Income inequality and poverty in the USA

LIST OF CONTENTS

LIST OF FIGURES

1. Introduction

2. The distribution of income
2.1. The role of age on the income distribution
2.2. Income inequality in the U.S. society
2.3. Reasons for income inequality
2.3.1. Further factors contributing to income inequality

3. Famine in the United States of America

4. How to define poverty ?
4.1. The poverty line
4.2. The poverty rate
4.3. Which demographic groups are especially affected by poverty ?

5. Conclusion

LIST OF LITERATURE

LIST OF FIGURES

U.S. Census Bureau, Washington, DC., September 2002 :

Figure 1: Households by total money income 1970 to 2001

Figure 2: Share of aggregate income received by each fifth and top 5 percent of families 1970 to 2001

Figure 3: Development of poverty rate from 1959 to 2001 in the USA

Figure 4: People and families in poverty by selected characteristics: 2001

1. Introduction

It can be thought, that poverty does not really exist in society in times of prosperity and technical progress in industrialised and high developed countries. The great prosperity is often celebrated in speeches by governments of high industrialised states and their goods are advertised through all channels of marketing. These countries have the highest living standards in the world. For example the United States of America, on the one hand they spend a lot of money for aerospace technologies, for the defence industry and other innovative technologies but on the other hand the country has to face a high rate of poverty within its population. Poverty is expanding quickly caused due to the raise of unemployment and is not longer only a problem for developing countries in the third world. Poverty and income distribution data are a very important indicator in order to evaluate the economic well-being of a state. Income inequality and poverty data must be differed regarding characteristics such as race, level of education, age, etc.

2. The distribution of income

There is a very different distribution of income in the U.S. society but as well as in the whole world. It can be said, that the income is distributed to all groups of the population, but not in a fair and equal way. Ernest Hemingway once said, that the difference between the rich and poor people is just, that the rich group of society has more money than the poor group.

In this sense it must be discussed the difference between money and income. These two words are often used in the same content, but this is a mistake and must be distinguished from eachother. The difference can be explained in the following example : it must be asked how much money a persons has at any point of time. For example, person A has right now in this moment 50.000 US dollars on his account with the bank. In this sense it is spoken of money. But for example, if person A earns a special amount of income, then it is said, that person A receives for example 1.500 US dollars per month. This means, that income is a special amount of money which a person receives over a period of time. It does not matter, if it is spoken of a period of a week, month or a year.

A typical family can earn 40.000 US dollars per year, but on its account at any time it only can have 2.000 US dollars.

But nevertheless, what are the specific factors that define a person`s income ?

Individual income = labour income + asset income + transfer payments – taxes

Labour income is the wage of a person depending on how many hours he/she works, the asset income is the return of money, which a person gets from the bank because of his/her account as return on savings or return on investment, etc., transfer payments are payments from governmental welfare programs, such as food stamps or medical assistance in form of goods or services or payments in form of money, such as direct monetary welfare assistance and Social Security Programs, and taxes are a special amount of money that persons have to pay to the government.¹

There are different ways to show the distribution of income in the economy. Following figure shows the percentage of the families, which belong to a specific category of annual income measured by household during the last thirty years. This presentation gives already an outline about how many percentage of the population are richer families, how many belong to the poor group and how many are in the bigger middle field.

Figure 1: Households by total money income 1970 to 2001

illustration not visible in this excerpt

Source: U.S. Census Bureau, www.census.gov/hhes/www/income.html, Washington, DC. 2002

All data from the U.S. Census Bureau are based on money income before taxes, they do not include fringe benefits for employees as well as governmental non-cash benefits, such as food stamps, medicare, etc. Money income includes earnings (consists of money wage or salary income including tips, comissions and cash bonuses, etc.), unemployment compensation, social security, public assistance, pension or retirement income, interests, dividends, child support or educational assistance, just to mention some of them.

The average household money income in 2000 was 43.162 US dollars and declined by 2,2 percent to 42.228 US dollars in 2001. Foreign-born households had to realize a 5,3 percent decline in median income between 2000 and 2001 to 37.948 US dollars. There was no change regarding the median income of Hispanic-origin households between 2000 and 2001 (33.565 US dollars), but all other races had to face a decline in their median income. There was a decline of 1,3 percent for non-Hispanic Whites, 3,4 percent for Blacks and 6,4 percent decline for Asians and Pacific Islanders. The Northwest region was the only region with no decline in real median household income between 2000 and 2001, there was also a decline for households living in metropolitan areas down to 45.219 US dollars between 2000 and 2001. During the same time the median income for women worked full time all year long raised to 29.215 US dollars, while men with similar working hours had no change in median income (38.275 US dollars).²

