Transcript Principles of Economics Third Edition by Fred Gottheil

Income Distribution and Poverty
• The Lorenz curve
• The Gini coefficient
• Distribution of income and wealth in the U.S.
• Poverty threshold (level)
Questions:
• What explains income inequality?
• What can (should) be done, if anything?
1
Income Distribution and Poverty
Person’s income related to primary source of income.
• If property income:
profits(entrepreneurship)
interest (capital)
rent (land)
tendency to be at the top of the distribution
• If labor income:
wages
tendency to be at the bottom of the distribution
2
Measuring Income Distribution
Two ways to measure an
economy’s income distribution:
The Lorenz curve.
The Gini coefficient.
3
LORENZ
CURVES
FOR THE
COMMUNITIES
OF
WASHTENAU,
SPRINGFIELD,
AND HOLMES
4
Lorenz curve
Shows the percentage of total income that a
specific part of the population -- typically
represented by quintiles, ranging from the poorest
to the richest -- receives.
The percentage of population is measured along the horizontal axis and
the percentage of total income is measured along the vertical axis.
Perfect income equality
(diagonal)
When each percent of the population receives an
equal percent of the economy’s total income.
Perfect income inequality
(2 sides of right angle)
One person receives all of the income.
5
LORENZ CURVES
SWEDEN, FRANCE, BRAZIL, AND THE UNITED STATES
6
Gini coefficient
A numerical measure of the degree of
income inequality in an economy.
The ratio of the two areas produced by the Lorenz
curve.
G = A/(A+B)
Area A lies between the diagonal and the economy’s Lorenz
curve.
Area B lies below the economy’s Lorenz curve.
0: perfect equality
1: perfect inequality
7
THE GINI COEFFICIENT
G = A/(A+B)
8
EXHIBIT 4
SHARE OF AGGREGATE INCOME
RECEIVED BY HOUSEHOLDS, BY QUINTILE
AND TOP 5 PERCENT, AND GINI
COEFFICIENT: 1970–99
Source: U.S. Bureau of the Census, Money Income in the United States: 1995, Current Population Reports, P60-193 (Washington, D.C.: U.S.
Government Printing Office, 1996); and U.S. Bureau of the Census, Money Income in the United States: 1999, Current Population Reports, P60-220
(Washington, D.C.: U.S. Government Printing Office, 1999).
0: perfect equality
1: perfect inequality
9
EXHIBIT 5
PERCENTAGE CHANGE IN HOUSEHOLD
GINI COEFFICIENT: 1967–99
Source: U.S. Bureau of the Census, Current Population Survey, March 1999.
10
Possible Causes of Growing Income Inequality
Decrease in minimum wage (in real value).
Decrease in union membership.
Changes in tax laws favoring the wealth.
Declining resources to public education.
“Deindustrialization”
(closing down manufacturing plants)
“Globalization.”
Stock market “boom” (1980-2000)
[Related to unequal distribution of wealth]
11
Wealth
Accumulated assets owned (financial
and physical) by individuals, including
inherited assets.
Net wealth (net worth) tends to be far
more unevenly distributed than
income.
12
EXHIBIT 8
DISTRIBUTION OF NET WEALTH OF U.S.
FAMILIES (1774 AND 1973)
Source: Jones, A. H., Wealth of a Nation to Be—The American Colonies on the Eve of Revolution
(New York: Columbia University Press, 1980); and Greenwood, D., “An Estimation of U.S. Family
Wealth and Its Distribution from Macro Data, 1973,” The Review of Income and Wealth, Series 29, I,
March 1983, pp. 23–44.
13
Is There an Optimal Income
Distribution? The Case for Equality
Good fortune and disaster--distributed
randomly.
Income inequality, then, has no more
justification than a lottery result.
14
Is There an Optimal Income
Distribution? The Case for Equality
Economist A.P. Lerner, made the case
for equality based on the argument
that equality produces the greatest
welfare for the greatest number of
people.
15
The Case for Inequality
Other economists argue for
income inequality:
productive contribution=
economic reward
Without the link between reward (income)
and labor, productive people would lack the
incentive to work.
