Income Distribution, Poverty, and Discrimination
Reading: Chapter 12 of Tucker
Overview:
· The Distribution of Income
· International Comparisons of Income Distribution
· Poverty
· Antipoverty Programs
· Reform Proposals
· Discrimination
The Distribution of Income
One function of labor markets is to determine the distribution of income -- how wages and salaries are divided among members of society.
Trends in Income Distribution:
· Income distribution did not fluctuate greatly between 1947 and 1970.
· However, there is an unequal distribution of income among families.
· Some are concerned that the gap between the poorest one-fifth and the richest one-fifth has been widening since 1970. The same is true for the poorest one-fifth and the richest 5 percent.
· Data shows that workers with a greater investment in human capital -- education and skills -- are likely to earn more money.
· Similarly, male heads of households are likely to earn more money than female heads of households.
What are the arguments for and against income inequality?
Arguments against income inequality:
· Those with more money may influence the political process to their benefit.
· Income inequality may result in unequal opportunities for various groups.
· The poor are unable to afford health care.
Arguments for income inequality:
· Income inequality gives people an incentive to be productive.
Lorenz curve: A graph of the actual cumulative distribution of income compared to a perfectly equal cumulative distribution of income.
· A primary tool used to measure income distribution.
· The horizontal axis measures the cumulative percentage of families, while the vertical axis measures the cumulative percentage of money income. NOTE: Money income is not adjusted for government subsidies such as food stamps, medical care and housing.
· At perfect equality, 20 percent of the families earn 20 percent of the income, 30 percent of the families earn 30 percent of the income, etc.
· The area between the perfect equality line and the Lorenz curve measures the degree of inequality in the distribution of income.
· The more the Lorenz curve is bowed outward, the more unequal the distribution of income is.
· In the US, the Lorenz curve has shifted slightly inward -- and therefore slightly closer to perfect equality -- from 1929 to 1997.
International Comparison of Income Distribution
In general, developed countries have greater income equality than developing countries.
Poverty
There are two views of poverty:
1. Poverty defined in absolute terms: A dollar figure that represents some level of income per year required to purchase some minimum amount of goods and services essential to meeting a person's or a family's basic needs.
2. Poverty defined in relative terms: A level of income required to place a person or family in the lowest, say, 20 percent among all persons or families receiving incomes.
Poverty line: The level of income below which a person or family is considered as being poor.
· First established by the federal government in 1964.
· Defined in absolute terms. It is based on the cost of a minimal diet multiplied by three, because low-income families spend about one-third of their income on food.
· Adjusted upward each year for inflation.
The poverty rate declined from the late 1950s until 1980. Since 1980 it has remained at about 14 percent.
The poverty rate for blacks is historically about three times higher than the rate for whites.
Problems with the poverty rate:
1. The poverty rate gives no indication of how poor the people in poverty are.
2. The poverty rate is computed by looking at a family's cash income. This income does not include government cash payments or in-kind transfers.
In-kind transfers: Government payments in the form of goods and services, rather than cash, including such government programs as food stamps, Medicaid, and housing.
Selected characteristics of poor families (1997):
· More likely to live in the South.
· More likely to be headed by an unmarried woman.
· Correlation between lack of education and likelihood of living in poverty.
Antipoverty Programs
Means test: A requirement that a family's income not exceed a certain level to be eligible for public assistance.
· People who pass the means test may be entitled to government assistance, and hence the name entitlement programs.
· There are 2 broad types of entitlement programs: cash assistance and in-kind transfers.
1. Cash assistance programs provide cash payments to purchase food, shelter, clothing and other basic needs. Examples include:
a). Social Security, or Old Age, Survivors, and Disability Health Insurance (OASDHI).
· Deducted from each workers paycheck.
· Current payments go to current benefit recipients.
· Major concerns that the trust fund will be depleted by 2030 and will not be able to pay benefits to those who have already paid in.
b). Unemployment Compensation: The government insurance program that pays income for a short time period to unemployed workers.
· Money comes from a payroll tax on employers.
· Administered by the states.
c). Aid to Families with Dependent Children (AFDC).
· Combination of state and federal funding.
· Provides aid to families with children who do not have the support of a parent, usually a father, due to divorce, desertion, disability or death.
2. In-kind transfer programs include:
a). Food stamps.
· Federally financed, but administered by the states.
· Coupons are issued to the poor, which can be used like cash at grocery stores.
b). Medicaid.
· Largest government in-kind transfer program.
· Provides medical services to eligible people under 65 who pass a means test.
c). Housing Assistance.
· State and federal programs to either provide subsidized housing in housing projects or subsidies to assist people who rent private housing.
Welfare Criticisms:
1. Work disincentives. Welfare provides income that is easier to earn than working, and so there is a disincentive to work.
2. Inefficiencies. More money makes it into the pockets of the bureaucrats than into the pockets of the poor.
3. Inequities. Poor people with equal needs receive unequal benefits, because the states administer their programs differently.
Reform Proposals
The variety of suggested approaches to reforming welfare programs fall into two categories: Negative Income Tax and Workfare.
1. Negative Income Tax: A plan under which families below a certain break-even level of income would receive cash payments that decrease as their income increases. No in-kind transfer benefits would be given.
· All cash and in-kind benefits would be combined into a single program administered by a single agency.
· Phase-out rate: Rate by which cash transfers are decreased as family income approaches the break-even level of income.
· As income increases above the break-even level, families would pay taxes on that income.
· POSITIVES: Decreased bureaucracy, less stigma associated with receiving welfare payments, cash subsidies are preferable to in-kind transfers.
· NEGATIVES: Voters perceive the system as a "giveaway" of taxpayer's money, cash payments may not be used for what they were intended, may create a disincentive to work.
2. Workfare: A piecemeal approach to reforming welfare that involves limiting welfare benefits to a certain number of years and requiring welfare recipients to perform some kind of work during the time they receive welfare benefits.
· POSITIVES: Encourages people on welfare to work.
· NEGATIVES: Subsidies may need to be paid to employers in order to encourage them to hire workfare recipients, subsidized welfare workers may take the place of unsubsidized workers who have never been on welfare.
Discrimination
There is a relationship between poverty and discrimination in the workplace.
Discrimination occurs when one group of people (often women and/or minorities) either cannot get a job because of employer prejudice or do basically the same work as another group of people, but earn less income.
Discrimination affects the equilibrium wage rate, making it lower for the group being discriminated against and higher for the group not being discriminated against.
Comparable worth: The principle that employees who work for the same employer must be paid the same wages when their jobs, even if different, require similar levels of education, training, experience, and responsibility. It involves a nonmarket wage-setting process to evaluate and compensate jobs according to point scores assigned to different jobs.