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of 22Chapter 14, ECON125

Version 090825

© 2007 Thomson South-Western © 2009 UMT

Economics for ManagersEconomics for Managers

University of Management and Technology1901 North Fort Myer DriveArlington, VA 22209 USA

Phone: (703) 516-0035Fax: (703) 516-0985

Website: www.umtweb.edu

Visit UMT online at www.umtweb.edu


Version 090825


Chapter 14Chapter 14 Income Distribution Income Distribution

Mastrianna, F.V. Basic Economics (14th ed.) © 2007 Thomson South-Western.

ISBN 9780324400700


Visit UMT online at www.umtweb.eduVersion 090825


Copyright WarningCopyright Warning

This presentation is the intellectual property of the textbook publisher Thomson South-Western 2007. Students are hereby advised that they may not copy or distribute this work to any third party




Learning ObjectivesLearning Objectives

Upon successfully completing this module, the student should be able to:

Describe the distribution of income in the United States

Understand the use of the Lorenze curve and the Gini coefficient as measures of income inequality

Analyze the causes of income inequality

Compare equal and equitable distributions of income

Define poverty and indicate the incidence of poverty in the United States

Describe the current status and future challenges facing the welfare system




Individual, Family, and Household IncomeIndividual, Family, and Household Income

FamilyA group of two or more persons who live in the same dwelling and are related by birth, marriage, or adoption

HouseholdIncludes all persons, related or unrelated, who occupy a housing unit

Includes individuals living alone




Distribution of IncomeDistribution of Income

The way in which income is divided up among households or families

The Bureau of Census presents the distribution of income by dividing all households into five income classes or quintiles, low to high, and indicating the percentage of total or aggregate income received by households in each quintile




Money Income of Households 2004Money Income of Households 2004

Money Income Share of Aggregate Income

Lowest fifth Under $22,629 3.4Second fifth $22,670–45,258 8.7Middle fifth $45,259–67,887 14.6Fourth fifth $67,888–90,516 23.2Highest fifth $90,517–and over 50.1

TOTAL 100.0

Source: U.S. Census Bureau, Current Population Reports: Income, Poverty, and Health Insurance: 2004 (August 2005).




Lorenz CurveLorenz Curve

A graph that traces the percentage relationship between the portion of total income received and the portion of

all households or families in the economy




Lorenz Curve for the 2004 Distribution of Income in the Lorenz Curve for the 2004 Distribution of Income in the United StatesUnited States

100

80

60

40

20

0 20 40 60 80 100

Perfect Equality

Lorenz Curve 2004

Cumulative Percentage of Households

Cu

mul

ativ

e P

erc e

n ta g

e o f

In c

o me

Re c

e ive

d

A

B




GINI CoefficientGINI Coefficient

An index that summarizes the inequality revealed by the Lorenz Curve in a single number

Computed by dividing the area between lines A and B by the total triangular area under line A




Lorenz Curves for United States, Brazil, Lorenz Curves for United States, Brazil, and Swedenand Sweden

100

80

60

40

20

0 20 40 60 80 100

Line of Perfect

Equality

United States

Cumulative Percentage of Households

Cu

mul

ativ

e P

erc e

n ta g

e o f

In c

o me

Re c

e iv e

d

Sweden

Brazil




Causes of Income InequalityCauses of Income Inequality

EducationIn 2004, the median income of a high school dropout was $18,874, compared to $26,104 for a high school graduate, and $42,087 for an individual with a bachelor’s degree

TechnologyIncreased demand for educated and highly skilled workers

UnionsThe decline in union membership

AbilitiesA wide variation in distribution of natural abilities which leads to variations in income





WealthHousehold wealth

The value of a household’s total assets minus its liabilities

Also known as net worth

The Bureau of the Census estimates that 84% of the nation’s wealth is held by 20% of the households




Household Median Income, 2004Household Median Income, 2004

Households Median income (Dollars)

All Households $44,369White, not Hispanic 48,977Black 30,134Hispanic 34,241Asian & Pacific Islander 57,518

Type of HouseholdFamily households 55,327Nonfamily households 44,923

Earnings of Year-Round, Full-Time WorkersMen 40,798Women 31,223

Source: U.S. Census Bureau, Current Population Reports: Income, Poverty, and Health Insurance: 2004 (August 2005).





DiscriminationLabor market discrimination

Discrimination that occurs if the employment and earnings practices are based on factors unrelated to worker productivity, such as race, sex, age, or national origin of the worker

Occupational segregationChanneling people into occupations according to sex or race




Female to Male Earnings Ratio and Median Earnings of Full-Female to Male Earnings Ratio and Median Earnings of Full-Time, Year Round Workers 15 Years Old and Older by Sex: Time, Year Round Workers 15 Years Old and Older by Sex:

1960–20041960–2004E

arn

ings

in t

hou

sand

s, r

atio

in p

erce

nt

100

90

80

70

60

50

40

30

20

10

01960 1965 1970 1975 1980 1985 1990 1995 2000 2004

77:100

$40,798

Female-to-male earnings ratio

Earnings of men

$31,223

Earnings of women

Source: U.S. Census Bureau, Current Population Reports: Income, Poverty, and Health Insurance in the United States: 2004 (August 2005).




Equal versus Equitable Income Equal versus Equitable Income DistributionDistribution

Equal distribution of incomeAll income distribution in which all households receive the same income

Equitable Distribution of IncomeAn income distribution based on the application of some objective standard

Perceived contribution of the individual




PovertyPoverty

Relative measure of povertyA definition of poverty based on the average annual incomes earned by other households

Absolute measure of povertyA definition of poverty based on a specific level of annual income for a given-sized household

Poverty threshold lineThe established annual income level that separates the poor from the nonpoor




Incidence of PovertyIncidence of Poverty

The percentage of persons in a particular group who are officially classified as having income below the poverty line

A major shortcoming inherent in the official poverty line measures is that only pretax income is included

No consideration is given to income received from cash transfers and in-kind benefits from government




Demographic Characteristics of the Poor, 2004Demographic Characteristics of the Poor, 2004

Characteristics Millions Percentage

Persons White, not Hispanic 16.8 8.6Black 9.0 24.7Hispanic 9.1 21.9Asian & Pacific Islanders 1.2 9.8Under age 18 13.0 17.865 years and over 3.5 9.8Female householder, no husband present 4.0 28.4

By RegionNortheast 6.2 11.6Midwest 7.5 11.6South 14.8 14.1West 8.4 12.6Source: U.S. Census Bureau, Current Population Reports: Income, Poverty, and Health Insurance: 2004 (August 2005).




Welfare-to-WorkWelfare-to-Work

Disincentives to workImplicit tax trap

Decrease in income

LegislationPersonal Responsibility and Work Opportunity Reconciliation Act of 1996

A lifetime limit of 5 years of welfare for each family

All able-bodied adults must work after two years on welfare




ResultsResults

The number and percentage of people on welfare has decreased

Most recipients who leave welfare find jobsHowever, many of these jobs pay a rate equal to or higher than minimum wage but not high enough to raise a family out of poverty

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