19 ECONOMIC INEQUALITY After studying this chapter you will be able to Describe the distributions of income and wealth and the trends in economic inequality in the United States Describe the distributions of income and the trends in inequality in selected countries and the world Explain the sources of economic inequality and its trends Describe the scale of government income redistribution in the United States 2014 Pearson Addison Wesley Extreme poverty and extreme wealth exist side by side in every major city in the United States and in most parts of the world How many rich and poor people are there in the United States How does the distribution of income in the United States compare with that in other countries Are the rich getting richer and the poor getting poorer Or are incomes becoming more equal 2014 Pearson Addison Wesley Economic Inequality in the United States The census bureau defines a household s income as money income which equals market income plus cash payments to households by the government Market income equals wages interest rent and profit earned by the household in factor markets before paying income taxes 2014 Pearson Addison Wesley Economic Inequality in the United States The Distribution of Income Figure 19 1 shows the distribution of income across the 121 million households in the United States in 2011 2014 Pearson Addison Wesley Economic Inequality in the United States The mode income is the most common income and was about 22 000 The median income is the level of income that separates the population into two groups of equal size and was 50 054 The mean income is the average income and was 69 677 2014 Pearson Addison Wesley Economic Inequality in the United States A distribution in which the mean exceeds the median and the median exceeds the mode is positively skewed which means it has a long tail of high values The U S distribution of income is positively skewed 2014 Pearson Addison Wesley Economic Inequality in the United States Figure 19 2 shows the distribution of income shares for the United States in 2011 The poorest 20 of households received only 3 2 of the total income The second poorest 20 of households received 8 4 of the total income The middle 20 received 14 3 of total income 2014 Pearson Addison Wesley Economic Inequality in the United States The next highest 20 of households received 23 of the total income The highest 20 received 51 1 of total income 2014 Pearson Addison Wesley Economic Inequality in the United States The Income Lorenz Curve The income Lorenz curve graphs the cumulative percentage of income against the cumulative percentage of households The vertical axis plots the cumulative percentage of income The horizontal axis is the cumulative percentage of households 2014 Pearson Addison Wesley Economic Inequality in the United States If everyone has the same income the income Lorenz curve would be shown by the line of equality 2014 Pearson Addison Wesley Economic Inequality in the United States The Lorenz curve shows the distribution of income 2014 Pearson Addison Wesley Economic Inequality in the United States The further the Lorenz curve is from the line of equality the more unequal is the distribution of income 2014 Pearson Addison Wesley Economic Inequality in the United States The Distribution of Wealth A household s wealth is the value of all the things that it owns at a point in time The distribution of wealth is another way of examining the degree of economic inequality 2014 Pearson Addison Wesley Economic Inequality in the United States Wealth is even more unequally distributed than income 2014 Pearson Addison Wesley Economic Inequality in the United States Wealth or Income Wealth is a stock of assets and income is a flow of earnings that result from a given stock of wealth Wealth is more unequally distributed than income because wealth does not measure the quantity of human capital Income reflects the quantity of human capital Because the distribution of wealth excludes human capital the distribution of income is a more accurate measure of economic inequality 2014 Pearson Addison Wesley Economic Inequality in the United States Annual or Lifetime Income and Wealth A household s income and wealth change over time A household headed by a young person starts out with moderate income and accumulates wealth for retirement years A middle age headed household is in its highest income years and enjoys the highest level of wealth A household headed by an older retired person has lower income and is consuming rather than accumulating its wealth 2014 Pearson Addison Wesley Economic Inequality in the United States Trends in Inequality To measure inequality as an index number we use the Gini ratio which equals the ratio of the blue area to the red area in the two figures below 2014 Pearson Addison Wesley Economic Inequality in the United States With the most extreme inequality one person has all the income the Lorenz curve runs along the axes and the Gini ratio is one 2014 Pearson Addison Wesley Economic Inequality in the United States The closer the Gini ratio is to one the more unequal is the distribution of income In 2011 the U S Gini ratio was 0 47 2014 Pearson Addison Wesley Economic Inequality in the United States Figure 19 5 shows the U S Gini ratio from 1971 to 2011 The Gini ratio shows that the distribution of income in the United States has become more unequal Despite the change in the definition in 1992 the trend is still visible 2014 Pearson Addison Wesley Economic Inequality in the United States Poverty Poverty is a situation in which a household s income is too low to be able to buy the quantities of food shelter and clothing that are deemed necessary Poverty is a relative concept In 2012 the poverty level calculated by the Social Security Administration for a four person family was 23 050 About 46 million Americans live in households with incomes below this poverty level 15 percent of the total population in 2012 2014 Pearson Addison Wesley Economic Inequality in the United States The distribution of poverty by race is unequal In 2012 the poverty rate among white Americans was 13 percent 31 million compared to 25 percent 13 million for Hispanic origin Americans and 28 percent 11 million for black Americans Poverty is also influenced by household status More than 28 percent of households in which the householder is a female with no husband present had incomes below the poverty level Poverty rates have increased during