ppt econ 9e one click ch18

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eDistribution© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 1 of 34

PowerPoint Lectures for

Principles of Economics,9e

By

Karl E. Case,Ray C. Fair &Sharon M. Oster

; ;



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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster

18PART III MARKET IMPERFECTIONS AND

THE ROLE OF GOVERNMENT

Income Distribution

and Poverty

Fernando & Yvonn Quijano

Prepared by:



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18The Utility Possibilities Frontier

The Sources of Household IncomeWages and SalariesIncome from Property

Income from the Government: Transfer Payments

The Distribution of IncomeIncome Inequality in the United StatesThe World Distribution of IncomeCauses of Increased InequalityPovertyThe Distribution of Wealth

The Redistribution Debate Arguments Against Redistribution Arguments in Favor of Redistribution

Redistribution Programs and PoliciesFinancing Redistribution Programs:TaxesExpenditure ProgramsHow Effective Are Antipoverty Programs?

Government or the Market? A Review

CHAPTER OUTLINE

Income Distribution

and Poverty

PART III MARKET IMPERFECTIONS AND

THE ROLE OF GOVERNMENT



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Income Distribution and Poverty

equity Fairness.

Why do some people get more than others? Whatare the sources of inequality? Should thegovernment change the distribution generated by

the market?



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The Utility Possibilities Frontier

utility possibilities frontier A graphicrepresentation of a two-person world that showsall points at which I’s utility can be increased onlyif J’s utility is decreased.

FIGURE 18.1 Utility PossibilitiesFrontier

If society were made up of

two people, I and J, and all

the assumptions of perfect

competition held, the market

system would lead to some

point along PP′. Every pointalong PP′ is efficient; it is

impossible to make I better

off without making J worse

off, and vice versa. Which

point is best? Is B better than

C ?



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The Sources of Household Income

human capital The stock of knowledge, skills, andtalents that people possess; it can be inborn or acquired through education and training.

Wages and Salaries

Required Skills, Human Capital, and Working Conditions

compensating differentials Differences in wagesthat result from differences in working conditions.Risky jobs usually pay higher wages; highlydesirable jobs usually pay lower wages.



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Another source of wage inequality amonghouseholds lies in the fact that many householdshave more than one earner in the labor force.Second, and even third, incomes are becomingmore the rule than the exception for U.S. families.

Wages and Salaries

Multiple Household Incomes



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Wages and Salaries

The Minimum Wage Controversy

minimum wage The lowest wage that firms arepermitted to pay workers.

FIGURE 18.2 Effect of Minimum

Wage LegislationIf the equilibrium wage in the

market for unskilled labor is

below the legislated

minimum wage, the result is

likely to be unemployment.

The higher wage will attract

new entrants to the labor

force (quantity supplied will

increase from L* to LS), but

firms will hire fewer workers

(quantity demanded will

drop from L* to LD).



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Wages and Salaries

Unemployment

Unemployment hurts primarily those who are laidoff, and thus its costs are narrowly distributed. For some workers, the costs of unemployment arelowered by unemployment compensation benefitspaid out of a fund accumulated with receipts froma tax on payrolls.



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Income from Property

property income Income from the ownership of real property and financial holdings. It takes theform of profits, interest, dividends, and rents.

Income from the Government: Transfer Payments

transfer payments Payments by government topeople who do not supply goods or services inexchange.



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The Distribution of Income

economic income The amount of money ahousehold can spend during a given periodwithout increasing or decreasing its net assets.Wages, salaries, dividends, interest income,transfer payments, rents, and so on are sources of economic income.



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ution© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 13 of 34


Income Inequality in the United States

TABLE 18.1 Distribution of Total Income and Components in the United States, 2006(Percentages)

Households Total IncomeLabor

IncomeProperty Income Transfer

Income

Bottom fifth 3.4 1.3 2.2 17.2

Second fifth 9.2 6.7 6.3 24.6

Third fifth 16.3 14.1 11.7 21.2

Fourth fifth 23.6 24.5 14.3 18.3

Top fifth 47.5 53.4 65.5 18.7

Top 1 percent 13.2 10.8 30.6 1.0

Source: Julie-Anne Cronin, US Department of the Treasury, OTA Paper 85, pg 19 and author’s calculations.



