Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 6 The Economics of Labor Markets
Chapter 20 of 36 Income Inequality and Poverty
Section 6 of 20
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Evaluations of income distribution often give an incomplete view of inequality because these three are not considered:
1· in-kind transfers
2· economic life cycle
3· transitory versus permanent income
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1· In-kind transfers, received mostly by the poorest members of society are transfers to the poor of goods and services rather than cash.
Through government programs the poor receive many nonmonetary items
including housing vouchers, Supplemental Nutrition Assistance Program (“food stamps”), and medical services.
According to a Census Bureau study if in-kind transfers were included in income at market value the number of families in poverty would be about 10% lower than standard data indicate.
2· Economic life cycle
Incomes vary over people's lives, typically income
· for a young worker is low
· rises as the worker gains maturity and experience
· peaks at around age 50
· falls sharply when the worker retires at about age 65
Because people can borrow and save to smooth life cycle changes in income their standard of living in any year depends more on lifetime income than on any year's income.
The young often borrow to go to school or to buy a house, then they repay the loans over years as their income increases.
Because people typically save for retirement the large declines in incomes at retirement often do not lead to similar declines in living standard.
This normal life cycle pattern causes annual income distribution inequality but is not an accurate measure of living standards inequality.
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economic life cycle
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