Poverty and Income Distribution - Hardcover

Wolff, Edward N.

Hardcover

ISBN 10: 1405176601 ISBN 13: 9781405176606

Publisher: Wiley-Blackwell, 2009

Synopsis

Poverty and Income Distribution 2E

Written by a leading scholar in the field, this textbook provides a thorough introduction to the topic of income distribution and poverty, with additional emphasis on the issues of inequality and discrimination. This book features an empirical focus, and includes sections on basic statistics, as well as optional econometric studies and more advanced mathematical handling of inequality measurement. Utilizing data from various countries around the globe, including the US and Europe, this textbook is international in its scope and provides a comparative element that will aid students in their studies. Up-to-date and comprehensive in its coverage, this new edition supplies a self-contained course on income distribution and poverty.

About this title

About the Author

Edward Wolff received his Ph.D. from Yale University in 1974 and is professor of economics at New York University, where he has taught since 1974, and a Senior Scholar at the Levy Economics Institute of Bard College. He is also a Research Associate at the National Bureau of Economic Research and a council member of the International Association for Research in Income and Wealth since 1987. He served as Managing Editor of the Review of Income and Wealth from 1987 to 2004 and was a Visiting Scholar at the Russell Sage Foundation in New York (2003-04), President of the Eastern Economics Association (2002-2003), and a council member of the International Input-Output Association (1995-2003), and has acted as a consultant with the Economic Policy Institute, the World Bank, the United Nations, the WIDER Institute, and Mathematica Policy Research. His principal research areas are productivity growth and income and wealth distribution. He is the author (or co-author) of 10 books, and the editor of 8. He is also the author of many articles published in books and professional journals and provides frequent commentary on radio and television

From the Back Cover

Written by a leading scholar in the field, this textbook provides a thorough introduction to the topic of income distribution and poverty, with additional emphasis on the issues of inequality and discrimination. This book features an empirical focus, and includes sections on basic statistics, as well as optional econometric studies and more advanced mathematical handling of inequality measurement. Utilizing data from various countries around the globe, including the US and Europe, this textbook is international in its scope and provides a comparative element that will aid students in their studies. Up-to-date and comprehensive in its coverage, this new edition supplies a self-contained course on income distribution and poverty.

From the Inside Flap

Written by a leading scholar in the field, this textbook provides a thorough introduction to the topic of income distribution and poverty, with additional emphasis on the issues of inequality and discrimination. This book features an empirical focus, and includes sections on basic statistics, as well as optional econometric studies and more advanced mathematical handling of inequality measurement. Utilizing data from various countries around the globe, including the US and Europe, this textbook is international in its scope and provides a comparative element that will aid students in their studies. Up-to-date and comprehensive in its coverage, this new edition supplies a self-contained course on income distribution and poverty.

Excerpt. © Reprinted by permission. All rights reserved.

Poverty and Income Distribution

By Edward Wolff

John Wiley & Sons

Copyright © 2009 Edward Wolff
All right reserved.
ISBN: 978-1-4051-7660-6

Chapter One

Introduction: Issues and Scope of Book

1.1 RECENT TRENDS IN LIVING STANDARDS

In this section, the author presents his own views about the development of the U.S. economy over the last 50 years. Please note that other researchers may differ in their opinions about these recent developments in U.S. living standards. A number of new terms are also introduced here. These will be formally defined in the ensuing five chapters. However, this section may serve as a way of motivating readers to delve more deeply into the subject matter of this book.

1.1.1 Income and earnings stagnate while poverty remains unchanged

The early years of the twenty-first century have witnessed a struggling middle class despite robust growth in the overall U.S. economy. During the first part of the George W. Bush administration, from 2001 to 2005, the economy (GDP in real dollars) expanded by 14 percent despite a brief recession in 2001, and labor productivity (real GDP divided by full-time equivalent employees) grew at an annual pace of 2.2 percent. Both figures are close to their post-World War II highs for similar periods.

Despite the booming economy, the most common metric used to assess living standards, real median family income (the income of the average family, found in the middle of the distribution when families are ranked from lowest to highest in terms of income), actually fell by 3 percent. From 1973 to 2005 its total percentage gain amounted to 6 percent. In contrast, between 1947 and 1973, median family income almost exactly doubled (see Figure 1.1).

