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Chapter 12 Income Distribution,

Poverty, and Discrimination• Key Concepts• Summary• Practice Quiz• Internet Exercises

©2000 South-Western College Publishing

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In this chapter, you will learn to solve these economic puzzles:

How can a negative income tax solve the

“welfare mess”?

What is the effect on labor markets of laws that

protect women from jobs deemed “too strenuous”

or “too dangerous”?

Could the rich become richer in the 1980’s and

other income groups also become better off?

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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

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Division of the Total Annual Money Income Among Families

% of Families 1980

Lowest 5thSecond-lowest 5th

5.1%

1990 1997

11.517.524.341.6

15.3

4.6%10.816.623.844.3

17.4

4.2%9.915.723.047.2

20.7

Middle 5thSecond-highest 5thHighest 5thHighest 5%

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What is Median Income?50% of families earn less

than the median income and 50% earn more

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Median Income of Families, 1994

Characteristic

All families

Headed by a male

Median Income

$44,568

$32,960$21,023

$39,979

$30,660

$40,040

Headed by a female

With head aged 25-34

With head aged 65 and over

Headed by a high school grad

Person with a bachelor’s degree $67,230

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What are some arguments against income inequality?

• Wealthy can influence politics• Wealthy have more

opportunities• Wealthy can afford better

health care

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What is an argument for income inequality?

Income inequality gives people an incentive to become more productive

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What is theLorenz Curve?

A graph of the actual cumulative distribution of income compared to a perfectly equal distribution of income

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80%

60%

40%

20%

20% 40% 60% 80%

Hypothetical Lorenz Curve

% o

f in

com

e

% of families

100%

Perfect Equality

Actual Income

100%

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80%

60%

40%

20%

20% 40% 60% 80%

Lorenz Curve 1929 & 1997

% o

f in

com

e

% of families100%

Perfect Equality

1929

100%

1997

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80%

60%

40%

20%

20% 40% 60% 80%

Lorenz Curve for Nations

% o

f in

com

e

100%

Perfect Equality

U.S.

100%

Russia

Brazil

% of families

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What is the Poverty Line?

The level of income below which a person or a family is considered to be poor

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Does the Poverty Line consider Cash Transfer Income?

Yes; Social Security, unemployment compensation, and Aid to Families of Dependent Children are considered

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What areIn-kind Transfers?

Government payments in the form of goods and services, rather than cash

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Does the Poverty Line consider In-kind transfers?

Receipts from government programs such as food stamps, Medicaid, and housing are not included

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22%

13% 12% 13% 14% 14%13%

1959 1970 1975 1980 1985 1990 1997

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% of U.S. Persons below Poverty Level

Characteristic

Headed by married couple

Headed by a male, no wife

%

5%13%32%24%10%2%

Headed by a female, no husband

No high school diploma

High school diploma, no college

Bachelor’s degree or more

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What are examples of Cash Transfer Programs?

• Social Security• Unemployment Compensation• Aid to Families with

Dependent Children

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What are examples of In-kind Transfer Programs?

• Food stamps• Medicaid• Housing Assistance

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What are major criticisms of Welfare?

• Work disincentives• Inefficiencies• Inequities

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What are examples of Reform Proposals?

• Negative income tax• Workfare

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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

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$5

0

$-5

$-20

$10 $20 $30 $40Family Income

$50

Positive Tax

Negative Tax

$10 Negative Income Tax

Tax

Lia

bil

ity

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What is Workfare?Recipients of government

programs have to work to receive the benefits

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Can Discrimination effect People’s wage rate?

Certain groups can receive more or less income if there is discrimination in the labor market

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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.

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Key Concepts

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Key Concepts• 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?

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Key Concepts cont.• 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?

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Summary

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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. Also, the degree of income inequality among families in the United States has changed little since 1929. During the 1980’s, the richest families did become richer; however, the median income of all groups increased.

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80%

60%

40%

20%

20% 40% 60% 80%

Hypothetical Lorenz Curve

% o

f in

com

e

% of families

100%

Perfect Equality

Actual Income

100%

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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. Today, about 12 percent of the U.S. population is officially classified as poor.

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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.

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

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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.

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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.

