Poverty and Income Distribution

Key Concepts

  • Income: A flow measure reflecting funds received by individuals or businesses over a specific period.
  • Wealth: A measure of an individual’s or family’s assets, net of liabilities, at a given time.
  • Functional distribution of income.
  • Personal or family distribution of income.
  • Lorenz curve.
  • Gini coefficient.
  • Poverty thresholds.
  • Poverty rate.
  • Income deficit.
  • Ratio of income to poverty.

Distribution of Income and Wealth

  • Income is a flow measure reflecting the funds received by individuals or businesses over a specific period.
  • Wealth is a measure of an individual’s or family’s assets, net of liabilities, at a given time.

Life Cycle Effects

  • Young people typically earn modest incomes.
  • Income peaks roughly between ages 45 and 55.
  • Income declines with retirement (as do costs).

Personal or Family Distribution of Income

  • The distribution of income to individuals or household groups, typically by quintiles (fifths) of the population.

American Dream

  • It is becoming harder for Americans to get ahead.
  • Percentage of children born in that year who earn more than their parents:
    • 1940: 92%
    • 1950: 79%
    • 1960: 62%
    • 1970: 61%
    • 1980: 50%

Share of Income by Quintile

  • U.S. distribution of income has grown more unequal over the past three decades.
  • Every income quintile except the highest has declined in percentage of income.
  • Income distribution by year and quintile:
    • 1975: Lowest (4.3%), Second (10.4%), Third (17.0%), Fourth (24.7%), Highest (43.6%), Top 5% (16.5%)
    • 1980: Lowest (4.2%), Second (10.2%), Third (16.8%), Fourth (24.7%), Highest (44.1%), Top 5% (16.5%)
    • 1985: Lowest (3.9%), Second (9.8%), Third (16.2%), Fourth (24.4%), Highest (45.6%), Top 5% (17.6%)
    • 1990: Lowest (3.8%), Second (9.6%), Third (15.9%), Fourth (24.0%), Highest (46.6%), Top 5% (18.5%)
    • 1995: Lowest (3.7%), Second (9.1%), Third (15.2%), Fourth (23.3%), Highest (48.7%), Top 5% (21.0%)
    • 2000: Lowest (3.6%), Second (8.9%), Third (14.8%), Fourth (23.0%), Highest (49.8%), Top 5% (22.1%)
    • 2005: Lowest (3.4%), Second (8.6%), Third (14.6%), Fourth (23.0%), Highest (50.4%), Top 5% (22.2%)
    • 2010: Lowest (3.3%), Second (8.5%), Third (14.6%), Fourth (23.4%), Highest (50.3%), Top 5% (21.3%)
    • 2015: Lowest (3.1%), Second (8.2%), Third (14.3%), Fourth (23.2%), Highest (51.1%), Top 5% (22.1%)
    • 2020: Lowest (3.0%), Second (8.1%), Third (14.0%), Fourth (22.6%), Highest (52.3%), Top 5% (23.0%)

Lorenz Curve

  • A graphical measure of income inequality.
    • Cumulates households of various income levels on the horizontal axis.
    • Cumulates the share of total income on the vertical axis.
    • The more bowed the Lorenz curve, the greater the income inequality.

Lorenz Curve for the United States

  • Wealth is distributed more unevenly than income.
  • The poorest 20% earn 3.1% of total income, and the poorest 40% earn 11.3% of total income.
  • The richest 20% earn 51.2% of total income and own 88.9% of wealth.

Gini Coefficient

  • The Gini coefficient is the ratio of area A to area A + B.
  • The more unequal the income distribution, the greater is area A and the greater the Gini coefficient.

Impact of Redistribution

  • The distribution of income becomes more equal once the effect of progressive taxation and transfer payments are taken into account.

Comparing Gini Coefficients

  • The Gini coefficient for income is 0.321 for Japan and 0.480 for the U.S., which means income inequality is worse in the U.S.
  • Denmark and Sweden have the most equal distribution of income, and Brazil and South Africa have the most unequal distribution of income.

Causes of Income Inequality

  • Differences in human capital, as high-paying jobs require much more education and skills than before.
  • Discrimination that keeps wages low for certain groups of workers.
  • The rise of two-earner households, which has increased overall household income significantly (in 2020, 4% of lowest quintile had 2-earners, 74% in highest quintile).

Differences in Human Capital

  • College graduates earn much more income on average than high school graduates.

Poverty

  • Poverty is a problem affecting about 11.5% of U.S. households in 2023.

