1

Poverty and the Income Distribution

Wendy A. Stock, Ph.D.

Professor and Department HeadDepartment of Agricultural Economics and

Economics

2

Income Distribution Questions• How much $$ does it take

to be “rich” in the U.S.?

• How much $$ does it take to be in the top 1/2 of households in earnings?

• How much $$ does it take to be in the top 1/5 of households in earnings?

3

Income Distribution Questions

• How equally do we share our earnings?

• Are the rich getting richer and the poor getting poorer?

4

Poverty Questions• What does it mean to be

“living in poverty”?

• Is poverty worse now than it was 20-50 years ago?

• Why are some people and countries poor and others not?

5

Income DistributionIncome Distribution shows the levels of

income in an economy and the percentage of households earning

those income levels.

"A" "B" "C" "D" "F"05

1015202530354045

Course Grades

6

Income Distribution Questions• How much $$ does it take

to be “rich” in the U.S.?

• How much $$ does it take to be in the top 1/2 of households in earnings?

• How much $$ does it take to be in the top 1/5 of households in earnings?

7

US Median Household Income

50,303

010,00020,00030,00040,00050,00060,00070,000

19651970

19751980

19851990

19952000

20052010

Values are adjusted for inflation to reflect 2008 dollars

8

Income Distribution Questions• How much $$ does it take

to be “rich” in the U.S.?

• How much $$ does it take to be in the top 1/2 of households in earnings?

• How much $$ does it take to be in the top 1/5 of households in earnings?

9

Lowest Quintile

Lower-Middle Quintile

Middle Quintile

Upper-Middle Quintile

Top Quintile

Top 5%

0 25000

50000

75000

100000

125000

150000

175000

200000

Highest IncomeLowest Income

Median U.S. Household Income by Quintile, 2012

10

Income Distribution Questions

• How equally do we share our earnings?

• Are the rich getting richer and the poor getting poorer?

11

U.S. Household Annual Income by Quintile3%

9%

15%

23%

50%

Bottom 5th($11,352)Lower Middle($28,777)Middle ($48,223)

Upper Middle($76,329)Top 5th($168,170)

Numbers in parentheses show average household incomes for each quintile

12

How Equally do We Share our Wealth?

Actual

Perceived

Ideal (<$50K)

Ideal (>$100K)

Ideal (Republican)

Ideal (Democrat)

Ideal (Women)

Ideal (Men)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Ideal, Perceived, and Actual Wealth Distribution in the U.S.

Top 20% 2nd 20% Middle 20% 4th 20% Bottom 20%

Percent of Wealth Owned

Source: Michael Norton and Dan Ariely, "Building a Better America - One Wealth Quintile At A Time"

13

How is income

distributed in other

countries?

14

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100.25

0.3

0.35

0.4

0.45

0.5

0.55

0.6

0.65

Figure 7: Countries' Income Inequality Over Time

Brazil

Mexico

China

United States

India

United Kingdom

Japan

Sweden

Year

Coeffi

cien

t Val

ue

An index value of 0 represents perfect equality. A value of 1 represents perfect inequality (i.e., one person has all the income). Brazil and Mexico are among countries with the most income inequality. Sweden and Japan have more equal distributions of income. The income inequality in the US has increased since the 1970s. Source: Authors compilation of World Bank data and adjusted from William Easterly (1999) "Life During Growth ," Journal of Economic Growth 4(3) (September): 239-275. Some values for 2010 are estimated.

15

How is world income shared across

countries?

16

Global Income Distribution

17

U.S., 22.5

China, 9.7

Japan, 7

All Other, 31.7

Mexico, 2.1Spain, 2.2

UK, 3.5 India, 4.3

Italy, 3Brazil, 2.9

France, 3.4Germany, 4.6

FSU, 3.1

Global Income Distribution

18

Income Distribution Questions

• How equally do we share our earnings?

• Are the rich getting richer and the poor getting poorer?

19

Are the Rich getting Richer?

1967

4% 11%

17%

24%

44%

2007

3% 9%

15%

23%

50%

Bottom Fifth2nd FifthMiddle4th FifthTop Fifth

U.S. Household Annual Income by Quintile

20

Are Rich Countries Getting Richer?

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1820 1840 1860 1880 1900 1920 1940 1960 1980

Year

Mea

n Lo

garit

hmic

Dev

iatio

n

within-country

between country

total inequality

21

Poverty

22

Poverty Questions• What does it mean to be

“living in poverty”?

