20a Income Inequality, Poverty, and Discrimination

OUTLINE - Lesson 20a – Income Inequality, Poverty, and Discrimination

Facts about Income Inequality

Distribution by Income Category

Distribution by Quintiles (Fifths)

Lorenze Curve
Gini Ratio

Income Mobility: The Time Dimension

individual and family income mobility over time is significant; for many people, “low income” and “high income” are not permanent conditions.

Also, the longer the time period considered, the more equal the distribution of income becomes.

Effect of Government Redistibution

The income data in Table 1 and Figure 1 include wages, salaries, dividends, and interest.

They also include all cash transfer payments such as Social Security, unemployment compensation benefits, and welfare assistance to needy families.

BUT: The data are before-tax data and therefore

They do not take into account the effects of personal income and payroll (Social Security) taxes that are levied directly on income receivers.

Nor do they include government noncash transfers, (also called in-kind transfers )

for example, Medicare, Medicaid, housing subsidies, subsidized school lunches, and food stamps.

Such transfers are “incomelike,” since they enable recipients to “purchase” goods and services.

The impact of taxes and transfers on U. S. income distribution

Causes of Income Inequality

Ability

Education and Training

Discrimination

Preferences and Risks

Unequal Distribution of Wealth

Market Power

Luck, Connections, and Misfortune

Global Perspective

Income Inequality over Time

Rising Income Inequality since 1970

Causes of Growing Income Inequality

Greater demand for  highly skilled workers

Demographic changes

International trade, immigration, and the decline of Unionism

Equality vs. Efficiency20a

The Case for Equality: Maximizing Total Utility = The President Trump Example

The Case for Income Inequality: Incentives and Efficiency

The Equality-Efficiency Trade-off

Occupational Discrimination – The Crowding Model

The Model

Effects of Crowding

The result is a loss of output for society. To see why, recall again that labor demand reflects labor's marginal revenue product, which is labor's contribution to domestic output. Thus, the blue areas for occupations X and Y in Figure above show the decrease in domestic output—the market value of the marginal output—caused by subtracting 1 million women from each of these occupations. Similarly, the green area for occupation Z shows the increase in domestic output caused by moving 2 million women into occupation Z. Although society would gain the added output represented by the green area in occupation Z, it would lose the output represented by the sum of the two blue areas in occupations X and Y. That output loss exceeds the output gain, producing a net output loss for society.

Eliminating Occupational Segregation

MODELS YOU MUST KNOW: 20a

1. The Utility Maximizing Distribution of Income = the President Trump Example

<![endif]>

Assumptions:

assume that the money incomes of two individuals, Anderson and Brooks, are subject to diminishing marginal utility.

In any time period, income receivers spend the first dollars received on the products they value most—products whose marginal utility is high.

The identical diminishing-marginal-utility-from-income curves (MU_A and MU_B in the figure) reflect the assumption that Anderson and Brooks have the same capacity to derive utility from income.

income is initially unequally distributed (say, $2500 to Anderson and $7500 to Brooks), therefore, the marginal utility derived from the last dollar will be greater for Anderson than for Brooks,

Conclusions:

The basic argument for an equal distribution of income is that income equality maximizes total consumer satisfaction (utility) from any particular level of output and income.

If a single dollar of income is shifted from Brooks to Anderson—that is, toward greater equality—then Anderson's utility increases by a and Brooks's utility decreases by b. The combined utility then increases by a minus b (Anderson's large gain minus Brooks's small loss).

The area under the MU curve and to the left of the individual's particular level of income represents the total utility of that income. Therefore, as a result of the transfer of the $2500, Anderson has gained utility represented by the blue area below curve MU_A, and Brooks has lost utility represented by the red area below curve MU_B.

The blue area is obviously greater than the red area, so i the income distribution is initially unequal, then distributing income more equally can increase the combined utility of the two individuals.

Criticisms: Incentives and Efficiency (The Equality-Efficiency Trade-off)

Although the logic of the argument for equality is sound, critics attack its fundamental assumption that there is some fixed amount of output produced and therefore income to be distributed.

Critics of income equality argue that the way in which income is distributed is an important determinant of the amount of output or income that is produced and is available for distribution.

MODELS YOU MUST KNOW (continued): 20a

2. The Occupational Segregation Model of Discrimination

Assumptions:

the labor force is comprised of 6 million men and 6 million women workers

the economy has 3 occupations, X, Y, and Z, each having identical demand curves for labor;

men and women workers are homogeneous with respect to their labor-market capabilities

women are discriminated against by being excluded from occupations X and Y and are confined to Z

aside from discrimination, the economy is competitive.

There are no barriers to mobility between X and Y for men

Conclusions:

Men would distribute themselves equally in occupations X andY and earn high incomes, M

Women will be crowed into occupation Z and earn low income, W

The result is a loss of output for society (less is being produced with the same number of workers

To see why, recall again that labor demand reflects labor's marginal revenue product, which is labor's contribution to domestic output.

Thus, the blue areas for occupations X and Y in Figure above show the decrease in domestic output—the market value of the marginal output—caused by subtracting 1 million women from each of these occupations.

Similarly, the green area for occupation Z shows the increase in domestic output caused by moving 2 million women into occupation Z.

Although society would gain the added output represented by the green area in occupation Z, it would lose the output represented by the sum of the two blue areas in occupations X and Y. That output loss exceeds the output gain, producing a net output loss for society.

If discrimination disappears, women, attracted by higher wage rates, shift from occupation Z to X and

- 1 million women move into X and another 1 million move into Y. Now there are 4 million workers in Z, and occupational segregation is eliminated.

- The new, nondiscriminatory equilibrium clearly benefits women, who now receive higher wages; it hurts men, who now receive lower wages

- Society also gains. The elimination of occupational segregation reverses the net output loss discussed above