Traditional Explanations for Differences in Income

1. Traditional Explanations for Differences in Income

2. Ability Tastes/Preferences Education & Training Experience Age/Lifecycle Political Power Property Ownership Luck Discrimination ** Traditional Explanations of Differences in Income

3. Traditional Explanations • Ability is what intelligence a person is born with, which varies. • Tastes & Preferences refers to peoples’ tastes: • Preference for working long hours • Preference for type of work • Preference for risk taking

4. Traditional Explanations • Education & Training; the more of either a person has, the higher their income, on average. • Experience: the more experience a person has, the higher their income, on average.

5. Traditional Explanations • Age/Lifecycle: the pattern is that, on average, as a person becomes older, their income rises. • For most people, income peaks somewhere in the mid-fifties, and falls sharply at retirement.

6. Traditional Explanations • Political Power: this refers to the ability of different groups to use their political power to increase their income, or lower their competitor’s income. • Unions • Business groups, such as doctors

7. Property Ownership & Income Distribution • Your family of origin has a major impact on your future chances of changing your position in society. • The rich live together in wealthy neighborhoods or towns. • These areas have higher property values. **

8. Property Ownership & Income Distribution Cont’ • Schools are paid for with local property taxes. • Wealthy neighborhoods or towns can afford, and pay, higher taxes for their schools. • More money for schools usually means better schools. **

9. Property Ownership & Income Distribution • Graduates from better high schools are better prepared for college. • They are more likely to go to more prestigious universities. **

10. Property Ownership & Income Distribution Cont’ • Graduates from prestigious colleges and universities are more likely to find the better jobs. • However, plenty of exceptions to this pattern! **

11. Types of Discrimination • Wage – pay people who are from different groups, different amounts for the same work. • Occupational – exclude people from certain groups from some types of jobs. **

12. Types of Discrimination Cont’ • Human Capital – different groups have unequal access to education & training. • Employment – unemployment is unevenly distributed among different groups of people. • Most people are opposed to the first two, & most people don’t care about the last two. **

13. Explanations For Discrimination • Economists have two explanations for discrimination: • Personal prejudice • Statistical discrimination.**

14. Explanations For Discrimination • Personal Prejudice • Employer Prejudice • Employers are prejudiced against certain groups. • Numerous examples of employers getting together to discriminate against groups. • Worker Prejudice • Workers have problems working with, or under, certain groups of people. **

15. Explanations For Discrimination Cont’ • Consumer Prejudice • Consumers have prejudices about who they want to have serve them in certain situations.**

16. Explanations For Discrimination Cont’ • While employer and worker prejudice have been decreasing, consumer prejudice remains quite strong. • Smart companies don’t discriminate. People have learned to work with others. But we still want certain types to be our waitpersons. **

17. Explanations For Discrimination • Statistical Discrimination • Occurs because of lack of information Employers don’t have all of the relevant information about candidates for jobs. • They hire people based on what they guess or have heard about schools, programs, or different groups of people. **

18. Luck • Some people have good luck. • Other people have bad luck. **

19. The Wealthy • Why are a few people rich? • Far superior intelligence. • Far superior abilities. • Work much harder than others. • Save, while others spend.

20. The Wealthy • In a study of the400 richest individuals in the US, 70% were found to have been born rich. • The other 30% came from professional families. • Studies of the wealthy have shown that the vast majority have been born rich, married into the rich, or born into the upper middle class.