Chapter 31. Income Distribution and Poverty

Chapter 31Income Distribution and Poverty31-1Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter ObjectivesHow unequal is income distribution in the United States?What determines how income is distributed?How does the distribution of income differ from the distribution of wealth?How is poverty defined?31-2Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter ObjectivesWho are the poor?What are the main government transfer payments for the poor?What are the causes of poverty?What are the solutions?31-3Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Some Quotations“The forces of a capitalist society, if left unchecked, tend to make the rich richer and the poor poorer.” - Jawaharial Nehru“I’ve been rich and I’ve been poor; rich is better.” - Sophie Tucker31-4Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Income Distribution in the United StatesHow unequal is income distribution in the United States?How unequal are the incomes ofThe poor and the rich?The blacks and whites?The males and females?31-5Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Lorenz CurveA Lorenz curve shows the cumulative share of income earned by each quintile of householdsA quintile is one-fifth (1/5) just like a quarter is one-fourth (1/4)One-fifth is also 20%31-6Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Lorenz CurveIs it accurate to say that 20% of our population is poor, 60% is middle class, and 20% is rich?Maybe notSocial scientist can’t agree about where to draw the dividing lines between the poor and the middle class and between the middle class and the rich 31-7Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.U.S. Household Income, by Quintile, 1999Lowest quintile $0 -16,799 Second quintile 16,800-30,828 Third quintile 30,829-49,015 Fourth quintile 49,016-76,009 Fifth quintile 76,010 and up 31-8Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Hypothetical Lorenz Curve31-9Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.How much does the lowest quintile (1/5) receive?5 %Hypothetical Lorenz Curve31-10Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.How much does the second quintile (1/5) receive?12.5 %Not the answer!The answer is 12.5% - 5% = 7.5% 5Hypothetical Lorenz Curve31-11Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.How much does the third quintile (1/5) receive?25.0Not the answer!The answer is 25.0% -( 5% + 7.5% ) = 12.5% 7.5512.5 Hypothetical Lorenz Curve31-12Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.How much does the fourth quintile (1/5) receive?40.0Not the answer!The answer is 40.0% -( 5% + 7.5% + 12.5) = 15% 7.5512.5 15Hypothetical Lorenz Curve31-13Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.How much does the fifth quintile (1/5) receive? This one is easyThe answer is 100.0% -( 5% + 7.5% + 12.5 +15%) = 60% 7.5512.5 156031-14Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Income Distribution in the United States, 1999Percentage of Total Income before Taxes Received by Each Fifth of American Families, 1960-1999 -------------------------------------------------- Income Rank 1960 1999 -------------------------------------------------- Lowest fifth 4.8% 3.7% Second fifth 12.2% 9.0% Third fifth 17.8% 15.1% Fourth fifth 24.0% 23.3% Highest fifth 41.3% 49.0% Income Distribution Getting More UnevenIncome tax rates on capital gains were cutThis helped the so-called richPayroll taxes were raisedThus hurt the lower income workersAbout 75% of all Americans pay more in payroll taxes than in personal income taxFrom 1960-1999 the average hourly wage fell by more than 10%Relatively high paying manufacturing jobs are being replaced with relatively low paying service sector jobs 31-15Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Distribution of Wealth in the United StatesIn 1976 the top 1% of our population held about 20% of the nation’s household wealthBy 2000 the top 1% held 40% of the nation’s household wealthThe top 5% of all households own 77% of equity holdingsThe bottom 80% own only 1.8%31-16Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Equity and EfficiencyIncome distribution affects our economic efficiencyTwo things make our economy work, the carrot and the stickThe carrot is all the money you can make by working hardThe stick is if you don’t work, you don’t eatComplete income equality would take away our productive incentivesGreat income equality means a great deal of human misery, because many of the poor would not even be able to afford the bare necessities of life 31-17Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Income Distribution31-18Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Whatever the means of income redistribution, the ends are always the sameThe ends are to take from the rich and give to the poorMost people probably agree that the rich and middle class should give some of their money to the poorHowever two questions must be answeredWho are the rich and middle class?How much do we take from them?What Determines Income Distribution?31-19Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Some positive determinants are training, education, intelligence, inborn skills, physical attributes, luck, and who you knowSome negative determinants are job discrimination, luck, and who you don’t knowTwo-thirds of all personal income is earned in wages and salariesProperty income accounts for almost one-quarter of personal incomeGovernment transfer payments account for the restDifferences in Wages and SalariesWhy do some people earn more than others?Why do doctors make more than word processors?Why do professional athletes make more than cashiers?The answer is supply and demandPeople in certain occupations are in short supply relative to the demand for these occupations31-20Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Differences in Wages and SalariesHow important is education?We know that college graduates earn more than high school graduatesThe average college graduate will earn three times as much as someone who has not completed the eighth gradeToday we know that