© 2005 mcgraw-hill ryerson ltd.microeconomics, chapter 16 1 slides prepared by judith skuce,...

© 2005 McGraw-Hill Ryerson Ltd. Microeconomics, Chapter 16 1

SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGESLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE

Income Inequality, Poverty, Income Inequality, Poverty, and Discriminationand Discrimination


In this chapter you will learnIn this chapter you will learn16.116.1 The facts about income inequality in The facts about income inequality in

Canada and how to measure itCanada and how to measure it16.216.2 The causes of income inequality The causes of income inequality16.316.3 About the tradeoff between income About the tradeoff between income

equality and economic efficiencyequality and economic efficiency16.416.4 The nature of poverty The nature of poverty16.516.5 About the conflicts that arise in About the conflicts that arise in

designing welfare policydesigning welfare policy16.616.6 About labour market discrimination About labour market discrimination

and income inequalityand income inequality


Chapter 16 TopicsChapter 16 Topics

16.116.1 Facts About Income Inequality Facts About Income Inequality

16.216.2 Causes of Income Inequality Causes of Income Inequality

16.316.3 Equality Versus Efficiency Equality Versus Efficiency

16.416.4 The Nature of Poverty The Nature of Poverty

16.516.5 Welfare Policy: Goals & Conflicts Welfare Policy: Goals & Conflicts

16.616.6 Labour Market Discrimination Labour Market Discrimination


Facts About Income InequalityFacts About Income Inequality

Distribution of Personal Income by Distribution of Personal Income by Income CategoryIncome Category• one way to measure income inequality one way to measure income inequality

is to look at the percentages of families is to look at the percentages of families in a series of income categoriesin a series of income categories


Distribution of Total Income by Families Distribution of Total Income by Families 2000 2000 Table 16-1Table 16-1

Personal income Personal income categorycategory

% of % of all all familiesfamiliesin this cin this categoryategory

Under $10,000Under $10,000$10,000 - $19,999$10,000 - $19,999$20,000 - $29,999$20,000 - $29,999$30,000 - $49,999$30,000 - $49,999$50,000 - $59,999$50,000 - $59,999$60,000 and over$60,000 and over

6.26.213.813.813.513.522.322.39.29.2

35.135.1


Facts About Income InequalityFacts About Income Inequality

Distribution of Personal Income by Distribution of Personal Income by Quintiles (Fifths)Quintiles (Fifths)• look at the percentage of total income look at the percentage of total income

received by each quintilereceived by each quintile


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

Table 16-2Table 16-2

QuintileQuintile% of % of income of income of families families andand unattached personsunattached persons in this in this quintilequintile

Lowest 20%Lowest 20%Second 20%Second 20%Third 20%Third 20%Fourth 20%Fourth 20%Highest 20%Highest 20%

5.05.011.111.116.816.824.324.342.842.8


The Lorenz CurveThe Lorenz Curve• the area between the diagonal (the line the area between the diagonal (the line

of perfect equality of income of perfect equality of income distribution) & the Lorenz Curve shows distribution) & the Lorenz Curve shows income inequalityincome inequality

Facts About Income InequalityFacts About Income InequalityFacts About Income InequalityFacts About Income Inequality


The Lorenz CurveFig. 16-1

0

20

40

60

80

100

0 20 40 60 80 100

Percent of families

Pe

rce

nt o

f in

com

e

Perfect Equality

40% of the 40% of the families receive families receive

40% of total 40% of total incomeincome

40% of the 40% of the families receive families receive

40% of total 40% of total incomeincome



0

20

40

60

80

100

0 20 40 60 80 100

Percent of families

Pe

rce

nt o

f in

com

e

Lorenz CurveLorenz Curve (actual distribution)(actual distribution)

bottom 40% of bottom 40% of the families the families

receive 16.1% of receive 16.1% of total incometotal income

bottom 40% of bottom 40% of the families the families

receive 16.1% of receive 16.1% of total incometotal income



0

20

40

60

80

100

0 20 40 60 80 100

Percent of families

Pe

rce

nt o

f in

com

e

Area betweenArea betweenthe lines showsthe lines shows

the degree ofthe degree ofincome inequalityincome inequality

Area betweenArea betweenthe lines showsthe lines shows

the degree ofthe degree ofincome inequalityincome inequality



0

20

40

60

80

100

0 20 40 60 80 100

Percent of families

Pe

rce

nt o

f in

com

e

green)light blue(light BAarea) blueA(light

ratio Gini

AABB


Income Mobility: The Time Income Mobility: The Time DimensionDimension• over a longer time period, incomes are over a longer time period, incomes are

more equally distributedmore equally distributed




0

20

40

60

80

100

0 20 40 60 80 100

Percent of families

Pe

rce

nt o

f in

com

e

Lorenz Curve over Lorenz Curve over longer time periodlonger time periodLorenz Curve over Lorenz Curve over longer time periodlonger time period


Effect of Government RedistributionEffect of Government Redistribution• government transfers have been the government transfers have been the

most important means of alleviating most important means of alleviating poverty in Canadapoverty in Canada



Causes of Income InequalityCauses of Income Inequality

AbilityAbility Education & TrainingEducation & Training DiscriminationDiscrimination Preferences & RisksPreferences & Risks Unequal Distribution of WealthUnequal Distribution of Wealth Market PowerMarket Power Luck, Connections, & MisfortuneLuck, Connections, & Misfortune


Trends in Income InequalityTrends in Income Inequality

incomes in Canada have moved up, incomes in Canada have moved up, in absolute termsin absolute terms

the relative distribution of income is the relative distribution of income is largely unchangedlargely unchanged

income inequality tends to be income inequality tends to be highest in developing nationshighest in developing nations


