Unit 4: Labor and Efficiency: Resource Markets, Inequality, and Immigration

Lesson 20a: Income Inequality and Discrimination

Summaries of the Lesson 20a Models

The Case for Equality = The President Trump Example of the 5Es

The Occupational Segregation Model of Discrimination

MODEL - The Case for Equality = The President Trump Example of the 5Es

The Utility Maximizing Distribution of Income

Assumptions:

• assume that the money incomes of two individuals, Joe and Jane, 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 (MUjoe and MUjane in the figure) reflect the assumption that Joe and Jane have the same capacity to derive utility from income.
• income is initially unequally distributed ($2000 to Joe and $6000 to Jane), therefore, the marginal utility derived from the last dollar will be greater for Joe (X) than for Jane. (Y)

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 Jane to Joe, that is, toward greater equality, then Joe's utility increases by X and Jane's utility decreases by Y. The combined utility then increases by X minus Y (Joe's large gain minus Jane'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 $2000, Joe has gained utility represented by the red area below curve MUjoe (area C + E + H), and Jane has lost utility represented by the blue area below curve MUjane (area F + I).
• The red area is obviously greater than the blue area, so if 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. A more equal distribution of income may be a disincentive to work and cause the total amount of income to decrease. This is the Equality-Efficiency trade-off.

MODEL -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, A, B, and C, 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 A and B and are confined to C
• except for discrimination, the economy is competitive, therefore Dlabor = MRP = P x MP.
• There are no barriers to mobility between the occupations for men.

Conclusions:

• Men would distribute themselves equally in occupations A and B (3 million in each) and earn high wages, $10
• All 6 million women will be crowded into occupation C and earn low wages, $4
• The result of discrimination is a loss of output for society (less is being produced with the same number of workers)
  • Remember that labor demand reflects labor's marginal revenue product (MRP = P x MP), which is labor's contribution to domestic output.
  • Thus, the red areas for occupations A and B (a + b + d + g + k in each occupation) in the figure above show the decrease in domestic output (MP x P) caused by subtracting 1 million women from each of these occupations.
  • Similarly, the blue area for occupation C (c + e + h+ m + f + j + n) shows the increase in domestic output caused by moving 2 million women into occupation C.
  • Although society would gain the added output represented by the blue area in occupation C, it would lose the output represented by the sum of the red areas in occupations A and B. That output loss exceeds the output gain, producing a net output loss for society caused by discrimination.
• If discrimination disappears, women, attracted by higher wage rates, shift from occupation C to A and B
  • 1 million women move into A and another 1 million move into B.
  • Ending discrimination clearly benefits women, who now receive higher wages; it hurts men, who now receive lower wages.
  • Society gains. The elimination of occupational segregation reverses the net output loss discussed above. Society gains the output represented by the two red areas in occupations A and B and loses the output represented by the blue area in occupation C. When discrimination is ended society gains more than it loses.