Of Income

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Main Idea

Reasons for income inequality include ability differences, education and training, and discrimination.

Reading Strategy

Graphic Organizer As you read the section, complete a graphic organizer similar to the one below by listing three explanations for a growing income gap.

Income gap

Lorenz curve, poverty guidelines, welfare, food stamps, Earned Income Tax Credits (EITC), enterprise zone, workfare, negative income tax

Objectives

After studying this section, you will be able to:

1. Explain how economists measure the distribution of income.

2. Discuss the reasons for the inequality of income.

3. Discuss antipoverty programs.

Applying Economic Concepts

Distribution of Income Do you compare what you make to the earnings of others? Read to find out more about how income is distributed in the United States.

CoverStorv

From Welfare to Work

When United Parcel Service of Ame Japarted itself into.

What UPS got was a pool of adept employees in it for the long haul.

In fact, of the 10,000 welfare recipients the company has hired since January 1996, the shipping giant estimates about for UPS.

Work-lùre program a plus for

Work-lùre program a plus for

In the United States, as in other parts of the world, people do not all have the same income. A large number of people live in poverty despite the efforts of programs such as the one featured in the cover story.

The Distribution of Income lj|n To evaluate the distribution of income, the JHHKa1 incomes of all families are ranked from highest to lowest. The ranking is then divided into quintiles, or fifths, for examination. The table in Panel A of Figure 14.7 shows family income quin-tile data for two different years. Only money income is counted; other aid such as food stamps, medicaid, or subsidized housing is excluded. Using a recent year as our example, the percent of income earned by each quintile is added to the lower quintiles and plotted as a Lorenz curve. The Lorenz curve-a curve that shows how much the actual distribution of income varies from an equal distribution-appears in Panel B.

ECONOMICS

AT A GLANCE

Figure 14.7

To illustrate, the 3.6 percent of total income received by the lowest quintile is plotted in Panel B as point a. This amount is combined with the income the next quintile earns and then plotted as point b. This process continues until the cumulative values of all quintiles are plotted.

If all families received exactly the same income-so that 40 percent of the families would earn 40 percent of the total income and so on-the Lorenz curve would appear as a diagonal line running from one corner of the graph to the other. Because all families do not receive the same income, however, the Lorenz curve is not a diagonal. As you can see in the figure, the distribution of income recently has become more unequal than it was in 1980.

Reasons for Income Inequality

■J! A number of reasons explain jffljf' why the incomes of various groups may be different. They include education, wealth, discrimination, ability, and monopoly power.

The Distributions of Income by Families

Q Family Income Ranked by Quintiles

1980

1998

Quintiles

Quintiles

Cumulative

Lowest Fifth

5.3%

3.6%

3.6%

Second Fifth

11.6%

9.0%

12.6%

Third Fifth

17.6%

15.0%

27.6%

Fourth Fifth

24.4%

23.2%

50.8%

Highest Fifth

41.1%

49.2%

100%

Top 5 Percent

14.6%

21.4%

20 40 60

Percent of Total Families

Source: U.S. Bureau of the Census

20 40 60

Percent of Total Families

Source: U.S. Bureau of the Census

Education

Some people have higher incomes than others because they have more education. Although exceptions exist, there is generally a strong relationship between median income and level of education. Education puts people in a better position to get the higherpaying jobs that require a higher level of skills.

Wealth

Income also varies because some people hold more wealth than others-and the distribution of wealth is even more unequal than the distribution of income. When wealth holders are ranked from

Categorizing Information

Economists use the Lorenz curve to contrast the distribution of income at different points in time. What percentage of income is received by the richest quintile in 1980? In 1998?

Visit epp.glencoe.com and click on Textbook Updates—Chapter 14 for an update of the data.

Visit epp.glencoe.com and click on Textbook Updates—Chapter 14 for an update of the data.

highest to lowest, the top fifth has 75 percent of all the wealth in the country. The bottom two-fifths, which is 40 percent of the people in the country, have less than 2 percent of the total wealth.

This inequality has an impact on people's ability to earn income. Wealthy families can send their children to expensive colleges and universities. The wealthy can also afford to set their children up in businesses where they can earn a better income. Even if the wealthy choose not to work, they can make investments that will bring them income.

