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Income Inequality, Poverty, and Discrimination

In this chapter you will learn


16.1 The facts about income inequality in Canada and how to measure it 16.2 The causes of income inequality 16.3 About the tradeoff between income equality and economic efficiency 16.4 The nature of poverty 16.5 About the conflicts that arise in designing welfare policy 16.6 About labour market discrimination and income inequality
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Chapter 16 Topics
16.1 Facts About Income Inequality 16.2 Causes of Income Inequality 16.3 Equality Versus Efficiency 16.4 The Nature of Poverty 16.5 Welfare Policy: Goals & Conflicts

16.6 Labour Market Discrimination

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Microeconomics, Chapter 16

Facts About Income Inequality

Distribution of Personal Income by Income Category

one way to measure income inequality is to look at the percentages of families in a series of income categories

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Microeconomics, Chapter 16

Distribution of Total Income by Families 2000


Table 16-1 Personal income category % of all families in this category

Under $10,000 $10,000 - $19,999 $20,000 - $29,999 $30,000 - $49,999 $50,000 - $59,999 $60,000 and over
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6.2 13.8 13.5 22.3 9.2 35.1


Microeconomics, Chapter 16

Facts About Income Inequality

Distribution of Personal Income by Quintiles (Fifths)

look at the percentage of total income received by each quintile

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Microeconomics, Chapter 16

Distribution of After-Tax Income Received by Each Quintile Group, 2000

Quintile

Table 16-2 % of income of families and unattached persons in this quintile

Lowest 20% Second 20% Third 20% Fourth 20% Highest 20%
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5.0 11.1 16.8 24.3 42.8


Microeconomics, Chapter 16

Facts About Income Inequality

The Lorenz Curve

the area between the diagonal (the line of perfect equality of income distribution) & the Lorenz Curve shows income inequality

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Microeconomics, Chapter 16

The Lorenz Curve Fig. 16-1


100
Percent of income

Perfect Equality

80 60 40 20 0 0 20 40

40% of the families receive 40% of total 60 income 80 100


Microeconomics, Chapter 16

Percent of families
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The Lorenz Curve Fig. 16-1


100
Percent of income

Lorenz Curve (actual distribution)

80 60 40 20 0 0 20 40

bottom 40% of the families receive 16.1% of total income 60 80 100


Microeconomics, Chapter 16

Percent of families
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The Lorenz Curve Fig. 16-1


100
Percent of income

80 60 40 20 0 0 20

Area between the lines shows 40 60 80 the degree of100 Percent of families income inequality
Microeconomics, Chapter 16

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Gini ratio 100 A(light blue area) A B (light blue light green)
Percent of income

The Lorenz Curve Fig. 16-1

80 60 40 20

B
0 20 40 60 80 100

0 Percent of families
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Facts About Income Inequality

Income Mobility: The Time Dimension

over a longer time period, incomes are more equally distributed

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The Lorenz Curve Fig. 16-1


100
Percent of income

80 60 40 20 0 0 20

Lorenz Curve over 40 60 80 100 longer time period Percent of families


Microeconomics, Chapter 16

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Facts About Income Inequality

Effect of Government Redistribution

government transfers have been the most important means of alleviating poverty in Canada

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Chapter 16 Topics
16.1 Facts About Income Inequality 16.2 Causes of Income Inequality 16.3 Equality Versus Efficiency 16.4 The Nature of Poverty 16.5 Welfare Policy: Goals & Conflicts

16.6 Labour Market Discrimination

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Causes of Income Inequality


Ability Education & Training Discrimination Preferences & Risks Unequal Distribution of Wealth

Market Power
Luck, Connections, & Misfortune

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Trends in Income Inequality


incomes in Canada have moved up, in absolute terms the relative distribution of income is largely unchanged income inequality tends to be highest in developing nations

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GLOBAL PERSPECTIVE 16.1


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

Brazil South Africa Guatemala Mexico United States Canada France Italy Sweden 0 10 20 30 40 50 60

% of total income

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Trends in Income Inequality

Causes of Growing Inequality


greater demand for highly skilled workers demographic changes international trade, immigration, & decline in unionism

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Chapter 16 Topics
16.1 Facts About Income Inequality

16.2 Causes of Income Inequality 16.3 Equality Versus Efficiency 16.4 The Nature of Poverty 16.5 Welfare Policy: Goals & Conflicts

16.6 Labour Market Discrimination

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Equality Versus Efficiency

The Case for Equality: Maximizing Total Utility

distributing income more equally can increase combined utility

an example

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Microeconomics, Chapter 16

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THE CASE FOR EQUALITY


Figure 16-2 Utility Utility

Anderson

Brooks

MUA
2500 Income

b
7500

MUB
Income

Unequal distribution means lower total utility


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THE CASE FOR EQUALITY


Figure 16-2

Redistribute the income


Utility Utility Anderson Brooks

a a'
G

MUA
Income

b' b
L

MUB
Income

2500 5000

5000 7500

The gain to Anderson outweighs the loss to Brooks


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Equality Versus Efficiency

The Case for Inequality: Incentives & Efficiency

the way income is distributed is an important determinant of the amount of income

