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Chapter 20

Chapter 20 - Income Inequality and Poverty.pdf

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University of California - Berkeley
Enrico Moretti

Chapter 20: Income Inequality and Poverty I. The Measurement of Inequality • How much inequality is there in our society? • How many people live in poverty? • What problems arise in measuring the amount of inequality? • How often do people move among income classes? A. US Income Inequality • divided into five equal groups (from lowest to highest income): • the bottom fifth • the second fifth • the middle fifth • the fourth fifth • the top fifth • sometimes also presented as how much each fifth earns out of total income of nation • even though top and bottom fifths include same number of families, top fifth will have more income than bottom fifth B. InequalityAround the World • difficult to gauge difference in income inequality in US compared to other countries because of non-standard methods to collect data • result: whenever find diff. between 2 countries, can never be sure whether reflects true diff. in economics or merely diff in data collection methods • one measurement = ratio of income received by richest 10th of population to income of poorest 10th • most equality found in Japan (top 10th receives 4.5x more) • least equality found in Brazil (top 10th receives 40.6x more) • US ends up around middle C. The Poverty Rate • poverty rate: the percentage of the population whose family income falls below an absolute level called the poverty line • poverty line: an absolute level of income set by the federal government for each family size below which a family is deemed to be in poverty • three striking facts: • poverty is correlated with race • Blacks and Hispanics 3x more likely to live in poverty than white • poverty is correlated with age • children more likely than avg. to be members of poor families, elderly less likely than avg. to be poor • younger, more poor; older, less poor • poverty is correlated with family composition • families headed by a single mom are 6x as likely to live in poverty as family headed by married couple • single parents (esp. mom), more poor; married couple, less poor D. Problems in Measuring Inequality • what people care about is not incomes, but ability to maintain good standard of living • for at least 3 reasons, date on income distribution and poverty rate give incomplete picture of inequality in living standards 1. In-Kind Transfers • measurements of distribution of income are based on families’money income • through various government programs, however, poor receive many non-monetary items (e.g. food stamps, housing vouchers, medical services) • in-kind transfers: transfers to the poor given in the form of goods and services rather than cash • standard measurements of goods and services don’t take account of these • according to study by Census Bureau, if in-kind transfers were included in income at their market value, number of families in poverty would be 10% less 2. The Economic Life Cycle • life cycle: the regular pattern of income variation over a person’s life • incomes vary predictably over people’s lives • young worker has low income • income rises as worker gains maturity and experience • peaks at age 50, then falls sharply when worker retires at around age 65 • because people can borrow and save to smooth out life cycle changes in income, standard of living in any year depends more on lifetime income than on that year’s income • young often borrow (e.g. school) then repay loans later when incomes rise • because people can save in anticipation of retirement, large declines in income at retirement need not lead to similar declines in standard of living • normal cycle pattern causes inequality in distribution of annual income, but doesn’t necessarily represent true inequality in living standards 3. Transitory vs. Permanent Income • incomes vary over people’s lives not only because of predictable life cycle variation, but also because of random and transitory forces • e.g. natural disaster • just as people can borrow and lend to smooth out life cycle variation in income, can also borrow and lend to smooth out transitory variation in income (to extent families save in good years and borrows in bad ones) • transitory changes in income need not affect standard of living • family’s ability to buy goods and services depends largely on its permanent income • permanent income: a person’s normal income • permanent income more relevant than distribution of annual income; as result, inequality in consumption is one gauge of inequality of permanent income • permanent income and consumption less affected by transitory changes in income, more equally distributed than current income E. Economic Mobility • economic mobility: the movement of people among income classes • substantial phenomenon • some mobility reflects transitory variation while some reflect persistent changes • because economic mobility so great, many of those below poverty line are only there temporarily • poverty is long-term problem for relatively few families • in typical 10-year period, about 25% of families fall below poverty line • however, fewer than 3% of families are poor for 8+ years • because likely that temporarily poor and persistently poor face different problems, policies that aim to combat poverty need to distinguish between these groups • another way to gauge economic mobility is the persistence of economic success from generation to generation • economists find that having above-average income carries over from parents to children • however, persistence is far from perfect and correlation is small • this indicates substantial mobility among income classes • one result of great economic mobility in US is many self-made millionaires (as well as heirs who have squandered their fortunes) II. The Political Philosophy of Redistributing Income A. Utilitarianism • utilitarianism: the political philosophy according to which the government should choose policies to maximize total utility of everyone in society • utility: a measure of happiness or satisfaction • utilitarian case for redistributing income is based on assumption of diminishing marginal utility • seems reasonable that extra dollar to poor person provides more additional utility than extra dollar to rich person • i.e. as person’s income rises, extra well-being derived from additional dollar of income falls • implies that government should try to achieve a more equal distribution of income • utilitarians reject complete equalization of incomes because accept the principle that all people respond to incentives • utilitarian must balance gains from greater equality against losses from distorted incentives B. Liberalism • liberalism: the political philosophy according to which the government should choose policies deemed just, as evaluated by an impartial observer behind a “veil of ignorance” • try to create system from objective perspective • pre-birth meeting where no one knows what they’ll be (“veil of ignorance”) • all discuss s
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