Mean (or average) family income likewise doubled between 1947 and 1973 and then increased by 21 percent from 1973 to 2005. This is less than the increase over the preceding quarter-century but greater than the rise in median family income. The disparity between the two reflects rising inequality since the early 1970s (see below).

Another troubling problem is poverty. Between 1959 and 1973, there was great success in reducing poverty in the United States, with the overall poverty rate declining by more than half, from 22.4 to 11.1 percent (see Figure 1.2). After that, the poverty rate has stubbornly refused to go any lower. After 1973, it trended upward to 15.1 percent in 1993, then fell back to 11.3 percent in 2000, only slight above its low point, but then rose again to 12.6 percent in 2005.

Another indicator of the well-being of lower income families is the share of total income received by the bottom quintile group (20 percent) of families (see Figure 1.3). Their share rose from 5 percent in 1947 to 5.7 percent in 1974, its high point. Since then it fell off rather sharply to 4 percent in 2005. A related statistic is the mean income of the poorest 20 percent of families (in 2005 dollars), which shows the absolute level of well-being of this group (the share of income shows the relative level of well-being). Their average income more than doubled between 1947 and 1974 but then gained almost nothing more by 2005.

The main reason for stagnating family incomes and recalcitrant poverty is the failure of wages to rise significantly. From 1973 and 2005 real wages were down by 6 percent (see Figure 1.4). This contrasts with the preceding years, 1947 to 1973, when real wages grew by 75 percent. Indeed, in 2005, the hourly wage was $16.11 per hour, about the same level as in 1966 (in real terms).

Two other measures of worker pay are shown in Figure 1.4. The results are fairly consistent among these alternative series. Average wages and salaries per full-time equivalent employee (FTEE) grew by 2.3 percent per year from 1947 to 1973 and then by only 0.3 percent per year from 1973 through 2005; and average employee compensation per FTEE increased by 2.6 percent per year during the first of these two periods and then by 0.5 percent per year in the second.

Despite falling real wages, living standards were maintained for a while by the growing labor force participation of wives, which increased from 41 percent in 1970 to 57 percent in 1988. However, since 1989, married women entered the labor force more slowly and by 2005 their labor force participation rate had increased to only 61 percent, and with it occurred a slowdown in the growth of real living standards.

1.1.2 Inequality rises sharply

The United States has also experienced sharply rising inequality since the late 1960s. We will first look at the Gini coefficient for family income (see Figure 1.5). The Gini coefficient is the most widely used measure of inequality and ranges from a value of zero to one, with a low value indicating less inequality and a high value more. Between 1947 and 1968, the Gini coefficient generally trended downward, reaching its lowest value in 1968, at 0.348. Since then, it trended upward, reaching a value of 0.440 in 2005. Historically, this represents an extremely large surge in income inequality.

A second index, the share of total income received by the top 5 percent of families, has a similar time trend. It first declined from 17.5 percent in 1947 to 14.8 percent in 1974 but then rose sharply to 21.1 percent in 2005, its highest value in the postwar period (see Figure 1.6). A third index is the ratio of the average income of the richest 5 percent of families to that of the poorest 20 percent. It measures the spread in income between these two groups. This index generally dipped between 1947 and 1974, from 14.0 to 10.4, and then almost doubled to a value of 20.7 in 2005.

Figure 1.7 shows another cut on family income inequality, based on "equivalent income." Equivalent income is based on the official U.S. poverty line, which, in turn, adjusts family income for family size and composition (the number of individuals age 65 and over, the number of adults, and the number of children in the family unit). A figure of 3.0, for example, indicates that the income of a family is three times the poverty line that would apply to their family size and composition. The series begins in 1967 and ends in 2001.

From the standpoint of inequality, the most telling result is that between 1973 and 2001, equivalent income grew faster the higher the income level. The differences are quite marked. Equivalent income increased by 53 percent among families in the highest quintile, 25 percent in the fourth quintile, 16 percent in the middle quintile, 5 percent in the second quintile, and a negative 5 percent in the bottom quintile.

