CHAPTER 18
INCOME DISTRIBUTION AND POVERTY
In this chapter, you will find:
Learning Outcomes
Chapter Outline with PowerPoint Script
Chapter Summary
Teaching Points (as on Prep Card)
Solutions to Problems Appendix
Experiential Assignments
INTRODUCTION
This chapter examines the distribution of income, the incidence of poverty over time by demographic group,
poverty programs, discrimination, and welfare reform. The chapter is packed with institutional details about
poverty programs and poverty rates among various groups.
LEARNING OUTCOMES
18-1 Identify reasons why incomes differ across households, and why the income gap has increased.
In a market economy, income depends primarily on earnings, which depend on the productivity of one’s
18-2 Summarize what has happened to the incidence of poverty since 1960, and determine when and why
there was the greatest progress made in reducing poverty.
The biggest decline in the poverty rate occurred before 1970. Because of a decline in unemployment and
18-3 Describe a primary source of poverty among families in the United States.
Young, single motherhood is a recipe for poverty. Often the young mother drops out of school, which
reduces her future earning possibilities when and if she seeks work outside the home. Growth in the num-
18-4 Outline some unintended consequences of efforts to reduce poverty.
One unintended consequence of income assistance is a high marginal tax rate on earned income, which
18-5 Describe how the 1996 federal welfare reform affected the number of people on welfare.
Welfare reforms introduced by the states set the stage for federal welfare reforms aimed at breaking the
cycle of poverty and promoting the transition from welfare to work. The states began experimenting with
Chapter 18 Income Distribution and Poverty 248
CHAPTER OUTLINE WITH POWERPOINT SCRIPT
USE POWERPOINT SLIDES 2-5 FOR THE FOLLOWING SECTION
The Distribution of Household Income: In a market economy, income depends primarily on earnings,
USE POWERPOINT SLIDES 6-7 FOR THE FOLLOWING SECTION
The Lorenz Curve: A curve showing the percentage of total income received by a given percentage of
households when incomes are arrayed from smallest to largest.
USE POWERPOINT SLIDES 8-10 FOR THE FOLLOWING SECTION
Why Incomes Differ? Education and the number of workers in each household are two major sources of
USE POWERPOINT SLIDES 11-12 FOR THE FOLLOWING SECTION
USE POWERPOINT SLIDES 13-16 FOR THE FOLLOWING SECTION
Problems with Distributional Benchmarks: There is no objective standard for evaluating income
distribution. Exhibits 1 and 2 measure income after cash transfers, but before taxes; household sizes differ
USE POWERPOINT SLIDES 17-29 FOR THE FOLLOWING SECTION
Programs to Help the Poor
Social Insurance: Programs designed to help make up for lost income of people who worked but are now
retired, temporarily unemployed, or unable to work because of disability or work-related injury. Social
Security and Medicare are two social insurance programs.
USE POWERPOINT SLIDES 30-36 FOR THE FOLLOWING SECTION
Who are the Poor?
Chapter 18 Income Distribution and Poverty 249
Poverty and Age: Poverty among the elderly has declined to 9.7% in 2007, just below the 10.9% for those 18-
64 years old. Tremendous growth in spending for Social Security and Medicare has contributed to the decline
in poverty among the elderly.
USE POWERPOINT SLIDE 37 FOR THE FOLLOWING SECTION
Unintended Consequences of Income Assistance
Disincentives: High marginal tax rates involved in moving from welfare to work discourage employment and
USE POWERPOINT SLIDES 38-40 FOR THE FOLLOWING SECTION
Welfare Reform: A variety of welfare reforms are aimed at reducing long-term dependency.
Recent Reforms: Aside from time limits and work participation rates imposed by the federal government,
states are free to set benefit levels and experiment however they choose.
CHAPTER SUMMARY
Money income in the United States has become less evenly distributed since 1970. The poverty rate has
dropped most among the elderly, thanks to Social Security and Medicare.
The wage gap between black and white workers narrowed between 1940 and 1976, widened until the early
1990s, and has been narrowing again since 1993. Affirmative action programs and gains in education seem to
have increased employment opportunities among black workers.
Chapter 18 Income Distribution and Poverty 250
TEACHING POINTS
1. Considerable disagreement regarding the facts of poverty and income distribution is common, even
among economists. Exhibits 1, 2, 4, and 5 should stimulate classroom discussion.
2. An issue related to the measurement of poverty is why family incomes differ. If, for example, family
incomes differ largely on the basis of the number of earners or the position of the family income level on
3. The text asks, “Who are the poor?” Here are some things to consider:
4. This chapter contains a section on discrimination. Evidence suggests that blacks earn less than whites
even after adjusting for factors that could affect wages such as education and job experience. Black teen-
5. The section on disincentives should highlight how difficult it can be to create effective policy.
SOLUTIONS TO PROBLEMS APPENDIX
1. (Distribution of Household Income) Look back at the graph below [Exhibit 1]. How would you
explain the shift of the U.S. income distribution in the last two decades?
In recent years, the share of U.S. income going to the highest fifth has increased while the share
2. (Lorenz Curve) What is a Lorenz curve? What does the Lorenz curve below [Exhibit 2] illustrate?
A Lorenz curve is a curve showing the percentage of total income received by a given percentage of
3. (Poverty Rates Over Time) During what period since 1960 did the U.S. poverty rate fall the most?
Why? Which age group has shown the most decline in poverty rates since 1960 and why?
Because of a decline in unemployment and an increase in income assistance, the U.S. poverty
Chapter 18 Income Distribution and Poverty 251
4. (Official Poverty Level) Although the poverty rate among single mothers has decreased since 1960,
the number of poor children from such families has more than doubled. Explain.
Poverty rates among female householders are high. These rates, however, have increased very little
5. (Income Differences) List some reasons why household incomes differ. Which factors are the most
important?
Household incomes may differ because of the number of household members who are working.
6. (Official Poverty Level) How does the U.S. Department of Agriculture calculate the official poverty
level? What government assistance programs does the Census Bureau consider when calculating
household income? What programs are ignored?
The official poverty level is calculated by estimating the cost of a nutritionally adequate diet and
7. (Poverty and Age) Poverty among the elderly fell dramatically between 1959 and 1974 and has
continued to decline. However, poverty among that portion of the U.S. population that is less than
18 years old is no lower today than in the 1970s. Why have the experiences of these two age groups
differed?
The elderly have benefited from a large increase in Social Security and Medicare spending. These
8. (Disincentives) How does the implicit tax on earned income (in the form of lost benefits from
government assistance programs as earned income increases) affect work incentives? How do some
people avoid the implicit tax?
Chapter 18 Income Distribution and Poverty 252
The level of benefits in income assistance programs is inversely related to income from other
sources. As earned income increases, government benefits programs such as TANF, Medicaid,
9. (Welfare Reform) What has happened to the number of people on welfare since 1994? What
explains the change over time?
Work requirements do seem to yield substantial declines in the number of people on welfare.
Experiential Assignments
1. Have students visit the Census Bureau’s page on poverty statistics at
2. The front page of the Marketplace section of the Wall Street Journal often carries articles on income
distribution and the personal impact of poverty. Ask students to pay particular attention to the