CHAPTER 14: ECONOMIC INSTABILITY 395

CONTENTS

Discrimination

Discrimination is another factor influencing income. Women may not be promoted to executive positions in some companies because male executives simply are not accustomed to women in roles of power. Some unions may deny immigrants or ethnic minorities membership on the grounds that they "don't belong" in the professions.

Although discrimination is illegal, it still takes place. When it does occur, discrimination causes women and minority groups to be crowded into other labor markets where oversupply drives down wages.

Ability

Some people earn more income because they have certain natural abilities, such as professional athletes who sometimes earn millions of dollars every year. Such athletes as Shaquille O'Neal and Anna Kournikova earn high incomes because they have unique abilities or talents. The same is true of popular performers such as Oprah Winfrey, Jim Carrey, and Harrison Ford.

Monopoly Power

Another factor is the degree of monopoly power that some groups hold. Recall from Chapter 8 that unions have been able to obtain higher wages for their members. Some white-collar workers-clerical, business, or professional workers who generally are salaried-also hold a degree of monopoly power. The American Medical Association, for example, has been successful in limiting the number of people in its profession by limiting enrollments in medical schools. More recently, the AMA voted to unionize in order to be in a better position to deal with the health maintenance organizations that employ them.

Poverty

Poverty is a relative measure that depends on prices, the standard of living, and the incomes that others earn. Poverty is a major problem in America-and one that is extremely difficult to resolve. Families and individuals are defined as living in poverty if their incomes fall below certain levels. Poverty guidelines are annual dollar amounts used to evaluate the money income that families and unrelated individuals receive. In 1999, poverty was defined as having an income of less than $16,700 for a family of four.

People in Poverty

Poverty in the United States is more extensive than most people realize. According to recent figures, there are 34.5 million Americans in poverty— or approximately 12.7 percent of the total population.

As Figure 14.8 shows, even the record economic expansions of the 1980s and 1990s failed to make a significant dent in the percent of Americans living in poverty. In fact, the proportion of the population living in poverty was smaller in the late 1960s and 1970s than it is today.

Of those in poverty, slightly more than two-thirds are white and approximately one-quarter are African American. Finally, children of all races make up approximately 40 percent of the people in poverty even though they account for only 26 percent of the total population.

The Growing Income Gap

One reason for the continued high poverty numbers is the growing gap in the distribution of income. According to the Census Bureau, the growing spread that has taken place since 1980 has several causes.

The first involves a structural change in the economy as industry changes from goods production to service production. Because wages are typically lower in the service industries such as fast-food chains, movie theaters, and entertainment parks, weekly paychecks tend to be lower.

The second reason for the spread in income distribution is the growing gap between well-educated and poorly educated workers. During the 1990s, wages for the highly skilled soared, while wages for the less skilled tended to remain about the same.

A third reason—declining unionism (especially among low-skilled workers)—is adding to the growing differential. The decline of unions means that many low-skilled workers have to work elsewhere for less pay.

396 UNIT 4 MACROECONOMICS: POLICIES

CONTENTS

ECONOMICS ■

Figure 14.8

AT A GLANCE

The fourth reason for the income gap concerns the changing structure of the American family. The shift from two-parent families to single-parent families and other nonfamily household living arrangements tends to lower average family income. All of these factors contribute to the trend of the rich getting richer and the poor getting poorer.

Antipoverty Programs

MR Over the years, the federal government has instituted a number of programs to help the needy. Most come under the general heading of welfare-economic and social programs that provide regular assistance from the government or private agencies because of need.

Income Assistance

Programs that provide direct cash assistance to those in need fall into the category of income assistance. One such program is the Temporary Aid to Needy Families (TANF), which replaced the Aid to Families with Dependent Children (AFDC) in 1996. Although provisions and benefits vary from state to state, many families are able to receive cash payments because of the death, continuous absence, or permanent disability of a parent.

Another income assistance program is the Supplemental Security Income (SSI), which makes cash payments to blind or disabled persons age 65 and older. Originally, the states administered the program because benefits varied so much from state to state. The federal government took it over in 1979 to assure more uniform coverage.

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