1.1.3 Middle-class debt explodes

Another dimension of well-being is household wealth. Wealth is a stock measure and indicates the value of assets owned by a household (such as housing and real estate, a business, bank accounts, money market funds, stocks, bonds) less outstanding debt (both mortgage and consumer debt). Wealth is an indicator of well-being independent of the direct financial income it provides. There are three reasons. First, owner-occupied housing provides services directly to their owner. Second, wealth is a source of consumption, independent of the direct money income it provides, because assets can be converted directly into cash and thus provide for immediate consumption needs. Third, the availability of financial assets can provide liquidity to a family in times of economic stress, such as occasioned by unemployment, sickness, or family break-up.

Median household wealth grew rapidly in real terms from 1983 to 2001, rising by 24 percent. Much of this increase can be traced to the booming stock market of the late 1990s in the United States. However, from 2001 to 2004, it actually fell by 1 percent, despite the robust real estate market. Mean real wealth, on the other hand, skyrocketed by 65 percent from 1983 to 2001 and then rose by another 6 percent from 2001 to 2004. Here, too, the divergence in these two series indicates rising wealth inequality. Between 1983 and 2004, the Gini coefficient for household wealth climbed from 0.80 to 0.82 and the share of the richest 5 percent from 56 to 59 percent.

Nowhere is the middle-class squeeze more vividly demonstrated than in their rising debt. There are two ratios that are typically used. The first, the ratio of debt to net worth, jumped from 37 percent in 1983 to 62 percent in 2004. Middle-class households, experiencing slow growth in incomes, expanded their debt in order to maintain their consumer spending (see Chapter 5 for more discussion of household wealth).

1.1.4 What has happened to tax rates?

Trends in marginal tax rates of personal income tax are explained here, since these also affect the well-being of families (see Figure 1.8). The first series is the top marginal tax rate (the marginal tax rate faced by tax filers with the highest income). Back in 1944, the top marginal tax rate was 94 percent! After the end of World War II, the top rate was reduced to 86.5 percent (in 1946). Even in 1960, it was still at 91 percent. This generally declined over time, as various tax legislations were implemented by Congress. It was first lowered to 70 percent in 1966, then to 50 percent in 1983 (Reagan's first major tax act), and then again to 28 percent in 1986 (the Tax Reform Act of 1986). After that, it trended upward to 31 percent in 1991 (under the first President Bush) and then to 39.6 percent in 1993 (under President Clinton), but by 2005 it was down to 35 percent (under President George W. Bush).

The second series shows the marginal tax rate faced by filers with an income of $135,000 in 1995 dollars. This income level typically includes families at the ninety-fifth percentile (the top 5 percent). This series generally has the same trajectory as the top marginal tax rate. The last two series show the marginal tax rates at $67,000 and $33,000, respectively, both in 1995 dollars. The time patterns are quite a bit different for these than the first two. The marginal tax rate at $67,000 (about the sixtieth percentile) was relatively low in 1946, at 36 percent, generally trended upward, reaching 49 percent in 1980 and then declined to 25 percent by 2005. The marginal tax rate at $33,000 (about the thirtieth percentile) was also relatively low in 1946, at 25 percent, but it actually increased somewhat over time, reaching 28 percent in 1991, and then dropped to 15 percent from 2001 onward.

All in all, tax cuts over the postwar period have generally been more generous for high income taxpayers, particularly those at the top of the income distribution. From 1946 to 2005, the top marginal tax rate fell by 60 percent, the marginal rate at $135,000 by 47 percent, the marginal rate at $67,000 by 31 percent, and the rate at $33,000 by 39 percent.

1.1.5 Rising profits is the key

Where did the increased output go after the early 1970s if median income grew so slowly? To understand this, we must consider the relation between productivity and earnings. In particular, the historical connection between labor productivity growth and real wage growth appears to have broken down after 1973.

