Unit 20: Income Inequality and Poverty
How to actually measure a gap that big — quintiles, a bowed curve, a poverty line — and the leaky bucket every attempt to close it carries.
6 topics · 20 questions
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Measuring Inequality with Income Quintiles
- How it worksHow does ranking households and grouping them into quintiles let you compare the share of total income each fifth of the population receives?
- Worked exampleFind how unequal an economy is if the top quintile earns 50 percent of total income while the bottom quintile earns 4 percent.
- Common mistakeWhy doesn't average household income by itself tell you anything about how that income is distributed?
Your turn1 of 2
Find how unequal an economy is if the top quintile earns 50 percent of total income while the bottom quintile earns 5 percent. What is the gap between the two shares?The Lorenz Curve
- How it worksHow does plotting the cumulative share of population against the cumulative share of income trace out the Lorenz curve, with perfect equality as the 45 degree line?
- Worked exampleWalk me through building a Lorenz curve from five quintiles earning 4, 9, 15, 22, and 50 percent of total income.
- Common mistakeWhy doesn't a Lorenz curve touching the 45 degree line at both ends mean the two economies it's drawn for are equally unequal in between?
- Going furtherWhat happens to a Lorenz curve's bow as a country's income distribution grows more unequal over time?
- Ties togetherHow does a country's Lorenz curve connect back to the income quintiles used to build it in the first place?
Your turn1 of 2
A country's income quintiles earn 5 and 8 percent of total income for the bottom two quintiles. What cumulative share of income does the bottom 40 percent hold?The Poverty Rate and the Poverty Line
- How it worksHow is the poverty line set, and how does the poverty rate then count the share of the population falling under it?
- Common mistakeWhy doesn't the poverty rate capture everything that matters about material hardship, like how far below the line a family actually falls?
- Going furtherWhat happens to a country's measured poverty rate if the poverty line is defined relative to the median income instead of a fixed dollar amount?
Your turn1 of 2
A country's poverty line separates the poor from the rest. Out of 284 million people, 36 million fall below that line. What is the poverty rate, as a percent?Policies to Reduce Poverty
- How it worksHow do the minimum wage, welfare payments, the earned income tax credit, and in-kind transfers each try to raise the incomes of the poor in a different way?
- Common mistakeWhy doesn't every one of these anti-poverty tools work by the exact same mechanism or come with the exact same trade-offs?
- Going furtherWhat happens to a family's incentive to work if a welfare benefit shrinks dollar for dollar as their earned income rises?
Your turn1 of 2
A welfare benefit shrinks by 56 cents for every extra dollar a family earns above a threshold. If the family earns 379 more dollars past that threshold, how much does its total income actually rise after the benefit reduction?The Efficiency Cost of Redistributing Income
- How it worksHow do the administrative cost of a transfer program and the weakened work incentives it creates leak value out of the bucket as it moves from rich to poor?
- Common mistakeWhy isn't the size of this efficiency leak an argument for doing no redistribution at all?
- Ties togetherHow does this leaky-bucket trade-off reuse the same efficiency-equity logic from the tax-design unit, now applied to transfers instead of taxes?
Your turn1 of 2
Find how much of a 129 dollar transfer actually reaches a poor household if administrative costs and reduced work effort leak away 38 dollars.Inequality and Mobility Across Generations
- How it worksHow does intergenerational mobility measure whether a child's economic position is tied to their parents' income or can shift across a lifetime?
- Common mistakeWhy doesn't a snapshot of income inequality in one year tell you anything about mobility between generations?
- Going furtherWhat happens to measured lifetime inequality once you average incomes over a person's whole career instead of looking at just one year?
Your turn1 of 2
A country's intergenerational income correlation is 0.479, meaning a child's income is predicted to move 0.479 times as many standard deviations from the mean as their parents' income did. If a parent's income was 2 standard deviations above the mean, how many standard deviations above the mean is the child's income predicted to be?