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CHAPTER 18

Who Gets What? The Distribution of Income

Eleventh Edition

© 2020 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
 Chapter Goals

Explain how income, wealth, and poverty are measured, and

how their real-world measures changed over time.

Summarize the socioeconomic tensions that high income

and wealth inequalities can cause.

Explain why there are so many philosophical debates about

equality and fairness, and summarize some of them.

Discuss the practical and theoretical problems of

redistributing income.

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 Measuring the Distribution of Income, Wealth,
and Poverty

Share distribution of income is the relative division of total

income among income groups. For example, it measures
how much income the top 5% or 15%, or the bottom 10%
gets.

Socioeconomic distribution of income is the allocation of

income among relevant socioeconomic groupings.

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 The Lorenz Curve

A Lorenz curve is a geometric representation of the share

distribution of income among families in a given country at a
given time.

It measures the cumulative percentage of families on the

horizontal axis, arranged from poorest to richest, and the
cumulative percentage of family income on the vertical axis.

Both axes start at zero and end at 100%.

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 A Lorenz Curve of U.S. Income

Percentage
of Total Cumulative
Income Family Percentage of Total
Quintile Income Family Income
Lowest fifth 3.1% 3.1%
Second fifth 8.2 11.3
Third fifth 14.3 25.6
Fourth fifth 23.2 48.8
Highest fifth 51.2 100.0
In the graph, we see the U.S. Lorenz curve
based on the numbers in the table compared to
a Lorenz curve reflecting a perfectly equal
distribution of income.

Access the text alternative for slide images.

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 Lorenz Curves for the United States: 1929,
1970, and 2017

From 1929 to 1970,

income inequality
decreased.
From 1970 to 2017,
income inequality
increased.

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 Defining Poverty

Poverty can be defined as a relative or absolute concept.

The poverty threshold is the income below which a family is

considered to live in poverty.

The US poverty threshold:

Equal to or less than three times an average family’s USDA-

calculated minimum food expenditures.

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 Number and Percentage of Persons in Poverty

Poverty Income of a
Number of Percentage of 4-Person Family
Year People (millions) Population (in current $)
1960 39.9 22.2% 3,022
1970 24.4 12.6 3,986
1980 29.3 13.0 8,351
1990 33.6 13.5 13,254
2000 31.6 11.3 17,463
2010 46.2 15.1 22,113
2015 43.1 13.5 24,036
2016 40.6 12.7 24,339
2017 39.7 12.3 25,858

© McGraw Hill Source: Current Population Reports, U.S. Bureau of the Census (www.census.gov). 8
 Debates about the Definition of Poverty

Those who feel that the poverty line is too low points out that
food is now closer to one-seventh of a family’s total budget,
so food is no longer a good basis for determining the poverty
level.

Some argue that the current measure is too high because

poverty figures do not include in-kind transfers,
underreporting of income or savings recipients may have.

Like most economic statistics, poverty statistics should be

used with care.

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 The Costs of Inequality & Poverty and Social Mobility

Some feel that society suffers when some of its people are in
poverty.

When poverty decreases, the incentives for crime also

decrease.

Individuals who work hard can escape poverty.

Concern about poverty has been lessened by the belief that

the United States has significant economic and social mobility.

Recent studies have found that income mobility has

significantly declined in the United States.

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 The Gini Coefficient

Economists use the Gini

coefficient to talk about
the degree of income
inequality.

The Gini coefficient is

derived from the Lorenz
curve.

Gini coefficient = Area

A/(Areas A + B).

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 International Dimensions of Income Inequality

Among countries
of the world, the
United States has
the neither the
most equal nor
the most unequal
distribution of
income.

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 Per Capita Income (GNP) in Various Countries

World
income
inequality
is much
greater
than
country
income
inequality.

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 The Distribution of Wealth

Wealth is the value of things individuals own less the value

of what they owe. It is a stock concept representing the value
of assets such as houses, buildings, and machines.

Income is payments received plus or minus changes in

value of a person’s assets in a specified time period. It is a
flow concept, a stream through time.

In the United States, wealth is significantly more unequally

distributed than is income.

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 Wealth Distribution in the United States and Wealth
Compared to Income

Wealth is much more

unequally distributed
than income in the
United States. The
lowest 40% have
borrowed nearly as
much as they own.

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 Socioeconomic Dimensions of Income Inequality 1

The share distribution of inequality is only one of the

dimensions that inequality of income and wealth can take.

Unequal distribution of income based on race, ethnic

background, geographic region, and other socioeconomic
factors such as gender and type of job exists.

The United States has socioeconomic classes with some

mobility among classes.

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 Socioeconomic Dimensions of Income Inequality 2

Median Income, 2017

Occupational Category Male ($) Female ($)
Financial analysts 82,680 71,188
Management 81,796 60,996
Healthcare Practitioners 69,732 55,536
Protective services 46,488 35,880
Sales and Office 43,368 34,944

Year Male ($) Female ($) Race, 2017 Median Income ($)
1990 20,293 10,070 White 40,601
2000 28,343 16,063 Asian 38,698
2010 32,205 20,775 Hispanic Origin 23,431
2016 40,396 25,486 Black 20,937

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 Income Distribution According to Class

The class system as a pyramid, a diamond, and a pentagon.

