Quiz 15: Income Inequality and Poverty


The presence of income inequality in the U.S. does not mean that the distribution of income is too unequal. Income inequality is a natural consequence of the market process. Market process allocates income on the basis of existing differences in the level of skills, talent, education, preferences, nature of family, family size, and so on. Therefore, to judge income inequality solely on the basis of outcome would be unfair. Rather, along with the outcome, the market process also needs to be considered to determine whether the income distribution is too equal or too unequal. The criteria to judge whether the distribution of income is fair or not, both the outcome and the process should be considered. The process criteria determine what needs to be changed with the existing system and the outcome criteria determine the magnitude of the income distribution and why such outcome resulted. The analysis of both the criteria provides a way out, but not the surest way, to determine what should or could be the policies to redistribute income in an effective way. Neither the final outcome nor the process is more important. Rather both are important and relevant to the issue of the fairness of the distribution of income.

Annual monetary income cannot serve as a yardstick for determining economic status. Economic status of a person depends upon other factors, as well; namely, non-monetary income, size of family, amount of taxes paid, cost of living, and so on. If these factors are taken into account, the annual income as a measure of economic status becomes less effective. High-earning individuals generally have less non-monetary income, have larger family, pay relatively more taxes, and they have a higher cost of living. Thus monetary income cannot be a true measure for comparing the standard of living or economic status of high-income and low-income groups.

Income mobility or inter-generational mobility refers to the changes in income-distribution rankings due to the movement of families and individuals up and down the income ladder over a period of time. Economists have established that income mobility affects income distribution, although the correlation between the two is a weak positive one. When the income mobility becomes substantial, then the importance of income distribution data becomes irrelevant and misleading. This is because data on income distribution does not capture such movements effectively as they provide income distribution only on the basis of the annual money income.

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