Key Terms
Poverty
Condition of not earning enough for basic necessities. Poverty line: the income threshold defining a basic standard of l
Poverty line
The specific income threshold that defines a basic standard of living.
Poverty rate
Percentage of the population living below the poverty line.
Income inequality
The disparity in income distribution across groups; who gets what share of the total.
Her method
Average family spent 1/3 of income on food; multiply the cost of a nutritionally adequate diet by 3.
Poverty trap
When government benefits are reduced dollar-for-dollar as income rises, working produces no net financial gain.
Classic setup
Government guarantees $18,000 in income. Every $1 earned = $1 of benefits cut.
Alternative design
Reduce benefits by $0.50 for every $1 earned instead of $1 for $1.
Effect
The worker effectively earns $4.00 per hour net instead of $0.
Other tools for reducing the trap
Work requirements as a condition of benefits; time limits on benefits.
Given
Worker earns $9/hr; government guarantees $10,000; phase-out rate is $0.50 per $1 earned; max hours = 2,500.
Horizontal intercept
2,500 hours of leisure; income = $10,000 (all government support, zero work).
Effective wage
$9.00 x 0.50 = $4.50/hr net.
Vertical intercept
$10,000 + (2,500 hrs x $4.50) = $10,000 + $11,250 = $21,250.
Quintile
One-fifth (20%) of a ranked population group. Lorenz curve: graph comparing cumulative income distribution to a perfectl