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Income Inequality, Poverty, and Discrimination

Income Inequality, Poverty, and Discrimination. SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE. 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

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Income Inequality, Poverty, and Discrimination

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  1. Income Inequality, Poverty, and Discrimination SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE

  2. 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

  3. 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

  4. 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

  5. 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 6.2 13.8 13.5 22.3 9.2 35.1

  6. Facts About Income Inequality • Distribution of Personal Income by Quintiles (Fifths) • look at the percentage of total income received by each quintile

  7. Distribution of After-Tax Income Received by Each Quintile Group, 2000 Table 16-2 % of income of families andunattached personsin this quintile Quintile Lowest 20% Second 20% Third 20% Fourth 20% Highest 20% 5.0 11.1 16.8 24.3 42.8

  8. 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

  9. Perfect Equality 40% of the families receive 40% of total income

  10. Lorenz Curve (actual distribution) bottom 40% of the families receive 16.1% of total income

  11. Area between the lines shows the degree of income inequality

  12. A B

  13. Facts About Income Inequality • Income Mobility: The Time Dimension • over a longer time period, incomes are more equally distributed

  14. Lorenz Curve over longer time period

  15. Facts About Income Inequality • Effect of Government Redistribution • government transfers have been the most important means of alleviating poverty in Canada

  16. 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 

  17. Causes of Income Inequality • Ability • Education & Training • Discrimination • Preferences & Risks • Unequal Distribution of Wealth • Market Power • Luck, Connections, & Misfortune

  18. 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

  19. GLOBAL PERSPECTIVE 16.1

  20. Trends in Income Inequality • Causes of Growing Inequality • greater demand for highly skilled workers • demographic changes • international trade, immigration, & decline in unionism

  21. 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  

  22. Equality Versus Efficiency • The Case for Equality: Maximizing Total Utility • distributing income more equally can increase combined utility an example…

  23. THE CASE FOR EQUALITY Figure 16-2 Brooks Utility Utility Anderson a b MUA MUB 2500 7500 Income Income Unequal distribution means lower total utility

  24. THE CASE FOR EQUALITY Figure 16-2 Redistribute the income… Brooks Utility Utility Anderson a b' a' b MUA MUB G L 2500 5000 5000 7500 Income Income The gain to Anderson outweighs the loss to Brooks

  25. Equality Versus Efficiency • The Case for Inequality: Incentives & Efficiency • the way income is distributed is an important determinant of the amount of income • The Equality–Efficiency Tradeoff

  26. 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   

  27. 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 cut-off”

  28. The Economics of Poverty • Who Are the Poor? • the poor are heterogeneous

  29. The Economics of Poverty • The “Invisible” Poor • many people are temporarily poor • permanently poor are increasingly geographically isolated • poor are politically invisible

  30. 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)

  31. 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    

  32. Welfare Policy: Goals & Conflicts • An ideal welfare program should simultaneously achieve three goals: • get people out of poverty • adequate incentives to work • reasonable cost

  33. Welfare Policy: Goals & Conflicts • Three hypothetical welfare plans • common features • minimum annual income • benefit-reduction rate

  34. Welfare: Goals & Conflicts break-even income is $16,000 • Plan 1: • minimum annual income $8,000 • benefit-reduction rate 50% benefit-reduction rate too high: does not provide sufficient incentives to work

  35. 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% costs greatly increased break-even income is $32,000

  36. 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% break-even income is $24,000 • Plan 3: • minimum annual income $12,000 • benefit-reduction rate 50% still more costly than plan 1

  37. Welfare: Goals & Conflicts • Conflicts among goals of • eliminating poverty • maintaining work incentives • holding down program costs

  38. 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     

  39. Labour Market Discrimination • Types of Discrimination • wage discrimination • employment discrimination • occupational discrimination • human capital discrimination • Costs of Discrimination

  40. Labour Market DiscriminationFigure 16-3 Discrimination resultsin productiveinefficiency X Capital goods Y D Z Kd Cd Consumer goods

  41. Economic Analysis of Discrimination • Taste-for-Discrimination Model • Discrimination Coefficient • Prejudice & the Market Visible Minority–White Wage Ratio • Competition & Discrimination

  42. an increase in prejudice would decrease the demand for visible minority workers Figure 16-4 S $9 Wage rate (dollars) 8 6 D1 Visible minority employment (millions)

  43. a decrease in prejudice would increase the demand for visible minority workers Figure 16-4 S $9 Wage rate (dollars) 8 6 D1 D2 Visible minority employment (millions)

  44. Figure 16-4 S $9 Wage rate (dollars) 8 6 D3 D1 Visible minority employment (millions)

  45. Economic Analysis of Discrimination • Statistical Discrimination • Basic Idea • Labour Market Example • Profitable, Undesirable, but Not Malicious

  46. Economic Analysis of Discrimination • Occupational Segregation: The Crowding Model • labour force equally divided • three occupations, X, Y & Z have identical labour demand curves • men & women have same skills/attributes

  47. Figure 16-5 Wage rate Wage rate Wage rate M W DY DZ DX Q Q Q 3 3 6 Quantity of labour Quantity of labour Quantity of labour a) Occupation X b) Occupation Y c) Occupation Z women are crowded into Occupation Z, earning a low rate of W, while men earn higher rates of M in Occupations X & Y

  48. Figure 16-5 Wage rate Wage rate Wage rate M B W DY DZ DX Q Q Q 4 4 3 3 6 4 Quantity of labour Quantity of labour Quantity of labour a) Occupation X b) Occupation Y c) Occupation Z elimination of discrimination would equalize wage rates at B

  49. Figure 16-5 Wage rate Wage rate Wage rate M B W DY DZ DX Q Q Q 4 4 3 3 6 4 Quantity of labour Quantity of labour Quantity of labour a) Occupation X b) Occupation Y c) Occupation Z eliminating occupational segregation leads to an increase in output (grey areas minus orange area)

  50. 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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