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Chapter 14

Income Distribution

© 2003 South-Western College Publishing

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Individual, Family, and Household Income

FamilyFamilyA group of 2 or more persons living the

same dwelling and related by birth, marriage, or adoption

HouseholdHouseholdAll persons, related or unrelated, who

occupy a housing unitA person living alone

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Distribution of Income The way in which income is divided up among

households or families

Bureau of Census divides all households into five income classes or quintiles

Next slide presents this information for 2001

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Distribution of Income

Money Share of Income Aggregate Income

Lowest Fifth Under $17,900 3.5Second Fifth $17,901-33,314 8.7Middle Fifth $33,315-53,000 14.6Fourth Fifth $53,001-83,500 23.1Highest Fifth $83,501 and over 50.1

Total 100.0

Top 5% (over $150,499)

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Lorenz Curve

Lorenz CurveLorenz Curve: a graph that traces the percentage relationship between the portion of total income received and the portion of all households or families in the economy

Next slide presents the Lorenz Curve for the United States for 2001

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Lorenz Curve for Distribution of Income in the United States: 2001

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0 20 40 60 80 100

Perfect Equality

Lorenz Curve, 2001

Cumulative Percentage of Households

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A

B

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GINI Coefficient

An index that summarizes the inequality revealed by the Lorenz Curve in a single number

Computed by dividing the area between lines A and B (the shaded area in previous figure) by the total area under line A

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Lorenz Curve for U.S., Brazil, and Sweden

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0 20 40 60 80 100

Line of Perfect

Equality

United States

Cumulative Percentage of Households

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Sweden

Brazil

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Causes of Income Inequality Education

In 2001, the median income of a high school dropout was $18,445, $24,645 for high school graduate, and $40,939 for bachelor’s degree

TechnologyIncreased demand for educated and highly skilled

workers Unions

Decline in union membership Abilities

Wide variation in distribution of natural abilities which leads to variations in income

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Household Wealth

Household wealthValue of a household total assets minus its

total liabilitiesAlso known as net worthBureau of Census estimates that 84% of the

nation’s wealth is held by 20% of the households

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Measured Net Worth: 1993 by Type of Household and Age

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Married couples

Male Householders

Female Householders

–35 35-54 55-64 65+ Age Group

Th

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($)

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Discrimination Labor market discriminationLabor market discrimination

Hiring, promotion, firing, or wage is based on factors unrelated to worker productivity - race, gender, age, national origin, etc.

Occupational SegregationOccupational SegregationChanneling people into occupations

according to gender and race

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Women’s Earning as a Percentage of Men’s Earnings, 1960-1998

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01960 1965 1970 1975 1980 1985 1990 1995 1998

Perc

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73%

61%

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Household Median IncomeHouseholds Median Income (Dollars)All Households $ 38,885White, not Hispanic 40,912Black 25,351Hispanic 28,330Asian and Pacific Islanders46,637Type of HouseholdFamily Households 47,469Nonfamily Households 23,441Earnings of Year-Round Full-Time WorkersMale 35,249Female 26,029

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Equal vs. Equitable Distribution of Income

Equal Distribution of IncomeEqual Distribution of IncomeIncome distribution in which all households receive

the same income Equitable Distribution of IncomeEquitable Distribution of Income

Income distribution based on the application of some objective standard

Perceived contribution of the individual

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Poverty

Relative measure of povertyDefines poverty in terms of the average annual

incomes earned by other households Absolute measure of poverty

Defines poverty as an annual income below a specific level for a given-sized household

Poverty threshold lineEstablished annual income level that separates the

poor from the nonpoor

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Incidence of Poverty

The percentage of persons in a particular group who are officially classified as having income below the poverty threshold line

Major shortcoming inherent in the official poverty line measures is that only pretax income ix included no consideration given to income received from cash transfers and in-kind benefits from government

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Demographic Characteristics of the Poor by Persons - 2001

Characteristics Millions PercentageTotal 34.5 12.7

White, not Hispanic 15.8 8.2Black 9.1 26.1Hispanic 8.1 25.6Asian and Pacific Islanders 1.4 12.5Under age 18 14.1 20.865 years and over 1.5 10.5Female householder, 3.8 29.9 no husband present

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Demographic Characteristics of the Poor by Region - 2001

Region Millions Percentage

Northeast 6.4 12.3

Midwest 6.5 10.3

South 13.0 13.7

West 8.6 14.0

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Welfare Disincentives to work

Implicit tax trapDecrease in income

LegislationPersonal Responsibility and Work Opportunity

Reconciliation Act of 1996all able-bodied adults must work after 2 years

on Welfare & 5 year lifetime limitpreliminary reports show 50%-70% find jobs,

but are still in poverty