you need to be able to read, write, do arithmetic, think, solve problems and be computer literate31-21Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Differences in Wages and SalariesWhy Does a College Graduate Earn More?The college graduate is probably smarter, richer, and more motivatedThe college graduate probably has better connectionsThe college graduate probably comes from a home with a more supportive learning environment31-22Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Differences in Wages and SalariesHow Important is Talent?Michael Jackson earns $60 million a yearOprah Winfrey brings in $150 million a yearPeople with good communication skills and who are extroverted usually do best in most jobsYet, talent usually is not a deciding factor in how much people earnNew employees tend to be hired at the same starting salaryThey tend to advance lockstep from one pay level to the nextThe most important factor in determining pay level seems to be seniority for most Americans 31-23Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Differences in Wages and SalariesDiscriminationDiscrimination still exist in spite of the gains made in equal economic opportunity1960s women made 60% of what men earn1973 women made 63% of what men earn1996 women made 74% of what men earn2000 women make almost 80% of what men earnThe average college-educated woman still earns less than the average high school-educated man31-24Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Differences in Wages and SalariesDiscriminationDiscrimination still exist in spite of the gains made in equal economic opportunityBlacks earn about 60% of what whites earnThe past forty years the unemployment rate for blacks has consistently been double that for whitesIn past recessions the unemployment for rate for black teenagers rose above 50% Hispanics have suffered almost as much as blacks in employment discrimination since WW II31-25Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Property IncomeWages and salaries accounted for 62% of personal income in 1997Property income accounted for 26%Most property income goes to the rich in the form of rent, interest, dividends, capital gains, and profitsLess than 10% of the middle class have property incomeThe two largest sources of wealth, exclusive of inheritance, are the stock market and starting up new companies Government transfer payments accounted for 12%31-26Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Social security benefits constitute more than two-thirds of all federal transfer paymentsSocial security benefits are not aimed specifically at the poorSocial security benefits keeps many people above the poverty lineSocial Security benefits are the main support of many retirees31-27Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Government Transfer PaymentsUnemployment benefitsUnemployment benefits are the sole means of support for most people collecting themUnemployment benefits go to less than half of the unemployed, primarily to lower income groupsMedicare helps the elderly regardless of income levelPublic assistance and food stamp programs targets lower income groups31-28Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Government Transfer PaymentsAlmost all agree that some income redistribution is neededThe hard questions areHow much income redistribution is needed?To whom should it be redistributed?We all probably want to see a more equitable and efficient society, but we are far from reaching a consensus on how this can be attained31-29Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Income RedistributionUpward Mobility: Europe versus the United States31-30Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Percentage share of poor who left poverty within a year in the 1980sDimensions of the poverty problemSome of the causes of povertyHow we are dealing with povertySome possible remedies for poverty31-31Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Poverty in AmericaThe relative concept of povertyThe absolute concept of poverty31-32Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Poverty DefinedBy defining the poor as the lowest income quintile, we set up poverty as a relative conceptThere are two basic problems with this conceptIf everyone’s income quadrupled, we would still be calling the bottom 20% poor, even though they would be living better than the entire middle class previouslyThe lowest American quintile is infinitely better off than average citizens of the world’s poorest nationsThe question remains “Relative to what?” 31-33Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Relative Concept of PovertyThere are two basic problems with the absolute concept of povertyWho gets to determine the dividing line between the poor and not so poor?How is that determination reached?One approach is to set up a minimum basic standard of living and figure out how much it cost to maintain that standard from year to year31-34Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Absolute Concept of PovertyCalculated annually by the U. S. Department of AgricultureIn 1999 this line was set at $17,029 for a family of fourCan a family of four live on this?It depends on what you mean by liveIt depends on where you liveNone of the nation’s thousands of locally administered welfare programs brings any of the poor up to the poverty line31-35Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Official Poverty LineU.S. Poverty Rate: Percentage of Individuals Below the Poverty Line, 1960-199931-36Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Who Are the Poor?People older than 65 used to have higher poverty rates than the general populationThe advent of Medicare, higher social security benefits and SSI have reduced the poverty rates for older Americans to well below the overall rate for the general population 31-37Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Who Are the Poor?Most Poor People Are White1996 white population was 225,440,005Multiply this by 9% (poverty rate for whites) = 20,289,600 whites below the poverty line1996 black population was 33,518,658Multiply