Lecture Economics (18th edition): Chapter 20 - McConnell, Brue, Flynn''s

Chapter 20 - Income inequality, poverty, and discrimination. In this chapter, you will learn to: Income inequality in the U.S, sources of income inequality, income inequality since 1970, economic arguments regarding income inequality, poverty measurement and incidence, the U.S. income-maintenance program, labor market discrimination.

Income Inequality, Poverty, and Discrimination

Chapter 20

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Chapter Objectives

• Income inequality in the U.S

• Sources of income inequality

• Income inequality since 1970

• Economic arguments regarding income inequality

• Poverty measurement and

Facts About Income Inequality

• Average household income

Facts About Income Inequality

(1) Quintile

(2) Percentage of Total Income

(3) Upper Income Limit

$20,035 37,774 60,000 97,032

No Limit

Income Inequality

• Lorenz Curve and Gini Ratio

20 40 60 80 100 20

40 60 80 100

Government Redistribution

20 40 60 80 100 20

40 60 80 100

0

Lorenz Curve

Before Taxes and Transfers Percentage of Households

Causes of Income Inequality

• Ability

• Education and training

• Discrimination

• Preferences and risks

• Unequal distribution of wealth

• Market power

• Luck, connections, and

misfortune

20-7

Income Inequality Over Time

• Rising income inequality since

1970

• Causes of growing inequality

–Greater demand for highly skilled workers

–Demographic changes

–International trade, immigration,

and decline in unionism

Income Inequality

Columbia

Brazil South Africa Guatemala

Mexico United States Italy Japan Sweden Germany

Equality Versus Efficiency

• The case for equality

–Maximizing total utility

• The case for inequality

–Incentives and efficiency

• The equality-efficiency tradeoff

The Utility-Maximizing Distribution of Income

Anderson’s Marginal Utility From Income

Brooks’ Marginal Utility From Income

(Entire Red Area)

Equality Versus Efficiency

20-11

The Economics of Poverty

Incidence of Poverty

Female Householders African Americans

Hispanics Foreign-Born (Not Citizens)

Children Under 18

Women

Total Population

Asians Whites Men Persons 65 or Over Married-Couple Families

The Economics of Poverty

• Poverty rate trends

–Significant decline 1959-1969

–Stable in 11-13% range since

–Rises with recession

• Measurement issues

–Arbitrary threshold

–Consumption vs income

Income-Maintenance System

• Entitlement programs

–All those eligible receive aid

• Social insurance programs

–Social security and Medicare

–Unemployment compensation

• Public assistance programs

–Welfare

20-15

Public Assistance Programs

• Supplemental security income

• Temporary assistance for needy families

• Food stamp program

• Medicaid

• Earned Income Tax Credit

Taste for Discrimination Model

12 16 18

6

$9 8

More Discrimination

Less Discrimination

• Statistical discrimination

–Judged on average group

characteristics

–Labor market example

–Profitable, undesirable, but not

malicious

20-19

• Occupational segregation

–The crowding model

–Crowd certain groups into less

desirable occupations

–Effects of crowding

–Elimination of crowding

Discrimination

(Millions) Quantity of Labor (Millions) Quantity of Labor (Millions)

By crowding women into one occupation (Z)…

Men enjoy higher wages in the other

occupations (X and Y)

0 0

0

20-21

U.S Family Wealth

Median and Average Family Wealth, 1995-2004 In 2004 Dollars

1995 1998 2001 2004

$70,800 83,100 91,700 93,100

$260,800 327,500 421,500 448,200

• Family wealth rose rapidly between

1995 and 2004

• Family wealth became more unequal between 1995 and 2004

Percentage of Total Family Wealth Held by Different Percentile Groups, 1995-2004

1995 1998 2001 2004

32.2%

31.4 30.2 30.5

34.6%

33.9 32.7 33.4

Year Bottom 90% Bottom 10% Top 1%

Percentile of Wealth Distribution

67.8%

68.6 69.8 69.5

U.S Family Wealth

20-23

• public assistance programs

• Supplemental Security Income (SSI)

• Temporary Assistance for Needy Families (TANF)

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The Economics

of Health Care

20-25