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Changes in the Distribution of Income

TABLE 18.2 Distribution of Money Income of U.S. Families by Quintiles, 1967–2006 (Percentages)

1967 1975 1985 1995 2000 2006

Bottom fifth 4.0 4.3 3.9 3.7 3.6 3.4

Second fifth 10.8 10.4 9.8 9.1 8.9 8.6

Third fifth 17.3 17.0 16.2 15.2 14.8 14.5

Fourth fifth 24.2 24.7 24.4 23.3 23.0 22.9

Top fifth 43.6 43.6 45.6 48.7 49.8 50.5

Top 5% 17.2 16.4 17.6 21.6 22.1 22.3

Source: Bureau of the Census, Current Population Survey, Annual Social and Economic Supplements.

money income The measure of income used bythe Census Bureau. Because money incomeexcludes noncash transfer payments and capitalgains income, it is less inclusive than economicincome.



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The Lorenz Curve and the Gini Coefficient

Lorenz curve A widely used graph of thedistribution of income, with cumulative percentageof households plotted along the horizontal axisand cumulative percentage of income plottedalong the vertical axis.

Gini coefficient A commonly used measure of thedegree of inequality of income derived from aLorenz curve. It can range from 0 to a maximum

of 1.



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The Lorenz Curve and the Gini Coefficient

TABLE 18.2 Distribution of Money Income of U.S.Families by Quintiles, 1967–2006(Percentages)

1967 1975 1985 1995 2000 2006

Bottom

fifth

4.0 4.3 3.9 3.7 3.6 3.4

Secondfifth

10.8 10.4 9.8 9.1 8.9 8.6

Third fifth 17.3 17.0 16.2 15.2 14.8 14.5

Fourth fifth 24.2 24.7 24.4 23.3 23.0 22.9

Top fifth 43.6 43.6 45.6 48.7 49.8 50.5

Top 5% 17.2 16.4 17.6 21.6 22.1 22.3

Source: Bureau of the Census, Current Population Survey, Annual Social and Economic Supplements.

FIGURE 18.3 Lorenz Curve for the United States, 2006

The Lorenz curve is the most common way of presenting income distribution graphically. The larger the

shaded area, the more unequal the distribution. If the distribution were equal, the Lorenz curve would be the

45-degree line 0 A.



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Differences Among African-American Households, WhiteHouseholds, and Single-Person Households

TABLE 18.3 Mean Household Income Received by the Top, Middle, and Bottom Fifthof Households in 2006

White (non-Hispanic) African-American Hispanic

Bottom 20% $ 13,129 $ 6,317 $ 9,671

Middle 20% 52,920 32,575 37,934

Top 20% 178,326 117,346 123,684

Top 5% 315,193 200,678 209,819

Source: U.S. Census Bureau, www.census.gov, Historical Income Tables, Table H3, 2006.



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The World Distribution of Income

TABLE 18.4 Income and Income per Capita Across the World in 2006

Population Gross National Income Per-Capita Income

Billions % Trillions of $ % (Dollars)

World 6.5 100 48.5 100.0 7,439Low-Income Countries 2.4 37 1.6 3.3 650

Middle-Income Countries 3.1 48 9.4 19.4 3,051

High-Income Countries 1.0 15 37.5 77.3 36,487

Source: World Bank, World Development Report 2008 , Key development indicators Table 1.



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Causes of Increased Inequality

The increased income inequality we see in theUnited States and in many other regions hasbecome the subject of much political debate. Muchof the debate concerns what we as a nation andas a member of the world community should do to

improve the position of the poorest of our citizens.

Is it the forces of free trade, immigration, andglobalization all working together to worsen theposition of the middle-income workers who findthemselves competing with workers in lower-income countries? Is it the declining power of unions and deregulation that have opened upmore labor markets to the forces of competition?



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Causes of Increased Inequality

To determine whether the net benefits of immigration outweigh its net costs, we must askone important question: To what extent does

immigration reduce domestic wages and increaseunemployment?

The Evidence: The Net Costs of Immigration



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Poverty

Poverty is a very complicated word to define. Insimplest terms, it means the condition of peoplewho have very low incomes.

The Problem of Definition

One school of thought argues that poverty shouldbe measured by determining how much it costs tobuy the “basic necessities of life.”

Some say that poverty is culturally defined and istherefore a relative concept, not an absolute one.

Although it is difficult to define precisely, the word poverty is one that we all understand intuitively tosome degree.



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Poverty

The Official Poverty Line

poverty line The officially established income levelthat distinguishes the poor from the nonpoor. It isset at three times the cost of the Department of Agriculture’s minimum food budget.

Poverty in the United States Since 1960

TABLE 18.5 Percentage of Persons in Poverty by Demographic Group, 1964 and 2006

Official Measure 1964 Official Measure 2004

All 19.0 12.3

White 14.9 8.2

African-American 49.6 24.3

Hispanic NA 20.6

Female householder–no husband present 45.9 28.3Elderly (65+) 28.5 9.4



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The Distribution of Wealth

Data on the distribution of wealth are not asreadily available as data on the distribution of income.

