Tibor G. Balogh Econ 003 INCOME AND WEALTH DISTRIBUTION In economics the term family income refers to the income earned buy an individual family per year. The differences in income distributions among families in America can be enormous as I will point out in my paper here today. Most middle class wage earners don't have any idea about what upper income distributions look like. Middle class people think that being rich is earning 60 to 120 thousand dollars a year while a truly rich person would almost suffer at such a low income level. In economics the study of income distribution among households is coined by the term 'size distribution of income'. (Lipsey, 326) This term refers to the distribution of income among different households without any reference to the source of the income or the social class of the households. (Lipsey, 326) Economics have another useful concept which is 'functional distribution of income', this refers to the distribution of total income among the major factors of production. (Lipsey, 326) The major factors a production being land, labor and capital resources. In this paper I will limit myself to the discussion of the first concept, the size distribution of family income. Economist have tracked family incomes for some time now, they study the trends that are associated with all aspects of the economy weather large or small. When raw economic data is collected and cleverly translated into visual graphs, a special kind of deeper understanding becomes apparent to economist's eyes. One person, Mr Lorenz, is famous for designing a curve that received its name after him. Lorenz curves are graphic representations of family incomes, they measure the unequal income distribution among families. A graph of a Lorenz curve compares the percentage of total families on the x-axis with the percentage of total family incomes on the y-axis. The larger the distance between the line y=x (the line that splits the first quadrant in half) and the graph of the family income distribution curve, the greater the income inequality among the families compared. The following table represents income statistics for the year 1989 taken from the 1991 Statistical and Abstract of the United States. Income Class % of Families ($K) ---------------------------------------- 0.0 to 10.0 9.9 10.0 to 19.9 24.8 30.0 to 34.9 16.4 35.0 to 49.9 19.8 50.0 to MAX 29.1 ---------------------------------------- (Lipsey, 327) This table shows that 29.1% of families earned more than fifty thousand dollars in 1989 while 9.9% of families earned less than ten thousand dollars. In fact income distribution in the United States was becoming more equal from after WWII to about the 1960s when the trend reversed itself and the gap between the rich and the poor families began to expand again. This next table will show income distribution by dividing the families into five income ranks and it will show each rank's corresponding percentage share of total family income. Family Rank Share of Total ---------------------------------------------- Lowest Fifth 4.6 % Second Fifth 10.6 % Middle Fifth 16.5 % Fourth Fifth 23.7 % Highest Fifth 44.6 % ---------------------------------------------- (Lipsey, 327) As you can see, the lowest fifth ranking family group only shares 4.6% of the total family income while the highest fifth receives 44.6%. The following graph will show the same information contained in the table above but now it will be represented in a graphic using the Lorenz curve form for a more visual presentation. Lorenz Curve of Family Income % of Income | 100 + * | | 80 + | | 60 + | * | 40 + | * | 20 + | * | * --+-----+-----+-----+-----+-----+----- 0| 20 40 60 80 100 Percentage of Families (Lipsey, 328) If there was a completely equal income distribution then the curved line be straight and it would run right down the middle of the graph. Since a larger portion of total income goes to fewer people there is an unequal income distribution. You might be asking the question "what causes such a staggering difference in income distributions?" and the answer is many things. Probably the biggest factor is education. More educated people will tend to be in the higher socioeconomic classes earning more money while less educated people will have to struggle in lower classes with less incomes. In the time period between 1975 and 1990 high school graduates and high school dropouts have experienced a steady decrease in wages while in this same period of time college graduates with a four year degree or more have seen their incomes steadily rise. (Lipsey, 15) This reinforces the need to accrue a professional education to be able to compete for the shrinking pool of available dollars in the economy. However, much of people in the top fifth income group received their share of the pie by being lucky or having good talents of some sort. Sports figures, actors or movie stars, news persons, and popular musicians are just a few examples of people who have good talents and who are in high demand and they get payed very well for selling their services. Others in the top fifth income group have inherited or were born into large family run businesses or wealth. Wealth transfers between generations makes it possible for offsprings of previously rich people to enjoy great standards of living that were made possible by ancestors. These offsprings of rich people I would count lucky (by worldly standards of course) to be born into a wealthy family. CONCLUSION In conclusion, there are some very rich people in the United States and some of them control factors of production which may or may not be handed down to them from their relatives. Factors of production enables the power elite to maintain status que, that is to maintain their level of living standards and economic or political influence (or both) on the rest of the population. Factors of production in private hands is something that this country was founded and thrived on for centuries. It is central to a free market economy, private and free enterprise must be the dictating market force if we are to be strong and free as a country. Unequal income distribution does not alarm me that much, nor do I believe that any government legislation should break up the economic power of individuals. I believe that the key to stabilizing the unequal income distribution is education. I also believe that the opportunity to make large sums of money should not be taken away from any group of people. WORKS CITED Lipsey, Richard G., et al. Micro Economics. New York: HarperCollins, 1993. Mansfield, Edwin. Principles of Macro Ecomonics. New York: W. W. Norton & Company, 1989.