Über die Autorin bzw. den Autor

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

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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.

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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.

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Poverty and Income Distribution

John Wiley & Sons

Chapter One

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...