A developing country’s U.S. class system in the U.S. class system in

class system 1960s and 1970s recent years

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 Globalization and the Splitting of the Middle Class

Outsourcing increased unemployment and pushed down

wages in tradable sector such as manufacturing.

Nontradable sectors were safe from outsourcing and

benefited from lower prices on the consumer side, moving
them into the upper middle class.

With globalization, those in the lower class are less likely to

move up the ladder, and those in the upper class are less
likely to move down the ladder.

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 Philosophical Debates about Equality and Fairness

Some philosophers argue that inequality creates diversity

that enriches the lives of everyone.

Others maintain that equality is the overriding goal.

The Declaration of Independence asserts that “all men are

created equal.”

Objective economists limit themselves to explaining the

effect of various policies on the distribution of income.

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 Fairness and Equality

Most Americans see fairness as equality of opportunity.

There are great differences of opinion as to what constitutes

“equal opportunity.”

There are three problems in determining whether an income

distribution is fair:

1. People’s abilities differ.

2. People’s needs differ.

3. People’s efforts differ.

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 Three Important Side Effects of Redistributive Programs

Society may decide to redistribute income from rich to poor to

meet its ideal of fairness.

There are three side effects of redistribution of income:

1. The labor to leisure incentive effect.

2. The tax avoidance or evasion incentive effect.

3. The incentive to appear more needy than you actually are.

Often politics, not value judgment, plays a central role in

determining what taxes and individual will pay.

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 Income Redistribution Policies

The government redistributes income through direct and

indirect methods.

The direct methods include:

• Taxation which are policies that tax the rich more than the
poor.

• Expenditures which are programs that help the poor more

than the rich.

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 Income Redistribution Policy, Fairness, and
Takeaway Principle

Discussions of income distribution often focus on

redistribution policy. One solution is to focus not on
redistribution policy but a policy to affect the structure of
society that underlies the distribution of income to society.
Examples:

• Structure of intellectual property rights.

• Licensing and restrictions on entry into different types of

work.

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 Taxation to Redistribute Income 1

A progressive tax is a one in which the average tax rate

increases with income. It redistributes income from the rich to
the poor.

A proportional tax is a one in which the average tax rate is

constant regardless of income. It is neutral in regard to
income redistribution.

A regressive tax is a one in which the average tax rate

decreases as income increases. It redistributes income from
poor to rich.

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 Taxation to Redistribute Income 2

The federal government gets most of its tax revenue from:

• Personal income tax.

• Corporate income tax.

• Social Security tax.

State and local governments get most of their tax revenue

from:

• Income tax.

• Sales tax.

• Property tax.
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 Expenditure Programs to Redistribute Income 1

Social Security is a social insurance program that provides

financial benefits to the elderly and disabled and to their
eligible dependents and/or survivors.

Expenditure programs have been more successful than

taxation for redistributing income.

Medicare is a medical insurance system for retired people.

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 Expenditure Programs to Redistribute Income 2

Public assistance programs are means-tested social

programs that provide financial, nutritional, medical, and
housing assistance to the poor and include:

• Temporary Assistance for Needy Families (TANF).

• Supplemental Nutritional Assistance Program (SNAP).

• General assistance.

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 Expenditure Programs to Redistribute Income 3

Medical programs provides significant medical assistance

for lower income individuals.

Supplemental Security Income (SSI) is a federal program

that pays benefits, based on need, to the elderly, blind, and
disabled.

Unemployment compensation is short-term financial

assistance, regardless of need, to eligible individuals who
are temporarily out of work.

Housing programs are federal and state programs to

improve housing or to provide affordable housing.

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 How Successful Have Income Redistribution
Programs Been?

Government programs have a slight effect on income

equality, but it is very small.

The incentive effects of collecting and distributing the money

has come at the cost of a reduction in the total amount of
income earned by the society.

Decisions on property rights issues have enormous

distributional consequences that are often little discussed,
even by economists.

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 Impact of Transfers and Taxes on Income

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© McGraw Hill 31
 Chapter Summary 1

The Lorenz curve is a measure of the distribution of income

among families in a country.

The farther the Lorenz curve is from the diagonal, the more
unequally income is distributed.

The official poverty measure is an absolute measure

because it is based on the minimum food budget for a family;
it is a relative measure because it is adjusted for inflation.

There is more income inequality among countries than

income inequality within a country.

Wealth is distributed less equally than income.

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 Chapter Summary 2

Income differs substantially by class and by other

socioeconomic factors, such as age, race, and gender

Fairness is a philosophical question, so people must judge a

program’s fairness for themselves.

Income is difficult to redistribute because of incentive effects

of taxes, avoidance and evasion of taxes, and incentive
effects of distribution programs

Government spending programs are more effective than

taxes in reducing income inequality in the United States.

