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Micro Chapter 16 - Income Inequality, Poverty and Discrimination

Income Inequality, Poverty, and Discrimination 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#1Copyright McGraw-Hill, Inc. 1996#In this chapter you will learn16.1 The facts about income inequality in Canada and how to measure it16.2 The causes of income inequality16.3 About the tradeoff between income equality and economic efficiency16.4 The nature of poverty16.5 About the conflicts that arise in designing welfare policy16.6 About labour market discrimination and income inequality 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#2Copyright McGraw-Hill, Inc. 1996#Chapter 16 Topics16.1 Facts About Income Inequality16.2 Causes of Income Inequality16.3 Equality Versus Efficiency16.4 The Nature of Poverty16.5 Welfare Policy: Goals & Conflicts16.6 Labour Market Discrimination 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#3Copyright McGraw-Hill, Inc. 1996#Facts About Income InequalityDistribution of Personal Income by Income Categoryone way to measure income inequality is to look at the percentages of families in a series of income categories 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#4Copyright McGraw-Hill, Inc. 1996#Distribution of Total Income by Families 2000 Table 16-1Personal income category% of all familiesin this categoryUnder $10,000$10,000 - $19,999$20,000 - $29,999$30,000 - $49,999$50,000 - $59,999$60,000 and over6.213.813.522.39.235.1 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#5Copyright McGraw-Hill, Inc. 1996#Facts About Income InequalityDistribution of Personal Income by Quintiles (Fifths)look at the percentage of total income received by each quintile 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#6Copyright McGraw-Hill, Inc. 1996#Distribution of After-Tax Income Received by Each Quintile Group, 2000 Table 16-2Quintile% of income of families and unattached persons in this quintileLowest 20%Second 20%Third 20%Fourth 20%Highest 20%5.011.116.824.342.8 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#7Copyright McGraw-Hill, Inc. 1996#Facts About Income InequalityThe Lorenz Curvethe area between the diagonal (the line of perfect equality of income distribution) & the Lorenz Curve shows income inequality 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#8Copyright McGraw-Hill, Inc. 1996#

Perfect Equality40% of the families receive 40% of total income 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#9Copyright McGraw-Hill, Inc. 1996#

Lorenz Curve (actual distribution)bottom 40% of the families receive 16.1% of total income 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#10Copyright McGraw-Hill, Inc. 1996#

Area betweenthe lines showsthe degree ofincome inequality 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#11Copyright McGraw-Hill, Inc. 1996#

AB 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#12Copyright McGraw-Hill, Inc. 1996#Facts About Income InequalityIncome Mobility: The Time Dimensionover a longer time period, incomes are more equally distributed 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#13Copyright McGraw-Hill, Inc. 1996#

Lorenz Curve over longer time period 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#14Copyright McGraw-Hill, Inc. 1996#Facts About Income InequalityEffect of Government Redistributiongovernment transfers have been the most important means of alleviating poverty in Canada 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#15Copyright McGraw-Hill, Inc. 1996#Chapter 16 Topics16.1 Facts About Income Inequality16.2 Causes of Income Inequality16.3 Equality Versus Efficiency16.4 The Nature of Poverty16.5 Welfare Policy: Goals & Conflicts16.6 Labour Market Discrimination 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#16Copyright McGraw-Hill, Inc. 1996#Causes of Income InequalityAbilityEducation & TrainingDiscriminationPreferences & RisksUnequal Distribution of WealthMarket PowerLuck, Connections, & Misfortune 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#17Copyright McGraw-Hill, Inc. 1996#Trends in Income Inequalityincomes in Canada have moved up, in absolute termsthe relative distribution of income is largely unchangedincome inequality tends to be highest in developing nations 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#18Copyright McGraw-Hill, Inc. 1996#

GLOBAL PERSPECTIVE 16.1 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#19Copyright McGraw-Hill, Inc. 1996#Trends in Income InequalityCauses of Growing Inequalitygreater demand for highly skilled workersdemographic changesinternational trade, immigration, & decline in unionism 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#20Copyright McGraw-Hill, Inc. 1996#Chapter 16 Topics16.1 Facts About Income Inequality16.2 Causes of Income Inequality16.3 Equality Versus Efficiency16.4 The Nature of Poverty16.5 Welfare Policy: Goals & Conflicts16.6 Labour Market Discrimination 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#21Copyright McGraw-Hill, Inc. 1996#Equality Versus EfficiencyThe Case for Equality: Maximizing Total Utilitydistributing income more equally can increase combined utility

an example 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#22Copyright McGraw-Hill, Inc. 1996#THE CASE FOR EQUALITYUnequal distribution means lower total utilityMUAaMUBIncomeIncomeAndersonBrooksUtilityUtility25007500Figure 16-2b 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#23Copyright McGraw-Hill, Inc. 1996#THE CASE FOR EQUALITYThe gain to Anderson outweighs the loss to BrooksMUA5000aMUBIncomeIncomeAndersonBrooksUtilityUtility5000a'b'b2500Figure 16-2Redistribute the incomeGL7500 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#24Copyright McGraw-Hill, Inc. 1996#Equality Versus EfficiencyThe Case for Inequality: Incentives & Efficiencythe way income is distributed is an important determinant of the amount of incomeThe EqualityEfficiency Tradeoff

