Poverty & Inequality Study Guide
Poverty & Inequality
Introduction to Poverty and Inequality
- **Discussion Points:
- There are always relatively rich and relatively poor individuals within every society.
- The question of the "best" amount of inequality is considered normative and remains open to interpretation.
- Key inquiries about income distribution include:
- Historical changes in income distribution in the United States.
- The effect of tax systems on income distribution.
- Comparison of U.S. income distribution with other countries.
**
Income Distributions & Poverty in 2009
- Breakdown of household income by quintiles in the United States:
- Top Quintile: 50%
- 2nd Quintile: 23%
- Middle Quintile: 15%
- 4th Quintile: 9%
- Bottom Quintile: 3%
The Distribution of Household Income in the United States (2016)
- Annual Income Brackets and Their Representations:
- $0–$24,999: 21% of all households
- $25,000–$49,999: 22% of all households
- $50,000–$74,999: 17% of all households
- $75,000–$99,999: 12% of all households
- $100,000–$199,999: 21% of all households
- $200,000 and above: 7% of all households
Historical Changes in Income Distribution in the U.S.
- Definition of Quintile:
- A quintile is defined as a 1/5th (20%) portion of the whole, used to classify populations or samples into five equal groups based on particular variable values.
- Income Data Over the Years by Quintile:
- 2016:
- Lowest 20%: 3.1%
- Second 20%: 8.3%
- Middle 20%: 14.2%
- Fourth 20%: 22.9%
- Highest 20%: 51.5%
- 2000:
- Lowest 20%: 3.6%
- Second 20%: 8.9%
- Middle 20%: 14.8%
- Fourth 20%: 23.0%
- Highest 20%: 49.8%
- 1990:
- Lowest 20%: 3.9%
- Second 20%: 9.6%
- Middle 20%: 15.9%
- Fourth 20%: 24.0%
- Highest 20%: 46.6%
- 1980:
- Lowest 20%: 4.3%
- Second 20%: 10.3%
- Middle 20%: 16.9%
- Fourth 20%: 24.9%
- Highest 20%: 43.7%
- 1970:
- Lowest 20%: 4.1%
- Second 20%: 10.8%
- Middle 20%: 17.4%
- Fourth 20%: 24.5%
- Highest 20%: 43.3%
- 1960:
- Lowest 20%: 3.2%
- Second 20%: 10.6%
- Middle 20%: 17.6%
- Fourth 20%: 24.7%
- Highest 20%: 44.0%
- 1950:
- Lowest 20%: 3.1%
- Second 20%: 10.5%
- Middle 20%: 17.3%
- Fourth 20%: 24.1%
- Highest 20%: 45.0%
- 1936:
- Lowest 20%: 4.1%
- Second 20%: 9.2%
- Middle 20%: 14.1%
- Fourth 20%: 20.9%
- Highest 20%: 51.7%
Poverty in the United States (1960–2016)
- Understanding Poverty:
- The federal government defines a household as "poor" if its annual cash income falls below the poverty line, defined as three times the amount of money needed to purchase the minimum quantity of food required for adequate nutrition.
- Poverty Rate Definition: The poverty rate is the percentage of the population that is classified as poor in accordance with the federal government's definition.
- Historical Context:
- Decreases in the poverty rate during the 1960s were largely attributed to the expansion of Social Security.
Economics of Poverty
- Poverty Rate Calculation:
- The level of income termed as a poverty line is defined as three times the amount necessary for adequate nutritional requirements.
- Key definitions for 2020 include:
- Single person: < $12,760
- Family of 4: < $26,020
- Family of 6: < $35,160
- Poverty Statistics:
- In 2018, approximately 46.7 million Americans were living in poverty, yielding a poverty rate of 14.8%.
Population Groups & Poverty Rates
- Overall Population: 12.7%
- Female head of family (no husband present): 28.8%
- Poverty rates among different ethnic groups:
- Blacks: 22.0%
- Hispanics: 19.4%
- Asians: 10.1%
- Whites (not Hispanic): 8.8%
- Married couple families: 5.1%
Historical Poverty Rate Trends
- Poverty Rates Across Demographics (Graphical Data):
- Figures representing poverty rates across racial categories from 1959 to 2014 (specifically noting African American, Hispanic, Asian, Total Population, and White categories).
Conceptual Issues with Poverty Lines
- Different Aspects of Poverty Evaluation:
- Overall income or value of consumption?
- Absolute vs. relative poverty:
- Relative Poverty: Evaluated relative to societal or regional standards.
- Absolute Poverty: Standards that apply universally across societies.
- Temporary vs. chronic poverty.
- Evaluation at household or individual levels.
Measuring Absolute Poverty
- Poverty Line Metric: An expenditure threshold viewed as necessary for adequate economic participation. Those below it are considered poor.
- Poverty Headcount Rate (Index): $H/N$, where $H$ = number of poor individuals, $N$ = total population.
