Chapter 20: Poverty and the Distribution of Income

• An income distribution shows the levels of income in an economy and the percentage. of individuals or households earning those income levels. There are many ways to illustrate income distributions. Some show the distribution of income at a given time, others track changes across time.

• Income ratios are measures of income inequality that compare the earnings of those at one point in the income distribution to the earnings of those at another point in the income distribution.

• The Gini coefficient is a measure of income inequality that ranges from 0 to 1.

• A Gini coefficient value of 0 indicates perfect equality of income in an economy.

• A Gini coefficient value of 1 indicates perfect inequality of the income distribution, which means that one person in an economy has all the income, while the rest of the people have zero income.

• The value of the Gini coefficient is not very useful on its own but is instead used to compare inequality across places or across time.

• Because higher values of the Gini coefficient indicate higher inequality, increasing Gini coefficients over time for a given country would imply that the country's income is becoming less equally distributed.

• Gini coefficients can also be compared across countries to gauge their relative income inequality.

• Poverty has traditionally been measured ^^using income- or consumption based guidelines.^^

• Examples of traditional measures of poverty include the amount of income earned or the ability to earn enough to meet a certain standard of living.

• <<Newer measures of poverty attempt to capture its multidimensionality by including indicators of educational attainment, measures of health outcomes, and measures of access to safe drinking water, or other services and infrastructure.<<

• All poverty measures set criteria or thresholds to determine who is in poverty and who is not.

• A poverty line, poverty threshold, or poverty guideline is a specific level of income or consumption below which a person is classified as being in poverty. Poverty thresholds tend to vary by time, place, and family size.

• The poverty rate is the percentage of people with incomes below the poverty line. Poverty rates vary across time, place, and demographic factors.

• The poverty thresholds and poverty rates described so far have been absolute measures of poverty.

• Absolute poverty measures do not refer to any underlying income distribntion to set poverty thresholds.

• A relative measure of poverty uses the income distribution to set poverty thresholds. Relative poverty thresholds are always set in comparison to the income of others in the economy.

• <<The causes of poverty include individual-level factors like productivity, opportunities and preferences as well as structural factors like economic downturns and governmental institutions.<<

• Individual-level Causes of Poverty

• Productivity :

  • Highly productive workers face higher demand for their labor and tend to have higher incomes.
  • Worker productivity is a function of intelligence, education, motivation, and other characteristics.
  • Some productivity-related characteristics are inherited from parents.
  • Other productivity-related characteristics result from environment, upbringing, and investment in skills and education.

• Restricted Opportunities:

  • Some poverty stems from restricted opportunities faced by individuals or families.
  • Restricted opportunities can arise because of discrimination, physical or mental health problems, or bad luck.
  • Individuals with restricted access to high-quality education, for example, have fewer opportunities to increase their productivity than others.
  • On the other end of the income distribution, individuals with the luck to inherit income from their families have more economic opportunities than those without such luck.

• Incentives and Preferences:

  • Although the perceptions have waxed and waned over time, public sentiment toward the poor often includes the notion that poverty is self-inflicted and results at least in part because of personal choice and motivation.

• Structural Causes of Poverty

• Macroeconomic Downturns :

  • Even people with high levels of skill and productivity can be pushed into poverty during economic downturns.
  • In most cases however, the highly skilled more easily move out of poverty as economic conditions improve.

• Resource Availability and Resource Use :

  • Many of the poor in developing nations depend on agriculture for subsistence and income.
  • Harsh environments, inadequate rainfall, and animal disease all contribute to poverty vulnerability among these groups.
  • Many of the poor are in remote locations. The lack of access to roads or other infrastructure exacerbates their great distance from markets where they can buy and sell goods and services or obtain education and health resources.
  • Lack of access to credit and other financial resources reduces opportunities for individuals to invest in education and to trade goods and services with others.
  • In some countries, resources are abundant, but are used inefficiently, are concentrated among relatively few families or in few industries, or are allocated to military or other conflict uses.

• Governmental Institutions :

  • Some governmental institutions and structures impede economic growth and its accompanying declines in poverty.
  • Governmental instability decreases the attractiveness of investments by foreign producers, an important source of growth and income.
  • Governments that do not operate under the rule of law constrain economic growth and development by fostering bribery, unstable banking systems, and unsafe transportation systems.

• Disease:

  • Malnourishment and inadequate access to clean water or reasonable health care contribute to vulnerability to life threatening diseases.
  • In turn, the declines in health associated with disease affect an individual's ability to work.
  • When family members must also take time from other activities to care for the ill, family incomes fall even further.

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