Poverty Thresholds

  • Poverty thresholds were developed in the 1960s based on the USDA’s food plan and are updated each year by the Census Bureau to account for inflation.
  • Spending 30% of income on food = poverty threshold.

Poverty Guidelines

  • A slightly modified measure issued by the Department of Health and Human Services is the poverty guidelines and is used to determine eligibility for federal programs.
  • Poverty guidelines (2022):
    • One person: $13,590
    • Two persons: $18,310
    • Three persons: $23,030
    • Four persons: $27,750
    • Five persons: $32,470
    • Six persons: $37,190
    • Seven persons: $41,910

College and Food Insecurity

  • About 30% of college students face some sort of food insecurity.
  • NCAA now requires unlimited meals for Div I athletes.

Food Spending and Share of Income

  • Food spending and share of income spent on food across U.S. households, 2014.

Ridesourcing Platforms and Socio-Economic Inequality

  • Ridesourcing platforms benefit from, even thrive on, socio-economic inequality.
  • High levels of socio-economic inequality allow for cheap labor and increase the share of travelers with a high willingness to pay for travel time savings and comfort.
  • Driver earnings are minimal in urban areas with large socio-economic inequality.

Uber Usage

  • Uber usage and Gini coefficient correlation.

Income and Wealth Inequality in the U.S.

  • Wealth inequality is worse than income inequality.

Programs and Income Distribution

  • Medicaid, Medicare, Progressive income tax and Social Security improve income inequality.

U.S. Poverty Rates

  • U.S. poverty rates declined from 1959 to 1975 and have remained roughly steady since.
  • Poverty rates for Blacks and Hispanics have decreased but remain above the poverty rate for Whites.

Real Median Household Income by Race and Hispanic Origin

  • Real Median Household Income by Race and Hispanic Origin: 1967 to 2020

Spending on Food

  • If you spend 15% of your income on food, you are likely above the poverty line.

Traditional Causes of Poverty

  • Lack of human capital
  • Mental or physical disability
  • Drug addiction
  • Unwillingness to work or apathy toward work
  • Refusal to relocate for work

New Factors Causing Poverty

  • Wages have not kept up with rising costs.
  • Technological changes and globalization have changed employment opportunities.
  • Health costs are rising.
  • Rise of single-parent families.

Lorenz Curve and Gini Coefficient

  • If income distribution becomes more unequal, the Lorenz curve will shift right and the Gini coefficient will increase.

People and Families in Poverty by Selected Characteristics, 2014

  • Poverty Rate by Household Type:
    • Married-couple households: 6.2%
    • Female households (no husband): 30.6%
    • Male households (no wife): 15.7%
  • Poverty Rate by Work Experience:
    • Worked full-time, year-round: 3.0%
    • Worked part-time, year-round: 15.9%
    • Did not work: 33.7%
  • Poverty Rate by Race:
    • White: 10.1%
    • Black: 26.2%
    • Asian: 12.0%
    • Hispanic: 23.6%

Working Age Adults in Poverty in 2020 - Reason for Not Working

  • Reasons for not working and percentage:
    • School: 2.9 million, 22%
    • Retired early: 1.5 million, 12%
    • Ill or disabled: 4.3 million, 33%
    • Home or family reasons: 3.4 million, 26%
    • Could not find work: 1.0 million, 7%

Definition of Poverty

  • According to the World Bank, "poor" is defined as living on less than $2/day.
  • In Denmark, “poor” is earning less than $45,000, with free health care and college education.
  • Poverty is relative.

Poverty in Eritrea

  • Eritrea: 66% of people live below the poverty line.
  • GDP per capita $650 USD.

Productivity and Compensation

  • The gap between productivity and a typical worker's compensation has increased dramatically since 1979.

  • Productivity growth and hourly compensation growth, 1948-2022

    • 1948-1979, average annual growth in: Productivity: 2.5%, Compensation: 2.4%
    • 1979-2022, average annual growth in: Productivity: 1.2%, Compensation: 0.3%

Rawls vs. Nozick Argument

  • Rawls Maximin Principle: A society should maximize the welfare of the least well-off individual.
    • Suggests that some people are born unlucky into poor households and therefore income redistribution would make society more equitable.
  • Nozick’s Argument: It would be unjust to redistribute wealth when it is earned through hard work and innovation.
    • Justice requires protecting property rights to ensure people are rewarded for their hard work.

Possible Solutions

  • Affordable access to high-quality child-care and high-quality education
  • Provide long-term, quality addiction treatment instead of incarceration
  • Policies to encourage economic growth to make the overall pie larger
  • Tax reform for the very rich

Nozick Argument

  • Redistributing wealth is not fair to the families that earned it.