16
Supply-Side Economics: “TrickleDown Theory”
Income inequality
economic growth.
Because….The rich tend to do the country’s saving
+ investing.
The richer the rich
the greater the saving and investment
higher the rate of growth.
“A rising tide lifts all boats.”
17
TAXES
• Problems in using taxes to
redistribute incomes
– economic costs of redistribution
• distortionary effects of taxes
• deadweight welfare loss of taxes
• disincentives
Total tax revenue
A Laffer curve
0
100
fig
Average tax rate (%)
A Laffer curve
Total tax revenue
R max.
0
t1
100
fig
Average tax rate (%)
Percentage shares of income before and after tax
by decile group of households: 2000/1
30
26.8
25.8
% of income
25
Income before tax
20
15.7 15.2
15
10
Income after tax
12.9 12.6
11.1 10.9
9.0 9.1
5
7.6 7.8
6.0 6.3
4.7 5.2 3.8 4.2
2.5 2.8
0
Top 10% 11 to 20 21 to 30 31 to 40 41 to 50 51 to 60 61 to 70 71 to 80 81 to 90 Bottom
10%
fig
Source: Economic Trends (ONS, April 2002)
EXHIBIT 6
INCOME DISTRIBUTION IN THE MID-1980s,
SELECTED COUNTRIES, BY QUINTILE
Source: European Economy: 1996 Broad Economic Policy Guidelines, no. 62 (Brussels, 1996), and World Development Report, 1996
(Washington, D.C.: World Bank, 1996).
22
EXHIBIT 7
INCOME DISTRIBUTION IN LESS-DEVELOPED
ECONOMIES, BY QUINTILE
Source: World Development Report, 1996 (Washington, D.C.: World Bank, 1996). The footnote to the table in the report reads: “These estimates
should be treated with caution.”
23
Average gross weekly earnings of
UK full-time adult employees: 2001
Financial managers
Medical practioners
Personnel managers
Secondary teachers
Nurses
Women's earnings
Factory lineworkers
Men's earnings
Clerks
Sales assistants
Bar staff
0
200
fig
400
600
800
1000
1200
INEQUALITY AND POVERTY
• The causes of inequality
– inequality of wealth
– differences in workers’
•
•
•
•
•
–
–
–
–
–
ability; qualifications
attitudes
hours worked
economic power
qualifications
differences in demand for goods
differences in household composition
discrimination
degree of government support
unemployment
• Government/societal attitudes towards
inequality
Benefits to reduce inequality/poverty
• “safety-net” temporary support
•
means-tested vs
universal benefits
Cash assistance
Transfer payments: Government assistance in the form
of direct income.
In-kind assistance
Government assistance in the form of goods and
services, such as healthcare, education, food stamps.26
Social protection benefits in various
European countries: (a) €
per head
8000
1999
7000
5000
4000
3000
2000
1000
EU15
UK
Sweden
Spain
Portugal
fig
Netherlands
Italy
Ireland
Greece
Germany
France
Denmark
0
Belgium
Euro per head
6000
Source: Eurostat, 2002
CASH AND NONCASH BENEFITS FOR
PERSONS WITH LIMITED INCOME: USA 1996
Source: Statistical Abstract of the United States, 1999 (Washington, D.C.: Department of Commerce, 1999), p. 389.
28
EXHIBIT 15 POPULATION BELOW 50 PERCENT OF
MEDIAN INCOME (LATEST OECD DATA)
Source: OECD Economic Surveys, Germany, 1996 (Paris: OECD, 1996), P. 90.
29
Exh. 15: Population Below 50 Percent
of Median Income (Latest OECD Data)
Has government spending to assist the poor been
effective at raising families out of poverty?
• In the U.S. the effects of low-income assistance
programs seem barely perceptible.
• While some countries have seen the numbers of
poor drop by half, the US number have dropped by
less than 1 percent.
30
TAXES AND BENEFITS
• The problem of the
poverty trap
– an argument for universal benefits
– problems with universal benefits
• The negative income tax system