From 1947 to 1973, average real worker compensation (a broader concept than wages, including social insurance and fringe benefits) grew almost in tandem with the overall labor productivity growth (see Figure 1.9). While the latter averaged 2.4 percent per year, the former ran at 2.6 percent per year. Labor productivity growth plummeted after 1973. The period from 1973 to 1979, in particular, witnessed the slowest growth in labor productivity during the postwar period, 0.5 percent per year, and the growth in real employee compensation per worker actually turned negative during this time. From 1979 to 2005, the U.S. economy experienced a modest reversal in labor productivity growth, which averaged 1.3 percent per year, while the growth in real employee compensation per worker (full-time equivalent employee) ran at 0.6 percent per year.

If productivity rose faster than earnings after 1973, where did the excess go? The answer is increased profitability in the United States. The basic data are from the National Income and Product Accounts of the U.S. Bureau of Economic Analysis (BEA). For the definition of net profits, I use the BEA's definition of total gross property-type income, including corporate profits, interest, rent, and half of proprietors' income. The net rate of profit is defined as the ratio of total net property income to total private net fixed capital. The net profit rate declined by 7.5 percentage points between 1947 and its low point in 1982 (see Figure 1.10). The trend then reversed itself and the net profit rate climbed by 7.4 percentage points from 1982 to 2005. By 2005, the net profit rate was almost back to its postwar high of 23 percent in 1948.

Figure 1.10 also shows trends in the net profit share in national income, which is defined as the ratio of total net property income to net national income. The net profit share fell by 4.8 percentage points between 1947 and its low point in 1970 (see Figure 1.10). The trend then reversed and the net profit share rose by 5.3 percentage points from 1970 to 2005. By 2005, the profit share was pretty close to its postwar high. The results show that the stagnation of labor earnings in the United States since the early 1970s translated into rising profits in the economy.

1.1.6 Yet schooling has continued to rise

One of the great success stories of the postwar era is the tremendous growth in schooling attainment in the U.S. population. This is documented in Figure 1.11. Median years of schooling among all people 25 years and over grew from 9.0 years in 1947 to 13.7 in 2005, with most of the gain occurring before 1973.

Trends are even more dramatic for the percentage of adults (age 25 and over) who completed high school and college (see Figure 1.12). The former grew from 33 percent of all adults in 1947 to 86 percent in 2005. Progress in high school completion rates was as strong after 1973 as before. The percent of college graduates in the adult population soared from 5.4 percent in 1947 to 28.3 percent in 2005. In this dimension, progress was actually greater after 1973 than before.

However, as noted in Section 1.1.1, real hourly wages grew strongly between 1947 and 1973 and then actually declined from 1973 to 2005. Yet, educational attainment continued to rise after 1973 and, indeed, in terms of college graduation rates even accelerated. The growing discordance between wages and schooling constitutes a real paradox from the vantage point of standard economic (human capital) theory, which posits a direct and positive association between schooling attainment and wages (see Chapter 8 for a formal treatment of human capital).

Rising inequality of family income stems in large measure from changes in the structure of the labor market. One indication of the dramatic changes taking place in the labor market is the sharp rise in the returns to education, particularly a college degree, which occurred during and after the 1980s. This trend is documented in Figure 1.13. Among males, the ratio in annual earnings between a college graduate and a high school graduate surged from 1.50 in 1975 to 1.92 by 2005. For females, the ratio also climbed sharply, from 1.45 in 1975 to 1.79 in 2005.

Among men, the increase in the return to a college degree relative to a high school degree was due, in part, to the stagnating earnings of high school graduates (see Figure 1.14). Between 1975 and 2005, their annual earnings in constant dollars gained less than 4 percent, while the earnings of men with a bachelor's degree (but not further schooling) increased by 22 percent. The biggest increase in earnings occurred among males with an advanced degree (master's or higher), who saw their annual incomes grow by 32 percent. Among males who did not graduate high school, earnings plummeted by 11 percent.

Another indicator of the country's success in education is the dramatic decline in the inequality of schooling in the United States. According to the human capital model, there is a direct and proportional relationship between earnings inequality and the variance of schooling (see Chapter 8). If the dispersion of schooling declines, so should earnings inequality.

(Continues...)

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Edition details

• Publisher: Wiley-Blackwell
• Publication date: 2009
• Language: English
• ISBN 10: 1405176601
• ISBN 13: 9781405176606
• Binding: Hardcover
• Edition number: 2
• Number of pages: 672