The problem of Poverty

  • Definition of poverty is an arbitrary task

  • In the United States, the poverty threshold is the minimum income required to purchase the necessities of life

  • Those that fall below this threshold would be considered poor

  • In 2009 for an adult living alone the figure was at $10,956; for two adults and two children, it was at $21,756

  • Poverty rates fell steeply in the 1960s down to between 10-15% in the 1970s. But, despite increased prosperity, the numbers have stayed relatively stagnant

Who are the Poor?

  • In 2009 (according to the US Census Bureau), 43.5 million Americans were in poverty, or roughly 4.3% of the population, or 1 in 7 people

  • 25.9% of African-Americans and 25.3% of Hispanics were considered poor. 9.4% of non-Hispanic whites below the poverty threshold

  • Female-headed households had a poverty rate of 32.5% while married couples had a relatively smaller poverty rate of 5.8%

  • Many part-time workers consist of a category analysts refer to as the working poor, usually because part-time work does not include health benefits, retirement or paid vacation

What Causes Poverty

  • Lack of education is the primary culprit in poverty

  • In 1979 the average hourly wage of a man with a college education was 36% higher than a man with a high school diploma

  • In 2009 this "college premium" was at 81% -- employers prefer workers with more human capital (which going to college usually signals to firms)

  • Racial and gender discrimination can be seen as causes

  • Sometimes, bad luck (wage-earner loses job of falls ill) might be the reason for poverty

Economic Inequality

  • In 2008, the average US household income was $60,000

  • More precisely, the mean income was $68,424 while the median income was $50,303

  • The ultra-high salaries of the few (Bill Gates and Mark Zuckerberg) will make the mean greater than the median

  • Income is unequally distributed as data from the U.S. Census Bureau shows

    18-2 TABLE Income group Bottom quintile Second quintile Third
quintile Fourth quintile Top quintile Top 5% U.S. Income Distribution
in 2010 Income range Less than $20,000 $20,000 to $38,043 $38,043 to
$61 ,735 $61,735 to $100,065 More than $100,065 More than $180,810
Average income $11 ,034 28,636 49,309 79,040 169,633 Percent of total
income 3.3% 8.5 14.6 23.4 50.2 287,686 21.3 Median income = $49,445
Mean income = $67,530 Source: U.S. Census Bureau.

Gini Coefficient

  • The most widely used measure of inequality, it's a number that summarizes a country's level of inequality

  • High level of inequality (such as Brazil) would be 0.6 whereas in Sweden the number is at 0.25

  • The US has a relatively high Gini coefficient for such a wealthy country. In 2009, the number was at 0.468

  • High Gini levels appear in Africa and South America

Lorenz Curve

  • a graph on which the cumulative percentage of total national income (or some other variable) is plotted against the cumulative percentage of the corresponding population (ranked in increasing size of share).

  • The extent to which the curve sags below a straight diagonal line indicates the degree of inequality of distribution.

    FIGURE 8 80 60 d 40 20 19.3 20 The Income Lorenz Curve in 2009 Line
of equality c 60 D Income Lorenz curve 80 IOO Cumulative percentage of

Three Types of Taxes

  • Proportional Tax

    • "flat" tax that takes a percentage of income regardless of the amount of income (ie. Hong Kong)
  • Regressive Tax

    • tax rate decreases as the amount subject to taxation increases that imposes a greater burden on the poor than the rich (ie. payroll taxes or cigarette taxes)
  • Progressive Tax

    • tax rate that goes up as income increases. Most conutries (including the US) have increasingly higher tax brackets for the wealthy

Means-Tested Programs

  • Welfare refers to money given to those that fall below the poverty threshold

  • In the US, Temporary Aid for Needy Families (TANF) assists families with children for a limited period of time

  • Replace the more controversial Aid to Families with Dependent Children (AFDC) which created perverse incentives for the poor

  • Supplemental Security Income help disabled individuals and Supplemental Nutrition Assistance Program help low-income families with food

  • Negative income tax -- program that creates incentive for low-wage earners to make more money (Earned Income Tax Credit)

  • Food Stamps and Medicaid

Social Security and Unemployment

  • Largest US welfare program is Social Security

  • Retirement income for elderly, disable and provides "survivor benefits"

  • Wages subject to tax up maximum amount ($106,800 in 2010)

  • Unemployment insurance pays 35% of salary until a new job is found for a period of time (extended during recessions)

  • Financed through a tax on employers

  • Trade-offs exist between efficiency and equity, which is ultimately a normative issue

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