2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#25Copyright McGraw-Hill, Inc. 1996#Chapter 16 Topics16.1 Facts About Income Inequality16.2 Causes of Income Inequality16.3 Equality Versus Efficiency16.4 The Nature of Poverty16.5 Welfare Policy: Goals & Conflicts16.6 Labour Market Discrimination 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#26Copyright McGraw-Hill, Inc. 1996#The Economics of PovertyDefinition of Povertyabsolute povertyrelative povertyfamilies that spend 53% or more of their income on food, shelter & clothing are below the low income cut-off 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#27Copyright McGraw-Hill, Inc. 1996#The Economics of PovertyWho Are the Poor?the poor are heterogeneous 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#28Copyright McGraw-Hill, Inc. 1996#The Economics of PovertyThe Invisible Poormany people are temporarily poorpermanently poor are increasingly geographically isolatedpoor are politically invisible 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#29Copyright McGraw-Hill, Inc. 1996#The Income Maintenance SystemThere is a wide variety of income-maintenance programs, includingCanada Pension Plan (CPP)Old Age Security (OAS)Guaranteed Income Supplement (GIS)Employment Insurance (EI) 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#30Copyright McGraw-Hill, Inc. 1996#Chapter 16 Topics16.1 Facts About Income Inequality16.2 Causes of Income Inequality16.3 Equality Versus Efficiency16.4 The Nature of Poverty16.5 Welfare Policy: Goals & Conflicts16.6 Labour Market Discrimination 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#31Copyright McGraw-Hill, Inc. 1996#Welfare Policy: Goals & ConflictsAn ideal welfare program should simultaneously achieve three goals:get people out of povertyadequate incentives to workreasonable cost 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#32Copyright McGraw-Hill, Inc. 1996#Welfare Policy: Goals & ConflictsThree hypothetical welfare planscommon featuresminimum annual incomebenefit-reduction rate 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#33Copyright McGraw-Hill, Inc. 1996#Welfare: Goals & ConflictsPlan 1:minimum annual income $8,000benefit-reduction rate 50%benefit-reduction rate too high:does not provide sufficient incentives to workbreak-even income is $16,000 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#34Copyright McGraw-Hill, Inc. 1996#Welfare: Goals & ConflictsPlan 2:minimum annual income $8,000benefit-reduction rate 25%Plan 1:minimum annual income $8,000benefit-reduction rate 50%costs greatly increasedbreak-even income is $32,000 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#35Copyright McGraw-Hill, Inc. 1996#Welfare: Goals & ConflictsPlan 2:minimum annual income $8,000benefit-reduction rate 25%Plan 1:minimum annual income $8,000benefit-reduction rate 50%Plan 3:minimum annual income $12,000benefit-reduction rate 50%break-even income is $24,000still more costly than plan 1 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#36Copyright McGraw-Hill, Inc. 1996#Welfare: Goals & ConflictsConflicts among goals ofeliminating povertymaintaining work incentivesholding down program costs 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#37Copyright McGraw-Hill, Inc. 1996#Chapter 16 Topics16.1 Facts About Income Inequality16.2 Causes of Income Inequality16.3 Equality Versus Efficiency16.4 The Nature of Poverty16.5 Welfare Policy: Goals & Conflicts16.6 Labour Market Discrimination 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#38Copyright McGraw-Hill, Inc. 1996#Labour Market DiscriminationTypes of Discriminationwage discriminationemployment discriminationoccupational discriminationhuman capital discriminationCosts of Discrimination 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#39Copyright McGraw-Hill, Inc. 1996#Labour Market DiscriminationFigure 16-3DDiscrimination results in productive inefficiencyConsumer goodsCapital goodsCdKdXYZ 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#40Copyright McGraw-Hill, Inc. 1996#Economic Analysis of DiscriminationTaste-for-Discrimination ModelDiscrimination CoefficientPrejudice & the Market Visible MinorityWhite Wage RatioCompetition & Discrimination 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#41Copyright McGraw-Hill, Inc. 1996#Figure 16-4Visible minority employment (millions)Wage rate (dollars)68$9SD1an increase in prejudice would decrease the demand for visible minority workers 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#42Copyright McGraw-Hill, Inc. 1996#Figure 16-4Visible minority employment (millions)Wage rate (dollars)68$9SD2D1a decrease in prejudice would increase the demand for visible minority workers 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#43Copyright McGraw-Hill, Inc. 1996#Figure 16-4Visible minority employment (millions)Wage rate (dollars)68$9SD1D3 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#44Copyright McGraw-Hill, Inc. 1996#Economic Analysis of DiscriminationStatistical DiscriminationBasic IdeaLabour Market ExampleProfitable, Undesirable, but Not Malicious 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#45Copyright McGraw-Hill, Inc. 1996#Economic Analysis of DiscriminationOccupational Segregation: The Crowding Modellabour force equally divided three occupations, X, Y & Z have identical labour demand curvesmen & women have same skills/attributes 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#46Copyright McGraw-Hill, Inc. 1996#Wage rateQDXQuantity of labour3QDYQuantity of labourQDZQuantity of labour36MWWage rateWage ratea) Occupation Xb) Occupation Yc) Occupation ZFigure 16-5women are crowded into Occupation Z, earning a low rate of W, while men earn higher rates of M in Occupations X & Y 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#47Copyright McGraw-Hill, Inc. 1996#QDXQuantity of labour3QDYQuantity of labourQuantity of labour36WWage rateWage ratea) Occupation Xb) Occupation Yc) Occupation ZB44elimination of discrimination would equalize wage rates at B4Figure 16-5Wage rateMDZQ 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#48Copyright McGraw-Hill, Inc. 1996#QDXQuantity of labour3QDYQuantity of labourQuantity of labour36WWage rateWage ratea) Occupation Xb) Occupation Yc) Occupation Z444eliminating occupational segregation leads to an increase in output (grey areas minus orange area)Figure 16-5Wage rateMBDZQ 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#49Copyright McGraw-Hill, Inc. 1996#Chapter 16 Topics16.1 Facts About Income Inequality16.2 Causes of Income Inequality16.3 Equality Versus Efficiency16.4 The Nature of Poverty16.5 Welfare Policy: Goals & Conflicts16.6 Labour Market Discrimination 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16#50Copyright McGraw-Hill, Inc. 1996#Chart10100