- Total Poverty Gap: Measures intensity of poverty, calculated as:
- Total Poverty Gap = $ ext{Total}[Yp - Yi]$, where $Yp$ = absolute poverty line, $Yi$ = income of individual poor person.
Head Count Ratio Example
- Example Scenario:
- Assume a poverty line of 125.
- Headcount Ratio:
- Country A: 2/5 = 0.5
- Country B: 2/5 = 0.5
- Drawbacks: The headcount does not consider the intensity of poverty.
Exercises on Poverty Metrics
- Scenario Analysis (2013 and 2014): Evaluate headcount ratios, poverty gap ratios, and poverty gaps under different income distributions and results of policy changes.
Lorenz Curves & Gini Coefficients
- Lorenz Curve Definition: A graphical tool to illustrate the degree of income inequality, demonstrating the relationship between cumulative population percentages and cumulative income percentages.
Calculating Income Distributions Using Lorenz Curves
- Example Given Income Distribution:
- Income Levels: (
- $200: 50 people
- $400: 25 people
- $600: 75 people
- $800: 25 people
- Calculation tables show:
- Total income, Cumulative population shares, Income shares, and the respective Lorenz coordinates.
Calculating Summary Statistics from Distributions
- Breakdown of population shares and cumulative income shares from distribution of incomes of four groups based on total income calculations.
The Lorenz Curve and Gini Coefficient
- The Gini coefficient measures income inequality and ranges from 0 (perfect equality) to 1 (absolute inequality).
- The Gini coefficient in the United States showed a rise from 0.403 in 1980 to 0.481 in 2016.
Gini Calculation Example
- Gini calculation from specific graphical metrics:
- With Area A: 0.16 and Area B: 0.34, Gini Coefficient is:
$Gini = \frac{A}{A+B} = \frac{0.16}{0.16 + 0.34} = 0.32$
Income and Inequality in Selected Countries
- Gini Coefficients and Income per Capita for Various Countries:
- Examples include Ethiopia ($280, Gini: 29.8$), Mozambique ($380, Gini: 47.1$), and others with broader metrics listed.
Advantages of Gini Coefficient
- Functionality:
- Gini coefficients offer comparison of income distributions across demographic sectors and countries and provide a critique of GDP as an incomplete measure of population-wide economic health concerning inequality trends.
The Lorenz Curve's Impact on Policy Discussion
- Understanding inequality relies on the degree of curvature of the Lorenz Curve, which reflects the relative degree of income inequality across populations.
Causes of Inequality
- Potential causes include:
- Ability, education, and training
- Discrimination effects
- Market power and risk preferences
- Unequal distribution of wealth
- Demographic changes contributing to income inequality post-1975
Explanation of Income Inequality Mechanism
- Marginal Productivity Theory': Suggests the income distribution parallels productivity based on human capital acquisition and ownership unequal distribution across populations.
Social Impact of Economic Discrimination
- Economics of Discrimination: Address the negative impact on occupational access and income for women and minority workers, which further perpetuates income disparity.
Addressing Discrimination Across Types
- Identification of discrimination types (wage, employment, occupational) highlights economic disparities resulting from systemic biases.
Other Contributing Factors to Inequality
- Assortative Mating, Luck, and other variables influence income distributions:
- Trends in educational similarities leading to household income discrepancies
- Randomness of luck plays a role in profitability and wealth accumulation.
Taxes & Transfers Overview
- Progressive Taxation: Federal income taxes affect distribution of wealth by imposing higher tax rates on increased income levels.
Implementing Redistribution Policies
- Types of Programs:
- Social Insurance: Cash and service provisions in exchange for prior contributions (like Social Security, Medicare).
- Public Assistance: Aid for those unable to earn (like SNAP and TANF).
Program Details
- Explaining Social Insurance Structures:
- Details of Social Security program's setup and Medicare's coverage requirements and funding mechanisms.
- Overview of unemployment compensation.
Public Assistance Program Features
- Public assistance addresses issues for individuals unable to earn income, financed primarily by federal revenue, with specific program metrics outlined for effectiveness.
- Description: Refundable tax credits targeting income-eligible families with children, aimed at augmenting incomes by offsetting other taxes.
- EITC Impact Statistics: Detailed information from the year 2014 regarding recipients and financial allocations.
Summary of Income-Maintenance Programs
- Detailed comparison of eligible population bases, funding sources, forms of aid, and overall expenditures in both social insurance and public assistance categories.
Impact of Policies on Income Distribution
- Observation of ratios between income brackets before and after tax and transfer adjustments shows significant reductions in perceived income inequality.
Tax and Transfer Impact Analysis
- Graphical depiction of Lorenz curves indicating income distributions before and post taxes and transfers.
Cohesive Policy Approaches to Inequality
- Summary of policy suggestions to mitigate income inequality through fertility social programs and improved equitable systems.
Conclusion on Income Inequality Policy Recommendations
- Address multiple factors including taxation, equal opportunity initiatives, and systemic discrimination to develop comprehensive inequality reduction strategies.
End of Transcript Notes