reforms
Biggest reform came with the
replacement of Aid to Families with
Dependent Children with Temporary
Assistance for Needy Families
AFDC set eligibility rules and left federal
costs open-ended through matching grants
to the stats
TANF offers a block grant to the states to
run their welfare programs
48
Welfare Reform
Under the new system, states have wide
latitude to run their own welfare
programs
But concerns about welfare dependency
fostered some special provisions
The act imposes a lifetime limit of five years
that a recipient can be on welfare
All able-bodied recipients on welfare for two
years must participate in welfare-to-work
programs
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Welfare Reform
States now have an incentive to constrain the
growth of welfare rolls
• Under the old system the federal government paid at
least half of the welfare bill, paying a larger share in
poorer states
• Under the new system, each state must pay 100
percent of any welfare costs above the federal grant
Aside from the time limits and work
participation rates imposed by the federal
government, states are free to set benefit
levels and experiment however they choose
A concern with ending federal entitlements
and capping grants to states is what will
happen should the economy enter a recession
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