2.1. The role of age on the income distribution

It must be also distinguished the level of annual income regarding the different ages of persons. Age is as well an important factor which determines, that often people belong only temporarily to the poor group of society. This can be shown in following example, a student, who is still in the university and has just a part-time job in a restaurant earns so less money, that he belongs for a specific period to the poor group. But when the student has finished his exam and he works later as manager in a high position in a company, he will earn more money. The level of income will raise permanently until the age of late fourties or early fifties, after that the income will decline slightly. Because of this development of a person`s income over years, it can be said, that the income distribution is more equal regarding the whole time of workforce in life than just to take a look at a person`s current income at a particular point in time. For example, a person aged 65 has less current income than a person aged 45. But according to the whole income workforce in their lifes, when both persons are aged 65 it is nearly a great income equality in summary.³

2.2. Income inequality in the U.S. society

In order to show the inequality of income distribution it very useful to devide the all the families in a economy into five equal groups, the bottom fifth, the top fifth and the three middle fifths. All five groups receive a special part of the total income. This representation shows how equal or how unequal the distribution of income in the economy really is.

A complete equal distribution of income would be, if every fifth would receive the same part of income, that means exact 20 percent of all income. The other extreme would be, if the top fifth receives all income and the other four fifth receive nothing. Both cases are not reality in the U.S. society, the real distribution of income lies in between. Additional there is still one more group in this division, the top 5 percent group. These are only 5 percent of all families, which received a very high part of all income comparing to the others.

The following figure shows the development of income inequality during the last thirty years in the USA.

Figure 2: Share of aggregate income received by each fifth and top 5 percent of families 1970 to 2001

illustration not visible in this excerpt

Source : U.S.Census Bureau, www.census.gov/hhes/www/income.html, Washington, DC. 2002

In 1970 the top fifth received 43,3 percent of all income and the top 5 percent group received 16,6 percent of all income. The percentages had risen to 2001, in 2001 the top fifth received already 50,1 percent and the top 5 percent group received 22,4 percent of all income in the economy. Regarding the bottom fifth in 1970, it received 4,1 percent of the income and in 2001 it received only 3,5 percent of all income. That means in 2001 the top fifth´s earnings were more than sixteen times higher than the bottom fifth´s earnings and in 1970 it was only more than ten times higher percentage of income, which received the top fifth comparing to the bottom fifth. This development of income distribution shows very clear a less income equality during the years 1970 to 2001 in the U.S. economy. Although other periods of time can give different results of income distribution. For example, during the years 1935 to 1970 it has become more equal.⁴

2.3. Reasons for income inequality

How much a person earns depend on the demand and the supply of labor of this person. This in turn depends on skills, education, discrimination, etc.

In general, income inequality exists, because people do not receive the same income. If the objective is to reduce this inequality, then people with higher incomes should earn less money and people with lower incomes should earn more money. But it is not that easy in the complex economy.

One reason for the current income inequality is for example the increased international trade with low wage countries as well as the further high developed technology, which requires high skilled workers, such as personnel, which has a wide knowledge in computerizing and Internet using. This also means, that the wages for these skilled workers raise and the wages for workers, who are unskilled and who can not get along with these high demands, will decrease. This causes further inequality in income distribution. Another fact, which must be considered, is the changed role of women in workforce and the with it connected composition of families. The number of women involved in workforce in the 1950´s increased from 32 percent to 54 percent in the 1990´s. More women earned money, this is an additional income for families, whose women are involved in workforce. The importance for women to stay at home and to care about the household became lower. Women have changed the U.S. workforce. Many women chosed to delay marriage and to get children in favor of higher education and career opportunities. According to recent statistics, women represent over 50 percent of bachelor and master degrees, 40 percent of doctorates, 38 percent of medical degrees and 40 percent of dentistry degrees. These data represent a drastic change from the generation before, when women most worked at home. This development led to more equality between men and women on the marketplace. But it must be also considered, that women from poor families did often not participate in this development, because of their lack of education and the within connected limited entrance possibilities into the labormarket.

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¹ cf.: Mankiw, Gregory N., Principles of Economics, Second Edition, Fort Worth 2001, page 437-439

Arnold, Roger A., Economics, fourth Edition, Cincinnati, Ohio 1998, page 634, 636

Baumol, William J.; Blinder, Alan S., Macroeconomics, Orlando 2001, page 257

² cf.: U.S. Census Bureau, www.census.gov/hhes/www/income.html, Washington, DC., September

2002 , page 1-2

³ cf.: Arnold, Roger A., Economics, fourth Edition, Cincinnati, Ohio 1998, page 635

⁴ cf.: Mankiw, Gregory N., Principles of Economics, Second Edition, Fort Worth 2001, page 439-440