The distribution of wealth is more unequal than the

distribution of income.



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The Redistribution Debate

Arguments Against Redistribution

Those who argue against governmentredistribution believe that the market, when left tooperate on its own, is fair.

Arguments in Favor of Redistribution

The argument most often used in favor of redistribution is that a society as wealthy as theUnited States has a moral obligation to provide allits members with the necessities of life.

In declaring war on poverty in 1964, President

Lyndon Johnson put it this way:

There will always be some Americans who are better off thanothers. But it need not follow that the “poor are always withus.”...It is high time to redouble and to concentrate our efforts toeliminate poverty....We know what must be done and this nation

of abundance can surely afford to do it.



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Utilitarian Justice

utilitarian justice The idea that “a dollar in thehand of a rich person is worth less than a dollar inthe hand of a poor person.” If the marginal utilityof income declines with income, transferringincome from the rich to the poor will increase totalutility.



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Social Contract Theory—Rawlsian Justice

Rawlsian justice A theory of distributional justicethat concludes that the social contract emergingfrom the “original position” would call for anincome distribution that would maximize the well-being of the worst-off member of society.



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The Works of Karl Marx

labor theory of value Stated most simply, thetheory that the value of a commodity depends onlyon the amount of labor required to produce it.

Income Distribution as a Public Good

We turn to government to provide goods andservices we want that will not be providedadequately if we act separately.



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Redistribution Programs and Policies

Financing Redistribution Programs: Taxes

Redistribution always involves those who end upwith less and those who end up with more.Because redistributional programs are financed bytax dollars, it is important to know who the donorsand recipients are—who pays the taxes and whoreceives the benefits of those taxes.

TABLE 18.6 Effective Rates of Federal, State, and Local Taxes, 2000 (Taxes asa Percentage of Total Income)

Federal Total

Bottom 20% 5.9 28.1

Second 20 11.7 26.3

Third 20 17.4 29.2

Fourth 20 20.1 32.6

Top 20 24.6 33.9

Top 10 25.7 34.5



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Expenditure Programs

Social Security system The federal system of social insurance programs. It includes threeseparate programs that are financed throughseparate trust funds: the Old Age and Survivors

Insurance (OASI) program, the DisabilityInsurance (DI) program, and the Health Insurance(HI), or Medicare program.

Social Security



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public assistance, or welfare Government transfer programs that provide cash benefits to: (1)families with dependent children whose incomesand assets fall below a very low level and (2) the

very poor regardless of whether they havechildren.

Public Assistance



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The Supplemental Security Income program (SSI )is a federal program that was set up under theSocial Security Administration in 1974.

SSI is designed to take care of the elderly who endup very poor and have no or very low SocialSecurity entitlement.

As with welfare, qualified recipients must havevery low incomes and virtually no assets.

Supplemental Security Income



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Unemployment Compensation

Unemployment compensation A state governmenttransfer program that pays cash benefits for acertain period of time to laid-off workers who haveworked for a specified period of time for a covered

employer.

Medicaid and Medicare

Medicaid and Medicare In-kind governmenttransfer programs that provide health and

hospitalization benefits: Medicare to the aged andtheir survivors and to certain of the disabled,regardless of income, and Medicaid to people withlow incomes.



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Food Stamps

food stamps Vouchers that have a face valuegreater than their cost and that can be used topurchase food at grocery stores.

Housing Programs

Over the years, the federal government and stategovernments have administered many differenthousing programs designed to improve the qualityof housing for low-income people.

The Earned Income Tax Credit

The program is quite complex but essentiallyallows lower-income families with children a creditequal to a percentage of all wage and salaryincome against their income taxes.



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How Effective Are Antipoverty Programs?

Does Price Matter inCharitable Giving?In the United States, one of theways in which people try to help thepoor is through charity. Almost 90percent of the populationcontributes each year to somecharitable organization. Recent

work in experimental economicshas explored the factors that leadpeople to make these contributions.



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Government or the Market? A Review

Remember that government is not a cure for alleconomic woes. There is no guarantee thatpublic-sector involvement will improve matters.Many argue that government involvement maybring about even more inequity and inefficiencybecause bureaucrats are often driven by self-interest, not public interest.

REVIEW TERMS AND CONCEPTS



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u

compensating differentials

economic income

equity

food stamps

Gini coefficienthuman capital

labor theory of value

Lorenz curve

Medicaid and Medicareminimum wage

money income

poverty line

property income

public assistance, or welfare

Rawlsian justiceSocial Security system

transfer payments

unemployment compensation

utilitarian justiceutility possibilities frontier

REVIEW TERMS AND CONCEPTS

ppt econ 9e one click ch18

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