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Chapter 28 (15 Micro)
Income Inequality and Poverty
OUTLINE
I. How Much Income Inequality Exists in the United States
A. Inequality in Money Income in the United States
B. A Closer Look at Factors Influencing Income Distribution
2. Young, inexperienced workers, students, single-parent families, and retirees are
over-represented among those with low incomes.
C. Why Has Income Inequality Increased?
1. An increasing proportion of both single-parent and dual-earner families.
3. -take-
4. Increases in the reported income of those in the top tax bracket due to lower
marginal tax rates.
II. Income Mobility and Income Inequality in Economic Status
A. Income Mobility
2. Tracking of household income over time shows there is considerable movement
both up and down the income spectrum.
III. Poverty in the United States
A. Changing Composition of Poor
B. Transfer Payments and the Poverty Rate
1. Income transfers expanded rapidly over the past several decades.
2. These transfers have been largely ineffective.
a. Though per capita income has increased substantially over time, the poverty
rate of working-age Americans has stayed about the same.
C. Income Transfer Effects
1. Income supplements large enough to significantly increase the economic status of
poor people will:
a. Encourage behavior that increases the risk of poverty.
IV. Income Inequality: Some Concluding Thoughts
A. Positive economics cannot determine how much inequality should be present.
B. Income inequality reflects differences between individuals and influences their
incentive to develop resources and engaging productive activities.
264 Chapter 28 (15 Micro)/Income Inequality and Poverty
OBJECTIVES
In this chapter, we present empirical evidence on economic inequality and poverty. Statistics in this
area are often misleading and often misused. Static data on the distribution of income often conceal
important information. They do not reveal why (for example, differences in age, education, and
family status) incomes vary. Neither do they reveal the extent that people exchange economic
positions over time. This chapter discusses these factors and presents data on income mobility as
The chapter also focuses on poverty in the United States who are the poor and what might
be done to improve their economic status? Analysis of the socioeconomic characteristics of the poor
IMPORTANT POINTS AND TEACHING SUGGESTIONS
1. Exhibit 1 presents a breakdown of annual money income data by quintile. As the table shows,
the distribution of annual money income during the last 50 years has been relatively stable.
2. Exhibit 2 presents data on the differences in the characteristics of high– and low-income
recipients. In most families with high incomes, more than one family member works, the level
3. The panel income data have substantially improved our knowledge of income mobility. As
4. It is difficult to overemphasize the heterogeneity of the poor. The poor are a diverse group with
respect to number of children, employment experience of the household head, age, health, and
6. During the last 50 years there has been a substantial change in the composition of the poor.
Today, families headed by a female of prime-working age who is not in the labor force are the
7. As Exhibit 5 illustrates, the poverty rate of families declined sharply during the 1950s and
8. Like other changes in economics, transfer payments generate secondary effects. Means-tested
transfers generally increase the marginal (implicit) tax rate of the poor. When transfers provide
9. A negative income tax is often discussed as a means of bridging the gap between income
inequality and the removal of productive incentives. Carefully explain how the negative income
11. It is important to get students to see that attempts to redistribute income may result in more
measured inequality. For example, an increase in non-measured in-kind transfers may lead
12. A good way to talk about income distribution issues and incentives is to talk about how
reductions in the top marginal tax rates affected the incentives of secondary workers to enter
266 Chapter 28 (15 Micro)/Income Inequality and Poverty
GAMES
1. What Do You Need to Get By?
Type: In-Class Assignment
Topics: earning power, poverty line
Textbook: Chapter 27 Income Inequality and Poverty
Materials Needed: none
Time: 20 minutes
Class limitations: works in any size class
Purpose
This assignment illustrates that for most people, the value of their labor is their biggest asset. It
then explores income levels needed to achieve particular comfort levels, and compares those to
official measures of poverty.
Instructions
Ask the class to answer the following questions. Give them time to write an answer to a question,
then discuss their answers before moving to the next question.
1. What income do you expect to earn the year after you graduate?
2. What do you expect your highest annual income to be?
3. Estimate your average annual income, over your career. (You may use a simple average of
your answers to questions 1 and 2.)
5. In your opinion, what is the minimum income needed to support a family of four at each of
these comfort levels:
Points for discussion
The estimates of lifetime earnings will range widely, but typically are in the range of a few
million dollars. The main point is that earning power is the most valuable asset for nearly
everyone.
The answers for question 5 will also vary widely. To some extent the figures will be correlated
Chapter 28 (15 Micro)/Income Inequality and Poverty 267
earning less than that amount are poor.
2. Picture a Poor Person
Type: In-Class demonstration
Topics: poverty
Textbook: Chapter 27 Income Inequality and Income
Materials Needed: none
Time: 2 minutes
Class limitations: works in any size class
Purpose
This exercise attempts to broaden the view of the poor beyond common stereotypes.
Instructions
Ask the class to visualize a poor person. Not someone they know personally, but a representative
individual. Ask them to picture a particular individual, and to answer the following questions:
What gender is this person?
How old is this person?
Where do they live?
What race is this person?
Points for discussion
The most common face of poverty is:
female
a child
268 Chapter 28 (15 Micro)/Income Inequality and Poverty
HINTS FOR ANSWERING CRITICAL THINKING QUESTIONS
1. The appropriate distribution of income is a subjective issue. There are two general criteria for
judging fairness: (1) the pattern of income shares relative to some desired pattern and (2) the
fairness of the process. In considering this issue, ask students to consider questions like the
following: Is an athletic contest fair if some are given a head start? Does the pattern of the
outcome determine the fairness of an athletic contest? Are income differences fair if they reflect
hard work, merit, luck, or superior opportunity?
5. Of course there is not a right answer to these questions. We suggest the following points for
discussion: (1) Is the property right of individuals to personal income meaningful if there are
generated by individuals belong to them or the government? (3) The U.S. Constitution
do transfer payments meet this criteria? and (4) The
taken for the public use without just
do transfer payments meet this criteria?