this by 30% (poverty rate for blacks) = 10,055,597 blacks below the poverty line31-38Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Who Are the Poor?It is obvious that a disproportionate number of poor are blacks and other minoritiesOne out 4 blacks are poor, but blacks are only 13% of the populationThe poverty rate for the American Indian is 47.3% The bottom line is that poverty is not just a problem for minorities but a problem for all Americans31-39Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Who Are the Poor?Most poor people live outside the citiesThey live in the suburbs, small towns, and rural areasWhile it is true that the majority of the poor are white residents of the suburbs, small towns, and rural areas, a disproportionate number of the poor are urban Blacks and HispanicsIf you want to be poor, you can increase your chances substantially by being Black or Hispanic and living in a large city 31-40Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Poverty Rates by Race, 199931-41Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Who Are the Poor?Three-fourths of the poor are single mothers and their childrenPeople living in the rural south and the Appalachian regions Migrant farm workers, native Americans, and recent immigrants People who once held jobs in declining industries (steel, autos, rubber, oil, mining, farming, etc)Inner city residents31-42Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Poverty Rates of Selected Population Groups, by Race, 199931-43Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Children Living in Relative Poverty, Selected Countries, 199931-44Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Working PoorAll the people employed at or just above the minimum wage could be considered the working poorMost of them receive little or no government benefitsEven if they don’t get one cent from the government, they are still a part of the poverty problem31-45Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Remember the unemployment rate does not count these peopleThey number in the millionsIf they were fully accounted for, the total number of unemployed would increase by 3 to 4 million people31-46Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Long-Term Unemployed and Discouraged WorkersThere have always been homeless peopleThere are now probably between two and three million homelessThere is much disagreement how many homeless people there really areIf we include individuals who are temporarily staying with family and friends this estimate is probably in the ball park 31-47Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The HomelessFour trends have made this problem much worseEntry level factory jobs are declining in large citiesThe availability of affordable housing (basically furnished rooms) has almost disappearedThere is ongoing gentrification in most citiesThere has been a deinstitutionalization of the mentally ill without the promised halfway houses to treat and shelter them31-48Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Homeless ProblemThe U.S Department of Health and Human Services estimates that one-third of the homeless are mentally ill and that one-half are alcoholics or drug addictsNot all of the homeless are poorThere are people earning more than $50,000 who live in shelters or in their cars in Santa Clara County, CaliforniaThe problem is being trapped between jobs that pay too little and housing that cost too much31-49Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Homeless ProblemThe Social Security Act of 1935 set up three major programsSocial SecurityUnemployment insuranceSocial security and unemployment insurance are both financed by taxes paid by employers and workersPubic assistancePublic assistance was intended to help families experiencing temporary economic distressPublic assistance instead has engendered a permanent dependence in millions of families31-50Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Main Government Transfer ProgramsMedicare and MedicaidMedicare is a supplement to social security that provides retirees with low cost medical careMedicaid provides free medical care to the poor (usually nonworking)About 45 million working poor have no health insuranceThey have jobs without health insuranceThey are too young for MedicareThey are too well off to receive help from Medicaid31-51Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Main Government Transfer ProgramsThe past four decades have produced second, third, and fourth-generation welfare familiesTeenage girls get pregnant and have babiesThey go on welfare, they do not marry, they have no hope of becoming self-sufficient, and their kids repeat the cycleThese young mothers are provided with surrogate husbands in the form of a welfare checkSome states are now restricting this eligibility31-52Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Welfare Culture“I’m sorry that I got myself into this and my children into this. And I don’t know how to get them out of it. If I don’t get them away from here, they’re going to end up dead, in jail, or like me.”31-53Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Words of a Welfare MotherPoor are LazyHeritage of SlaveryEmployment DiscriminationBlack Male JoblessnessPoverty Breeds PovertyInadequate Human Capital 31-54Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Theories of the Causes of PovertyThe theory was popular through the 19th century up to the time of the DepressionThe belief was that prosperity was associated with being one of God’s chosen peopleIf you were rich or well off, you obviously were going to heavenIf you were poor, you obviously were not going to heavenThis theory went down the tubes with the Great Depression31-55Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Poor are LazyBlacks were brought here in chains and held back for three centuries by slavery and a feudal sharecropping system in the southBlacks were systematically excluded from all but the most menial jobs and were denied educational opportunities open to almost all other AmericansMortgage