Percent of familiesPercent of incomeThe Lorenz CurveFig. 16-1

Sheet1Norway35.3Italy38.9France40.1Canada41.1United States45.2Mexico58.2Guatemala63Brazil64.2South Africa64.8

Sheet1000000000

% of total income% of total income received by top quintile, selected nations

Fig. 17-1share per quintilecum. share00020554011.116.16016.832.98024.357.210042.810000100100

Fig. 17-100000000

Percent of familiesPercent of incomeThe Lorenz CurveFig. 17-1

Sheet3

Chart100510016.132.957.2100

Percent of familiesPercent of incomeThe Lorenz CurveFig. 16-1

Sheet1Norway35.3Italy38.9France40.1Canada41.1United States45.2Mexico58.2Guatemala63Brazil64.2South Africa64.8

Sheet1

% of total income% of total income received by top quintile, selected nations

Fig. 17-1share per quintilecum. share00020554011.116.16016.832.98024.357.210042.810000100100

Fig. 17-1

Percent of familiesPercent of incomeThe Lorenz CurveFig. 17-1

Sheet3

Chart100510016.132.957.2100

Percent of familiesPercent of incomeThe Lorenz CurveFig. 16-1

Sheet1Norway35.3Italy38.9France40.1Canada41.1United States45.2Mexico58.2Guatemala63Brazil64.2South Africa64.8

Sheet1

% of total income% of total income received by top quintile, selected nations

Fig. 17-1share per quintilecum. share00020554011.116.16016.832.98024.357.210042.810000100100

Fig. 17-1

Percent of familiesPercent of incomeThe Lorenz CurveFig. 17-1

Sheet3

Chart100510016.132.957.2100

Percent of familiesPercent of incomeThe Lorenz CurveFig. 16-1

Sheet1Norway35.3Italy38.9France40.1Canada41.1United States45.2Mexico58.2Guatemala63Brazil64.2South Africa64.8

Sheet1

% of total income% of total income received by top quintile, selected nations

Fig. 17-1share per quintilecum. share00020554011.116.16016.832.98024.357.210042.810000100100

Fig. 17-1

Percent of familiesPercent of incomeThe Lorenz CurveFig. 17-1

Sheet3

Chart100510016.132.957.2100

Percent of familiesPercent of incomeThe Lorenz CurveFig. 16-1

Sheet1Norway35.3Italy38.9France40.1Canada41.1United States45.2Mexico58.2Guatemala63Brazil64.2South Africa64.8

Sheet1

% of total income% of total income received by top quintile, selected nations

Fig. 17-1share per quintilecum. share00020554011.116.16016.832.98024.357.210042.810000100100

Fig. 17-1

Percent of familiesPercent of incomeThe Lorenz CurveFig. 17-1

Sheet3

Chart1202224263142454548

% of total income% of total income received by top tenth of income receivers, selected nations

Sheet1Sweden20Italy22France24Canada26United States31Mexico42Guatemala45South Africa45Brazil48

Sheet1

% of total income% of total income received by top quintile, selected nations

Sheet2

Sheet3