Ch 15 Economic Inequality

Chapter 15 | Poverty and Economic Inequality

Overview

  • Focus on key aspects of poverty and economic inequality.

    • Topics Covered:

      • Poverty Line

      • The Poverty Trap

      • The Safety Net

      • Income Inequality: Measurement and Causes

      • Government Policies to Reduce Income Inequality

Understanding Poverty and Income Inequality

  • Poverty:

    • Definition: A state of having income below the necessary level for basic living standards.

    • Poverty Rate: Percentage of the population living below the poverty line.

    • Poverty Line: Specific income threshold needed to maintain a basic standard of living.

  • Income Inequality:

    • Definition: A condition where a disproportionate share of total income or wealth is held by one group compared to others.

    • Measurement:

      • Comparison of income share among different income groups (e.g., top 10% vs. bottom 10%).

Historical Context of U.S. Poverty Line

  • Originated from Mollie Orshansky's work with the Social Security Administration.

  • Development of the poverty line based on the cost of a healthy diet in 1963.

    • Current U.S. poverty line adjusted annually:

      • $11,790 for individuals

      • $25,240 for households of four

Federal Poverty Guidelines for 2021-2023

Family Size

FPL 2020

FPL 2021

FPL 2023

1

$12,490

$12,760

$13,590

2

$16,910

$17,240

$18,310

3

$21,330

$21,720

$23,030

4

$25,750

$26,200

$27,750

5

$30,170

$31,800

$32,470

6

$34,590

$37,400

$37,190

Each additional person

+$4,420

+$5,600

+$5,600

Recent Trends

  • U.S. Poverty Rate Trends (1960-Present):

    • Decrease during the 1960s, spikes in early 1980s and 1990s.

    • Rise to 15.9% in 2011, near 1960 levels; slight drop to 14.5% in 2013.

Poverty Measurement in Low-Income Countries

  • World Bank Poverty Lines:

    • $1.25/day and $2/day.

    • U.S. 2015 poverty line for a family of three: $20,090 annually (~$18.35/day).

  • Contextual poverty in countries such as China, India, Nigeria, and Egypt.

The Safety Net

  • Definition: Government programs assisting the poor.

  • Key U.S. Programs:

    • TANF: Temporary Assistance for Needy Families

      • Provide assistance to needy families so that children can be cared for in their own homes or in the homes of relatives. End the dependence of needy parents on government benefits by promoting job preparation, work, and marriage.

    • SNAP: Supplemental Nutrition Assistance Program

      • SNAP provides food benefits to low-income families to supplement their grocery budget so they can afford the nutritious food essential to health and well-being.

    • EITC: Earned Income Tax Credit

      • A refundable tax credit for low- to moderate-income working individuals and couples, particularly those with children. The amount of EITC benefit depends on a recipient's income and number of children.

    • Medicaid: Health insurance for low-income individuals and families.

      • A medical assistance program that helps many people who cannot afford medical care pay for some or all of their medical bills. with state and federal tax money.

    • WIC: Women, Infants, and Children food program.

      • Provides federal grants to states for supplemental foods, health care referrals, and nutrition education for low-income pregnant, breastfeeding, and non-breastfeeding postpartum women, and to infants and children up to age 5

The Poverty Trap

  • Concept: Occurs when government support decreases as income rises, reducing the incentive to work.

    • Solutions: Gradual phase-out of benefits and employment requirements.

Measuring Income Inequality

  • Approaches to Measure:

    • Quintiles: Grouping population into fifths to track income share.

    • Lorenz Curve: Graph demonstrating cumulative income distribution against equal distribution.

Causes of Income Inequality

  • Key Factors:

    • Natural Ability: Unequal distribution of abilities leads to income disparities.

    • Human Capital: Varying levels of education and training impact earning potential.

    • Discrimination: Persistent barriers despite ability and qualifications.

    • Preferences: Choices between leisure and labor can affect income.

    • Market Power: Concentration of wealth leads to greater inequality.

    • Luck and Connections: Opportunities can hinge on fortunate circumstances or connections.

Economic Distribution and Measurement Tools

  • Income Distribution Factors:

    • Worker productivity, education, age, and work status.

  • Measures of Inequality:

    • Lorenz Curve: Visual representation of income distribution with respect to equality.

    • Gini Coefficient: Ranges from 0 (perfect equality) to 1 (perfect inequality).

      • Calculation: Gini = A / (A + B) - Areas below the Lorenz Curve.

Policy Considerations and Implications

  • Government Policies: Aim to redistribute income and alleviate inequality.

    • Potential risks: Overly aggressive policies may undermine economic incentives.

    • A balanced approach could enhance economic output by improving education and supporting market mechanisms.

Key Terms To Know

  • Income: Flow of money received over a period (monthly/annually).

  • Poverty Rate: Percentage of population below the poverty line.

  • Poverty Trap: Diminishing support as income increases.

  • Safety Net: Programs providing assistance to the impoverished.

  • Wealth: Total value of assets and resources owned.