Lecture 22
INCOME INEQUALITY

1. Efficiency and equity

Supply-side policies
• Eg., cut in capital gains tax
• Efficiency and equity effects

2. Income distribution and Wealth distribution

• How the Census Bureau measures poverty: https://www.census.gov/topics/income-poverty/poverty/about.html
• The Federal poverty guideline
  • Issued each year by the Department of Health and Human Services (HHS)
  • Used to determine who receives federal subsidies or aid
  • For a family of four in 2019: $25,926. [Source: Census poverty thresholds]
  • Programs that use the poverty guideline to determine eligibility:
    • Head Start
    • Supplemental Nutrition Assistance Program (SNAP) (formerly Food Stamp Program)
    • Some parts of Medicaid
    • Low-Income Home Energy Assistance Program (LIHEAP)
    • Children’s Health Insurance Program (CHIP)
• In 2019, the official poverty rate was 10.5 percent. [Source: Income and Poverty in the U.S.]
  • Number of people in poverty: 34 million.
  • The 2019 U.S. median household income was $68,703.
  • In 2019, 9.2% of people, or 29.6 million, were not covered by health insurance at the time of interview, according to the ACS, up from 8.9% and 28.6 million. [Source: Census/ACS]

• Measure of income inequality in a country
• Graph of Cumulative percentage of income vs Cumulative percentage of households
• Perfect equality is represented by the 45-degree line
• The greater the "sag" of the Lorenz curve, greater is the income inequality

Source: Census Historical Tables H-1 and H-3

2.3 Gini coefficient

• Twice the area between the Lorenz curve and the 45-degree line
• Higher the coefficient, more is the inequality
• In 2019, Gini coefficent in the U.S. was 0.481. Source: census.gov

3. Reasons for income inequality

• Differences in:
  • Ability
  • Risk-taking
  • Education
• Discrimination by employers, fellow workers

4. Income redistribution policies

(a) For those currently unemployed:
• Unemployment insurance
• Job-retraining programs
(b) For low-income workers:
• Minimum wage
• Earned-income tax credit (EITC)
(c) For low-income families:
• Temporary Assistance for Needy Families (TANF)--replaced Aid to Families with Dependent Children (AFDC) in 1997
• Welfare-to-Work program: Personal Responsibility and Work Opportunity Reconciliation Act of 1996
(d) To ensure basic necessities for the poor:
• Medicaid
• Food stamps