The EqualityEfficiency Tradeoff

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Chapter 16 Topics
16.1 Facts About Income Inequality

16.2 Causes of Income Inequality 16.3 Equality Versus Efficiency 16.5 Welfare Policy: Goals & Conflicts

16.4 The Nature of Poverty


16.6 Labour Market Discrimination

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The Economics of Poverty

Definition of Poverty

absolute poverty relative poverty

families that spend 53% or more of their income on food, shelter & clothing are below the low income cutoff

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The Economics of Poverty

Who Are the Poor?

the poor are heterogeneous

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The Economics of Poverty

The Invisible Poor


many people are temporarily poor permanently poor are increasingly geographically isolated poor are politically invisible

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The Income Maintenance System


There is a wide variety of income-maintenance programs, including

Canada Pension Plan (CPP)


Old Age Security (OAS) Guaranteed Income Supplement (GIS) Employment Insurance (EI)

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Chapter 16 Topics
16.1 Facts About Income Inequality

16.2 Causes of Income Inequality 16.3 Equality Versus Efficiency

16.4 The Nature of Poverty


16.5 Welfare Policy: Goals & Conflicts

16.6 Labour Market Discrimination

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Welfare Policy: Goals & Conflicts

An ideal welfare program should simultaneously achieve three goals:


1.
2. 3.

get people out of poverty


adequate incentives to work reasonable cost

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Welfare Policy: Goals & Conflicts

Three hypothetical welfare plans

common features

minimum annual income benefit-reduction rate

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Welfare: Goals & Conflicts

Plan 1:

break-even income benefit-reduction rate 50% is $16,000


minimum annual income $8,000

benefit-reduction rate too high: does not provide sufficient incentives to work
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Welfare: Goals & Conflicts


Plan 1:
minimum annual income $8,000 benefit-reduction rate 50%

Plan 2:

costs greatly increased

minimum annual income $8,000 benefit-reduction rate 25%

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Welfare: Goals & Conflicts


Plan 1:
minimum annual income $8,000 benefit-reduction rate 50%

Plan 2:

minimum annual income $8,000 benefit-reduction rate 25%

Plan 3:
still more$12,000 costly than minimum annual income plan 1 benefit-reduction rate 50%
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Welfare: Goals & Conflicts

Conflicts among goals of


eliminating poverty maintaining work incentives holding down program costs

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Chapter 16 Topics
16.1 Facts About Income Inequality

16.2 Causes of Income Inequality 16.3 Equality Versus Efficiency

16.4 The Nature of Poverty


16.5 Welfare Policy: Goals & Conflicts

16.6 Labour Market Discrimination

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Microeconomics, Chapter 16

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Labour Market Discrimination

Types of Discrimination

wage discrimination employment discrimination occupational discrimination human capital discrimination

Costs of Discrimination

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Labour Market Discrimination


Figure 16-3

Capital goods

X Y

Kd

D
Cd
Consumer goods

Discrimination results in productive inefficiency

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Economic Analysis of Discrimination

Taste-for-Discrimination Model

Discrimination Coefficient Prejudice & the Market Visible MinorityWhite Wage Ratio Competition & Discrimination

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Figure 16-4

an increase in prejudice would decrease the demand for visible minority workers
S

Wage rate (dollars)

$9 8 6

D1
Visible minority employment (millions)
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a decrease in prejudice would Figure 16-4 increase the demand for visible minority workers
S
Wage rate (dollars)

$9 8 6

D2 D1
Visible minority employment (millions)
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Figure 16-4

S
Wage rate (dollars)

$9 8 6

D1

D3

Visible minority employment (millions)


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Economic Analysis of Discrimination

Statistical Discrimination

Basic Idea Labour Market Example Profitable, Undesirable, but Not Malicious

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Economic Analysis of Discrimination


Occupational
labour

Segregation: The Crowding Model


force equally divided three occupations, X, Y & Z have identical labour demand curves men & women have same skills/attributes

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Figure 16-5
Wage rate Wage rate Wage rate

DX
3 Quantity of labour a) Occupation X
Q

DY 3 Quantity of labour b) Occupation Y


Q

DZ 6 Quantity of labour c) Occupation Z


Q

women are crowded into Occupation Z, earning a low rate of W, while men earn higher rates of M in Occupations X & Y
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Figure 16-5
Wage rate Wage rate Wage rate

M B
W

DX
3 4 Quantity of labour a) Occupation X
Q

DY 34 Quantity of labour b) Occupation Y


Q

DZ 4 6 Quantity of labour c) Occupation Z


Q

elimination of discrimination would equalize wage rates at B


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Figure 16-5
Wage rate Wage rate Wage rate

M B
W

DX
3 4 Quantity of labour a) Occupation X
Q

DY 34 Quantity of labour b) Occupation Y


Q

DZ 4 6 Quantity of labour c) Occupation Z


Q

eliminating occupational segregation leads to an increase in output (grey areas minus orange area)
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Chapter 16 Topics
16.1 Facts About Income Inequality

16.2 Causes of Income Inequality 16.3 Equality Versus Efficiency

16.4 The Nature of Poverty


16.5 Welfare Policy: Goals & Conflicts

16.6 Labour Market Discrimination

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Microeconomics, Chapter 16

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