loans, restaurant meals, hotel and motel lodging, and union membership were routinely denied This didn’t start changing until the 1960s31-56Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Heritage of SlaveryEmployment discrimination has been especially strong in holding down the incomes of Women, Blacks, Hispanics, and other minoritiesEducation, training, and experience also contribute to these wage differentialsSocial scientists generally believe that about half of these wage differentials result from discrimination and the rest from other factors31-57Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Employment DiscriminationIn 1970, 33% of black families were headed by women. In the 1990s this number was over 60%The growing number of a permanent welfare population of single black mothers has raised the question of where the young black males who got them pregnant areFour-fifths of white males aged 20 to 44 have jobsOne-half of black males aged 20 to 44 have jobsSome are officially unemployedSome are “discouraged workers”Some may be working in the underground economy either legally or illegallyThe loss of blue collar jobs has hurt young black men the most31-58Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Black Male JoblessnessBefore birth an infant may suffer from poor prenatal care and may be addicted to drugsIn early childhood children in poverty may get inadequate nutrition and medical and dental careChildren in poverty may grow up in an unsafe, even violent environmentChildren in poverty may experience emotional deprivation and grow up in a broken homeThe bottom line is that all of the above can be serious handicaps to overcome 31-59Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Poverty Breeds PovertyHuman capital is defined as the acquired skills of individuals, along with their education, training, and work habitsPeople who grow up poor usually have poor home learning environments, attend the worst schools, drop out before graduation, acquire little useful work experience, do not develop good work habits, and have poor communication skillsIn short, these people are virtually unemployable in today’s economy31-60Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Inadequate Human CapitalThe poverty theory debateBoth agree on the ends - getting people off welfare and into self-supporting jobsThey disagree on the means - how to do it31-61Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Conservative View versus the Liberal View Conservatives advocate the “stick approach” - you don’t work you don’t eatMost conservatives believe that the social programs of the 60s and 70s not only didn’t work but caused more poverty by destroying people’s incentive to work 31-62Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Conservative ViewThe “carrot approach” - training and jobsHad there been no 60s and 70s social programs there would have been even more poverty than we have nowThese programs prevented a bad situation from getting worseDuring times of rising unemployment, especially among black males, it is a victory just to keep the poverty rate from rising31-63Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Liberal ViewMinimize employment discriminationProvide the poor with better education and trainingProvide the poor with millions of government jobs 31-64Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Liberal SolutionProvide the poor with jobs mainly through the private sectorCut the poor off from public assistanceThis would leave them with no recourse except the job market, family members, friends, and public or private locally funded services31-65Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Conservative SolutionWorkfare is a combination of work and welfareWorkfare is a compromise between liberals and conservativesThe workfare concept has widespread support31-66Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.WorkfareThe federal guarantee of cash assistance to the poor is endedThe head of every welfare family would have to work within two years or the family would lose benefitsAfter receiving welfare for two months adults must find jobs or perform community serviceLifetime welfare benefits would be limited to 5 years (Hardship exemptions would be available to 20% of families)Each state receives a lump sum to run its own programsFuture legal immigrants barred from welfare assistance$24 billion cut from the food stamp programUp to 20% of those on public assistance – the ones who are least employable - will be allowed to remain on the rolls beyond the time limit31-67Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Personal Responsibility and Work Opportunity Reconciliation Act of 1996Experts estimate that at least 2 million families have become long-term, repeat users of public assistance64% of the women who join the welfare rolls leave within two yearsBut 75% of them return to welfare31-68Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.ConclusionThe economic boom of the 90s enabled perhaps half of those leaving the welfare roles to find employmentBut the boom cannot go on indefinitelyWhat will happen to the millions of former welfare recipients most of whom have minimal job skills and training when the unemployment rate begins to rise?31-69Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.ConclusionThe federal government needs to do for the poor what it did for the working and middle class during the Great DepressionWe need a full-scale jobs project patterned after the WPA (Works Progress Administration)–which provided productive jobs for millions of AmericansPeople can, for example, be put to work rebuilding our crumbling infrastructure31-70Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.ConclusionSince the overwhelming majority of adults who have been receiving public assistance or are still on the rolls are single mothers with young children, there is a tremendous need for child careIt appears that the provision of free or low-cost child care would significantly lower the poverty rate 31-71Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Conclusion