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$5

0

$-5

$-20

$10 $20 $30 $40Family Income

$50

Positive Tax

Negative Tax

$10 Negative Income Tax

Tax

Lia

bil

ity

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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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Chapter 12 Quiz

©2000 South-Western College Publishing

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1. In 1997, the wealthiest 5 percent of all U.S. families earned what percentage of total annual money income among families? a. More than 20 percent.b. Less than 10 percent.c. More than 25 percent.d. More than 50 percent.

A.

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Division of the Total Annual Money Income Among Families

% of Families 1980

Lowest 5thSecond-lowest 5th

5.1%

1990 1997

11.517.524.341.6

15.3

4.6%10.816.623.844.3

17.4

4.2%9.915.723.047.2

20.7

Middle 5thSecond-highest 5thHighest 5thHighest 5%

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2. A figure that measures the relationship between the cumulative percentage of money income on the vertical axis and the cumulative percentage of families on the horizontal axis is called the a. family-income curve.b. Washington curve.c. Lorenz curve.d. Gini curve.

C.

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80%

60%

40%

20%

20% 40% 60% 80%

The Lorenz Curve

% o

f in

com

e

% of families100%

Perfect Equality

100%

Inequality

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80%

60%

40%

20%

20% 40% 60% 80%

Exhibit 11Lorenz Curve

% o

f in

com

e

100%

Perfect Equality

100% Y

X

Z

WCumulative % of families

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3. As shown in Exhibit 11, the perfect equality line is drawn between points a. W and Y along the curve.b. X and Z.c. W and Y along the straight line.d. W and X.

C.

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4. As shown in Exhibit 11, 20 percent of families earned a cumulative share of about _______ percent of income. a. 5.b. 10.c. 30.d. 50.

A.

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5. As shown in Exhibit 11, 40 percent of families earned a cumulative share of about _______ percent of income. a. 5.b. 15.c. 30.d. 40.

B.

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6. Since 1929, the overall income distribution in the United States has become a. much more unequal.b. much less unequal.c. slightly more unequal.d. slightly more equal.

D.

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80%

60%

40%

20%

20% 40% 60% 80%

Lorenz Curve 1929 & 1997

% o

f in

com

e

% of families100%

Perfect Equality

1929

100%

1997

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7. Comparing the family income distributions of the United States, Russia, and Brazil, the conclusion is that income is distributed a. most equally in Brazil.b. most equally in the United States.c. about the same in all three countries.d. most equally in Russia.

D.

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80%

60%

40%

20%

20% 40% 60% 80%

Lorenz Curve for Nations

% o

f in

com

e

100%

Perfect Equality

U.S.

100%

Russia

Brazil

% of families

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8. In order to establish the poverty line that divides poor and nonpoor families, the government a. multiplies the cost of a minimal diet by 3.b. multiplies the cost of a minimal diet by 5.c. adds 50 percent to cost of a minimal diet.d. adds 100 percent to cost of a minimal diet.

A. Absolute poverty can be defined in dollars to purchase some minimum amount of goods and services essential to meeting a person or family’s basic needs.

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9. The poverty line a. is defined as one-half average family

income.b. includes in-kind transfers.c. includes Medicaid benefits.d. has been attacked for overstating poverty.

D. The poverty line does not include noncash transfers, such as food stamps and Medicaid.

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10. Which of the following is an in-kind transfer? a. Social Security payments.b. Unemployment compensation.c. Food stamps.d. Welfare payments.

C. Social Security payments, unemployment compensation and welfare payments are cash transfer payments included in the poverty line.

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11. Which of the following is a cash assistance (not an in-kind transfer) program? a. Aid to Families with Dependent Children.b. Medicare.c. Medicaid.d. Food stamps.

A. Medicare and Medicaid provide medical care services and food stamps are used for food. AFDC provides cash that can be used to purchase goods and services chosen by recipient.

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12. The negative income tax (NIT) is a plan under which families a. above a level of income pay no tax.b. pay the same tax rate except for the

poor.c. below a level of income pay no tax.d. below a level of income receive a cash

payment.

D.

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$5

0

$-5

$-20

$10 $20 $30 $40Family Income

$50

Positive Tax

Negative Tax

$10 Negative Income Tax

Tax

Lia

bil

ity

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13. Which of the following might decrease the supply curve of labor? a. Discrimination against blacks.b. Discrimination against women.c. Difficult licensing requirements.d. All of the above.

D. Discrimination against blacks and women and different licensing requirements reduce the number of workers who are willing to work at various possible wage rates.

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END