South-Western EconNews: The Rich Get Richer, The Poor Get Slightly Richer

The Rich Get Richer, The Poor Get Slightly Richer

Subject

Income distribution

Topic

Labor markets

Key Words

Boom, income, poverty, inflation, growth, hours, rich, poor, quintile

News Story

The economic boom is making most Americans better off. Median household income is now a record $38,885. The percentage living below the poverty line fell from 13.3% in 1997 to 12.7% in 1998.

However, the growth in incomes after inflation over the last nine years has only been about 0.3% per year because in the early years of the expansion growth was sluggish. In general, many have to work longer hours for their wage gains. Also, the rich have benefited more than the poor have: the poverty rate is still 1.6 percentage points above the 1973 rate. The more educated are faring better than those with less education.

The percentage share of household income of (quintiles) fifths of the population in 1970 and 1998 was as follows:

1970 1998

Lowest quintile 4.1 3.6

Second quintile 10.8 9.0

Third quintile 17.4 15.0

Fourth quintile 24.5 23.2

Highest quintile 43.3 49.2

(Updated December 1, 1999)

Questions

1.	Consider the data in the news story.
	a) How do you know that the distribution of income has become more unequal?
	b) Draw a diagram with identically-scaled axes representing the percentage share of household income and the percentage share of households. Draw a 45-degree line showing a perfectly equal distribution of income. Explain why the line you have drawn shows this.
	c) Now plot the share of income earned by the lowest 20 percent of households in 1970. Repeat this for the lowest 40 percent, 60 percent, 80 percent, and all households. Draw a curved line connecting neighboring points as well as the origin. Do the same for 1998.
	d) Explain how your diagram shows an increasingly unequal distribution of income.
2.	The poverty rate is lower.
	a) How is the poverty rate determined?
	b) What affects the proportion of households that fall below the poverty line?
3.	How would you explain the higher growth of incomes of more-highly educated persons using supply and demand analysis? Draw a diagram to illustrate your reasoning.

Source

Jacob M. Schlesinger, Tristan Mabry, and Sarah Lueck, "Charting the Pain Behind the Gain," The Wall Street Journal, October 1, 1999