• Is poverty worse now than it was 20-50 years ago?

• Why are some people and countries poor and others not?

23

Poverty Threshold or Poverty Line

U.S. poverty line 2012single householder:

$11,170family of four: $23,050

specific level of income, below which a person is in poverty - varies by time, place,

and family sizeWould that provide a

comfortable lifestyle?

24

% living below the poverty thresholdPoverty Rate

25

What about world

poverty?

26

• Source: http://en.wikipedia.org/wiki/File:Percentage_population_living_on_less_than_1_dollar_day_2007-2008.png

From UN Human Development Statistics, licensed under the Creative Commons Attribution ShareAlike 3.0 license

Percentage of Population Living on Less Than $1.25 Per Day, 2007-2008

27

Poverty Questions• What does it mean to be

“living in poverty”?

• Is poverty worse now than it was 20-50 years ago?

• Why are some people or countries poor and others not?

28

Causes of Individual Poverty

• Individual-level– Demographics– Skills, motivation,

intelligence– Restricted opportunities

educational quality, discrimination, health status

29

Group Poverty Rate Group Poverty

RateAll people 15.0 Education  All families 13.1 Less than high

school24.9

Married couples 5.8 High school diploma 22.6Female householder families, no husband

31.6 Some college 15.5

Male householder families, no wife

15.8 Four year degree or more

6.5

Age   Race & Ethnicity  Under 18 21.9 White, non-Hispanic 9.8Age 18-64 13.7 Black, non-Hispanic 27.6Age 65+ 8.7 Asian 12.3

    Hispanic 25.3Disabled 28.8 Nondisabled 12.5

U.S. Poverty Rates by Demographic Characteristics, 2011

30

Causes of Individual Poverty• Structural or Macro-

level– Recessions

– Resource availabilityclean water, land, rainfall, animal health, roads, conflict

31

Causes of Country Poverty & Economic Growth

Proximate Causes Fundamental Causes

1. Physical Capital

2. Human Capital

3. Technology

1. Geographyclimate, soil quality

2. CultureSlow v. rapid change in religious beliefs, nationalistic ideas, etc.

3. Institutionsrule of law, property rights

Source: Daron Acemoglu, MIT, “Why Nations Fail” http://economics.mit.edu/files/7850

32

How do we combat poverty?

33

U.S. Poverty Policy• Many Approaches

– Direct payments– Food, health, and housing– Training and education– Tax policy (EITC)– Regulation (Minimum Wage)

34

Global Poverty Policy• UN Millennium Development

Goals:– Combat global poverty– Combat global disease (AIDS, TB,

Malaria)– Increase educational attainment– Improve women’s status– Promote environmental

sustainability

35

Is poverty policy

effective?

36

Poverty Policy Effectiveness?

37

51

39

19

16

8

6

5

3

58

42

35

36

11

4

8

4

57

49

39

60

11

2

3

5

0 10 20 30 40 50 60 70

Sub-Saharan Africa

Southern Asia

South-Eastern Asia

Eastern Asia

Latin America & the Caribbean

Western Asia

Former Soviet Union

Northern Africa

1990

1999

2005

Percentage of people living on less than $1.25/day, 1990, 1999, 2005

Poverty Policy Effectiveness?

38

Discussion Questions

What are the costs and benefits of having an unequal income distribution?

What are the tradeoffs associated with providing income support to the poor?

39

Discussion QuestionsSuppose that a direct payment anti-poverty program provides a base payment of $10,000 per year to poor families. At the same time, however, the value of the base payment is reduced by $1.00 for every $1.00 of income the family earns. How would such a program affect a household’s incentive to work? Would the effect on work incentives be different if the base payment were reduced by only $0.50 for each dollar of income earned?

40

Other Sources for Discussion

The PBS program, “The New Heroes” highlights social entrepreneurs, including those focused on problems of global poverty and disease. http://www.pbs.org/opb/thenewheroes/whatis/

Ehrenreich, Barbara (2001) Nickel and Dimed: On (Not) Getting By in America. New York, NY: Henry Holt and Company http://www.henryholt.com/holt/nickelanddimed.htm describes the author’s experience with living on the minimum wage for one year

41

Poverty and the Income Distribution

Wendy A. Stock, Ph.D.

Professor and Department HeadDepartment of Agricultural Economics and

Economics