© McGraw Hill 33
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© 2020 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
 Accessibility Content: Text Alternatives for Images

© McGraw Hill 35
 A Lorenz Curve of U.S. Income - Text Alternative
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This graph plots Cumulative percentage of families from 0 to 100% on the

x-axis and Cumulative percentage of income from 0 to 100% on the y-
axis. One linear curve called the Line of absolute equality spans from the
origin to Point C with coordinates (100%, 100%). Point A resides on this
linear curve at (20%, 20%), and Point B resides at (40%, 40%). Beneath
the linear curve is a nonlinear curve showing Point F at (20%, 3%), Point
G at (40%, 11%), Point H at (60%, 26%), Point I at (80%, 50%), and
Point J which shares the spot with Point C at (100%, 100%).

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© McGraw Hill 36
 Lorenz Curves for the United States: 1929, 1970, and
2017 - Text Alternative
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As the Lorenz curves show, the amount of inequality of income

distribution has fluctuated in the United States. Until about 1970, it
decreased; since then, it has increased. This graph has Cumulative
percentage of population from 0 to 100% on the x-axis and Cumulative
percentage of income from 0 to 100% on the y-axis. One linear curve
called the Line of absolute equality spans from the origin to a point with
coordinates (100%, 100%). Beneath this linear curve are the three
Lorenz curves for the United States for 1929, 1970, and 2017. The 1970
curve is closest to the Line of absolute equality, and the curves for 1929
and 2017 are nearly the same and farther from the Line of absolute
equality.

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© McGraw Hill 37
 The Gini Coefficient - Text Alternative
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This graph plots Cumulative percentage of population on the x-axis from

0 to 100% and Cumulative percentage of income from 0 to 100%. A linear
45 degree angle line of equality runs from the origin to the point (100%,
100%). Beneath it is the outward bulging Lorenz curve, and this shaded
area is labeled A. Below the A area is a second shaded area B that
includes the remaining area under the Lorenz curve to the x-axis
intercept of 100%. In other words, the Gini coefficient is derived from the
Lorenz curve by comparing the area between (1) the Lorenz curve and
the diagonal (area A) and (2) the total area of the triangle below the
diagonal (areas A and B). Put another way: Gini coefficient = Area
A ̸(Areas A + B); a Gini coefficient of zero would be perfect equality, since
area A is 0 if income is perfectly equally distributed. The highest the Gini
coefficient can go is 1. As a result, all Gini coefficients must be between 0
and 1. The lower the Gini coefficient, the closer the income distribution is
to being equal.

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© McGraw Hill 38
 Per Capita Income (GNP) in Various Countries - Text
Alternative
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This bar graph shows nine countries on the x-axis and Per capita income
(GDP) from $0 to $90,000 on the y-axis. The estimates are calculated
using the purchasing power parity method. The countries and graphed
amounts are: Switzerland, $86,835; United States, $62,152; United
Kingdom, $44,178; Japan, $40,859; Hungary, $16,722; Brazil, $10,224;
Kenya, $1,838; Uganda, $711; and Congo, Dem. Rep, $478.

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© McGraw Hill 39
 Wealth Distribution in the United States and Wealth
Compared to Income - Text Alternative
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This graph has an x-axis of Cumulative percentage of

families/households (0 to 100%) and a y-axis of Cumulative percentage
of wealth/income (0 to 100%). A 45 degree line from the origin to point
(100%, 100%) is used to reference Lorenz curves for Family Income and
Household wealth. Household wealth lies below Family income. A table
contained within the graph shows two columns: Wealth Quintile and
Percentage of Total Household Wealth. Entries for each of these are:
Bottom fifth, -0.5; Second fifth, 0.5; Third fifth, 3.2; Fourth fifth, 9.8; and
Top fifth, 87.0. Thus, the lowest 40 percent of the population has no
wealth; these people have borrowed as much as they own.

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© McGraw Hill 40
 Income Distribution According to Class - Text Alternative
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The class structure in developing countries is a pyramid, with a large

lower class on the bottom, middle class in the middle, and a small upper
class on the top.
In the United States in the 1960s and 1970s, the middle class grew and
the United States changed from a pyramid shape to a diamond shape,
with a large middle class and smaller lower and upper classes.
In the current United States, the class structure is more like a pentagon,
with an expanding lower class on the bottom that was split from the
middle class in the middle and relatively small upper class on the top.

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© McGraw Hill 41
 Impact of Transfers and Taxes on Income - Text
Alternative
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The y-axis is labeled Average Annual Income in Dollars and goes from 0
to 300,000 in increments of 50,000. Five quintiles are shown on the x-
axis: Lowest, Second, Third, Fourth, and Highest. The graph legend
shows that blue bars represent Before Federal Transfers and Taxes and
red bars represent After Federal Transfers and Taxes. For the lowest
quintile, the blue bar is 19,200 and the red bar is 31,100. For the second
quintile, the blue bar is 45,000 and the red bar is 49,000. For the third
quintile, the blue bar is 68,700 and the red bar is 62,300. For the fourth
quintile, the blue bar is 103,000 and the red bar is 85,000. For the
highest quintile, the blue bar is 281,400 and the red bar is 207,300.

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© McGraw Hill 42