Income distribution

1
Income distribution
2
Overview

• Equality and income distribution
• Measures of inequality
• The poor and poverty
• Measuring poverty
• Anti-poverty programs
• Why do wages differ?

3
Background equality and income distribution

• Data often from surveys can get differing
  results depending on data source
• Inequality can be measured in income, wealth or
  expenditure
• In Australia
• Top 20 of households by income earn about 50 of
  all income
• Bottom 20 of households by income earn about 4
  of all income
• Middle 20 of households by income earn about 15
  of all income

4
Measures of inequality The Lorenz curve
Notes The horizontal line measures of
population from poorest to richest. The vertical
line represents of national income
received. The more bowed-out is the Lorenz
curve, the more unequal is income distribution.
5
Measures of Inequality the Gini coefficient
Notes The Gini coefficient is the area A divided
by area (A B). If there is no income
inequality (the Lorenz curve is the 45 degree
line) then the Gini coefficient is zero. If there
is complete inequality (one person earns all the
income) then the Gini coefficient is 1.
6
NATSEM study

• Increased income inequality in the late 1980s to
  mid 1990s in Australia
• Real incomes have not fallen but have been stable
  at the bottom of the income distribution.
  However, they have increased at the top end of
  the income distribution

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Who are the poor?

• Traditionally the poor have been the elderly and
  indigenous Australians
• In the 1980s, single parents became a growing
  part of the poor.
• From the NATSEM study, in the 1990s more retired
  and childless working poor returned to the
  bottom of the income distribution.

8
Measuring poverty

• The poverty line
• Set as a fraction of average weekly earnings and
  depends on family size.
• Idea is to capture the amount of money needed to
  cover basic living costs.
• e.g. in 2001, for a single parent with one child
  the Henderson poverty line was 356.95 per week.
  For a couple with one child it was 447.09 per
  week.

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Issues in measuring poverty

• What is the correct poverty line?
• The Henderson poverty line in 2001 was less than
  total federal government benefits. For example,
  for a couple with one child receiving
  unemployment benefits, total Federal government
  benefits (including all supplementary payments
  but not in kind payments) came to 380.90 per
  week, 66.19 less than the poverty line.
• Is the poverty line too high or is the government
  too stingy?
• Transitory and permanent income and the economic
  life-cycle
• The income poor but asset rich

10
Anti-poverty programs

• Social security
• Minimum wage laws
• In-kind transfers
• The poverty trap of social security

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Why do wages differ?

• Human capital
• Compensating differentials
• Innate ability
• The superstar phenomenon
• Efficiency wages why raising wages might
  benefit employers

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Lessons

• Income inequality is rising but real incomes are
  not falling to the poor.
• The poor tend to be the old, indigenous
  Australians and single parents but who is poor
  alters over time.
• Poverty measures are controversial and measures
  to alleviate poverty may have adverse side
  effects if they are badly designed