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©2007ThomsonSouth-Western,allrightsreservedN.GREGORYMANKIWPowerPoint®SlidesbyRonCronovichIncomeInequalityandPoverty20ECONOMICSPRINCIPLESOFFOURTHEDITION1CHAPTER20INCOMEINEQUALITYANDPOVERTYInthischapter,lookfortheanswerstothesequestions:Howmuchinequalityandpovertyexistinoursociety?Whataretheproblemsmeasuringinequality?Whataresomeoftheleadingphilosophiesontheproperroleofgovernmentinalteringthedistributionofincome?Whatpoliciesareusedtofightpoverty?Whataretheproblemswiththesepolicies?2CHAPTER20INCOMEINEQUALITYANDPOVERTYIntroductionRecapoftheprevioustwochapters:•equilibriumwagesequalthevalueofworkers’marginalproducts•differencesinequilibriumwagesresultfromdifferencesin•workercharacteristics:education,experience,talent,effort•jobcharacteristics:extenttowhichajobispleasantandsafe•someearningsdifferencesduetodiscrimination3CHAPTER20INCOMEINEQUALITYANDPOVERTYIntroductionEvenintheabsenceofdiscrimination,theincomedistributioninamarketeconomymaynotbeequitableorotherwisedesirable.Inthischapter,weexamine•indicatorsofinequalityandpoverty•philosophiesaboutincomeredistribution•policiesdesignedtohelpthepoor4CHAPTER20INCOMEINEQUALITYANDPOVERTYTheU.S.IncomeDistribution:2003GroupAnnualfamilyincomeBottomfifthUnder$24,117Secondfifth$24,117–$42,057Middlefifth$42,057–$65,000Fourthfifth$65,000–$98,200Topfifth$98,200andoverTop5percent$170,082andover5CHAPTER20INCOMEINEQUALITYANDPOVERTYU.S.InequalityOverTime46810121419301940195019601970198019902000Incomeshareofthetop20%dividedbyincomeshareofthebottom20%6CHAPTER20INCOMEINEQUALITYANDPOVERTYInequalityAroundtheWorld05101520253035JapanGermanyIndiaCanadaUnitedKingdomUnitedStatesRussiaChinaNigeriaMexicoBrazilSouthAfricaIncomeshareofthetop20%dividedbyincomeshareofthebottom20%7CHAPTER20INCOMEINEQUALITYANDPOVERTYPovertyPovertyline:anabsolutelevelofincomesetbythegovtforeachfamilysizebelowwhichafamilyisdeemedtobeinpovertyPovertyrate:thepercentageofthepopulationwhosefamilyincomefallsbelowthepovertylineIn2003intheU.S.,•medianfamilyincome=$52,680•povertylineforfamilyoffour=$18,810•povertyrate=12.5%8CHAPTER20INCOMEINEQUALITYANDPOVERTYU.S.PovertyOverTimePercentofthepopulationbelowpovertyline9CHAPTER20INCOMEINEQUALITYANDPOVERTYU.S.PovertyRatebyGroup,2003GroupPovertyRateAllpersons12.5%White,notHispanic8.2Black24.4Hispanic22.5Asian,PacificIslander11.8Children17.6Elderly10.2Married-couplefamilies5.4Femalehousehold,nospousepresent28.010CHAPTER20INCOMEINEQUALITYANDPOVERTYProblemsMeasuringInequality1.In-kindtransfers:assistancethattakestheformofg&sratherthancash•Omittedfrommeasuresofinequalityandpoverty,biasingthemupward2.TheLifeCycle:theregularpatternofincomevariationoveraperson’slife•Peoplecanborrowandsavetooffsetlife-cyclechangesinincome(e.g.,savingforretirement).•Life-cycleincomevariationcausesinequalityinincome,butnotinequalityinlivingstandards.11CHAPTER20INCOMEINEQUALITYANDPOVERTYProblemsMeasuringInequality3.Transitoryvs.PermanentIncome:•Peoplecanborrowandsavetosmoothouttransitoryincomefluctuations.•Abettermeasureofinequalityinlivingstandardswouldbebasednotoncurrentincome,butonpermanentincome,aperson’snormalincome.4.Economicmobility:•Manypeoplemoveamongincomeclasses.•Thepovertyandinequalitymeasuresdiscussedabovedonotdistinguishbetweenthetemporarilypoorandthepersistentlypoor.12CHAPTER20INCOMEINEQUALITYANDPOVERTYThePoliticalPhilosophyofRedistributingIncomeWeconsiderthreephilosophies:UtilitarianismLiberalismLibertarianism13CHAPTER20INCOMEINEQUALITYANDPOVERTYUtilitarianismUtility:ameasureofhappinessorsatisfactionUtilitarianism:arguesthatgovtshouldchoosepoliciestomaximizesociety’stotalutility•Founders:JeremyBentham,JohnStuartMillBecauseofdiminishingmarginalutility,redistributingincomefromrichtopoorincreasesutilityofthepoormorethanitreducesutilityoftherich.Yet,utilitariansdonotadvocateequalizingincomes–wouldreducetotalincomeofeveryoneduetoincentiveeffectsandefficiencylosses.14CHAPTER20INCOMEINEQUALITYANDPOVERTYLiberalismLiberalism:arguesthatgovtshouldchoosepoliciesdeemedtobejustbyanimpartialobserverbehinda“veilofignorance”•Founder:JohnRawlsMaximincriterion:govtshouldaimtomaximizethewell-beingofsociety’sworst-offpersonCallsformoreredistributionthanutilitarianism(thoughstillnotcompleteequalizationofincomes).Incomeredistributionisaformofsocialinsurance,agovtpolicyaimedatprotectingpeopleagainsttheriskofadverseevents.15CHAPTER20INCOMEINEQUALITYANDPOVERTYLibertarianismLibertarianism:arguesthatgovtshouldpunishcrimesandenforcevoluntaryagreementsbutnotredistributeincome•Advocate:RobertNozickInsteadoffocusingonoutcomes,libertariansfocusontheprocess.•Govtshouldenforceindividualrights,shouldtrytoequalizeopportunities.•Iftheincomedistributionisachievedfairly,govtshouldnotinterfere,evenifunequal.16CHAPTER20INCOMEINEQUALITYANDPOVERTYPoliciestoReducePovertyPoorfamiliesmorelikelytoexperience•homelessness•drugdependence•healthproblems•teenpregnancy•illiteracy•unemploymentMostpeoplebelievegovtshouldprovidea“safetynet.”Wenowconsiderafewsuchpolicies…17CHAPTER20INCOMEINEQUALITYANDPOVERTY1.Minimum-WageLawsA