Because learning changes everything.

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.

© McGraw Hill 2
 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.

© McGraw Hill 3
 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%.

© McGraw Hill 4
 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.

© McGraw Hill 5
 Lorenz Curves for the United States: 1929,
1970, and 2017

From 1929 to 1970,

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

Access the text alternative for slide images.

© McGraw Hill 6
 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.

© McGraw Hill 7
 Number and Percentage of Persons in Poverty

Poverty Income of a
Number of People Percentage of 4-Person Family
Year (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.

© McGraw Hill 9
 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.

© McGraw Hill 10
 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).

Access the text alternative for slide images.

© McGraw Hill 11
 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.

© McGraw Hill 12
 Per Capita Income (GNP) in Various Countries

World
income
inequality
is much
greater
than
country
income
inequality.

Access the text alternative for slide images.

© McGraw Hill 13
 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.

© McGraw Hill 14
 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.

Access the text alternative for slide images.

© McGraw Hill 15
 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.

© McGraw Hill 16
 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

© McGraw Hill 17
 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

Access the text alternative for slide images.

© McGraw Hill 18
 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.

© McGraw Hill 19
 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.

© McGraw Hill 20
 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.

© McGraw Hill 21
 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.

© McGraw Hill 22
 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.

© McGraw Hill 23
 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.

© McGraw Hill 24
 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.

© McGraw Hill 25
 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.
© McGraw Hill 26
 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.

© McGraw Hill 27
 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.

© McGraw Hill 28
 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.

© McGraw Hill 29
 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.

© McGraw Hill 30
 Impact of Transfers and Taxes on Income

Access the text alternative for slide images.

© 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.

© McGraw Hill 32
 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
 End of Main Content

Because learning changes everything. ®

www.mheducation.com

© 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.