In this chapter we discuss the distribution of income. As we shall see, this topic raises some fundamental questions about the role of economic policy. One of the Ten Principles of Economics in Chapter 1 is that governments can sometimes improve market outcomes. This possibility is particularly important when considering the distribution of income. | 20 Income Inequality and Poverty Income Inequality and Poverty A person’s earnings depend on the supply and demand for that person’s labor, which in turn depend on natural ability, human capital, compensating differentials, discrimination, and so on. 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? Table 1 The Distribution of Income in the United States: 2000 Copyright©2004 South-Western . Income Inequality Imagine that you. . . lined up all of the families in the economy according to their annual income. divided the families into five equal groups (bottom fifth, second fifth, etc.) computed the share of total income that each group of families received. Table 2 Income Inequality in the United States Copyright©2004 South-Western . Income Inequality If income were equally distributed across all families, each . | 20 Income Inequality and Poverty Income Inequality and Poverty A person’s earnings depend on the supply and demand for that person’s labor, which in turn depend on natural ability, human capital, compensating differentials, discrimination, and so on. 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? Table 1 The Distribution of Income in the United States: 2000 Copyright©2004 South-Western . Income Inequality Imagine that you. . . lined up all of the families in the economy according to their annual income. divided the families into five equal groups (bottom fifth, second fifth, etc.) computed the share of total income that each group of families received. Table 2 Income Inequality in the United States Copyright©2004 South-Western . Income Inequality If income were equally distributed across all families, each one-fifth of families would receive one-fifth (20 percent) of total income. . Income Inequality From 1935-1970, the distribution of income gradually became more equal. In more recent years, this trend has reversed itself. . Income Inequality Reasons for Recent Increase in Income Inequality The following have tended to reduce the demand for unskilled labor and raise the demand for skilled labor: Increases in international trade with low-wage countries Changes in technology Therefore, the wages of unskilled workers have fallen relative to the wages of skilled workers. This has resulted in increased inequality in family incomes. CASE STUDY: The Women’s Movement and the Income Distribution The percentage of women who hold jobs has risen from about 32 percent in the 1950s to about 54 percent in the 1990s. CASE STUDY: Income Equality around the World The Poverty Rate The poverty rate is the percentage of the population whose family income falls below an absolute level called the poverty line.