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

0 10 20 30 40 50 60

Sweden

Italy

France

Canada

United States

Mexico

Guatemala

South Africa

Brazil

% of total income

GLOBAL PERSPECTIVEGLOBAL PERSPECTIVE 16.1 16.1


Trends in Income InequalityTrends in Income Inequality

Causes of Growing InequalityCauses of Growing Inequality• greater demand for highly skilled greater demand for highly skilled

workersworkers• demographic changesdemographic changes• international trade, immigration, & international trade, immigration, &

decline in unionismdecline in unionism


Equality Versus EfficiencyEquality Versus Efficiency

The Case for Equality: Maximizing The Case for Equality: Maximizing Total UtilityTotal Utility• distributing income more equally can distributing income more equally can

increase combined utilityincrease combined utility

an example…an example…


THE CASE FOR EQUALITYTHE CASE FOR EQUALITY

Unequal distribution means lower Unequal distribution means lower total utilitytotal utility

MUA

a

MUB

IncomeIncome IncomeIncome

Anderson Brooks

Util

ityU

tility

Util

ityU

tility

2500 7500

Figure 16-2Figure 16-2

b


THE CASE FOR EQUALITYTHE CASE FOR EQUALITY

The gain to Anderson outweighs the The gain to Anderson outweighs the loss to Brooksloss to Brooks

MUA

5000

a

MUB

IncomeIncome IncomeIncome

Anderson Brooks

Util

ityU

tility

Util

ityU

tility

5000

a'b'b

2500


Redistribute the income…Redistribute the income…

GG LL

7500


Equality Versus EfficiencyEquality Versus Efficiency

The Case for Inequality: Incentives & The Case for Inequality: Incentives & EfficiencyEfficiency• the way income is distributed is an the way income is distributed is an

important determinant of the important determinant of the amountamount of of incomeincome

The Equality–Efficiency TradeoffThe Equality–Efficiency Tradeoff


The Economics of PovertyThe Economics of Poverty

Definition of PovertyDefinition of Poverty• absolute povertyabsolute poverty• relative povertyrelative poverty

families that spend 53% or more of families that spend 53% or more of their income on food, shelter & their income on food, shelter & clothing are below the “low income clothing are below the “low income cut-off”cut-off”



Who Are the Poor?Who Are the Poor?• the poor are heterogeneousthe poor are heterogeneous



The “Invisible” PoorThe “Invisible” Poor• many people are temporarily poormany people are temporarily poor• permanently poor are increasingly permanently poor are increasingly

geographically isolatedgeographically isolated• poor are politically invisiblepoor are politically invisible


The Income Maintenance The Income Maintenance SystemSystem

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

Canada Pension Plan (CPP)Canada Pension Plan (CPP) Old Age Security (OAS)Old Age Security (OAS) Guaranteed Income Supplement Guaranteed Income Supplement

(GIS)(GIS) Employment Insurance (EI)Employment Insurance (EI)


Welfare Policy: Goals & Welfare Policy: Goals & ConflictsConflicts

An ideal welfare program should An ideal welfare program should simultaneously achieve three goals:simultaneously achieve three goals:

1.1. get people out of povertyget people out of poverty

2.2. adequate incentives to workadequate incentives to work

3.3. reasonable costreasonable cost


Welfare Policy: Goals & Welfare Policy: Goals & ConflictsConflicts

Three hypothetical welfare plansThree hypothetical welfare plans• common featurescommon features

– minimum annual incomeminimum annual income– benefit-reduction ratebenefit-reduction rate


Welfare: Goals & ConflictsWelfare: Goals & Conflicts Plan 1:Plan 1:

• minimum annual income $8,000minimum annual income $8,000• benefit-reduction rate 50%benefit-reduction rate 50%

benefit-reduction rate benefit-reduction rate too high:too high:

does not provide does not provide sufficient incentives to sufficient incentives to

workwork

benefit-reduction rate benefit-reduction rate too high:too high:

does not provide does not provide sufficient incentives to sufficient incentives to

workwork

break-even break-even income is income is $16,000$16,000

break-even break-even income is income is $16,000$16,000


Welfare: Goals & ConflictsWelfare: Goals & Conflicts

Plan 2:Plan 2:• minimum annual income $8,000minimum annual income $8,000• benefit-reduction rate 25%benefit-reduction rate 25%


costs greatly increasedcosts greatly increasedcosts greatly increasedcosts greatly increased

break-even

break-even

income is income is

$32,000$32,000

break-even

break-even

income is income is

$32,000$32,000






break-even

break-even income is

income is $24,000$24,000

break-even

break-even income is

income is $24,000$24,000

still more costly than still more costly than plan 1plan 1

still more costly than still more costly than plan 1plan 1



Conflicts among goals ofConflicts among goals of• eliminating povertyeliminating poverty• maintaining work incentivesmaintaining work incentives• holding down program costsholding down program costs


Labour Market Labour Market DiscriminationDiscrimination

Types of DiscriminationTypes of Discrimination• wage discriminationwage discrimination• employment discriminationemployment discrimination• occupational discriminationoccupational discrimination• human capital discriminationhuman capital discrimination

Costs of DiscriminationCosts of Discrimination


Labour Market Labour Market DiscriminationDiscrimination


DD

Discrimination Discrimination resultsresults in in

productiveproductive inefficiencyinefficiency

Consumer goodsConsumer goods

Cap

ital

go

od

sC

apit

al g

oo

ds

CCdd

KKdd

XX

YY

ZZ


Economic Analysis of Economic Analysis of DiscriminationDiscrimination

Taste-for-Discrimination ModelTaste-for-Discrimination Model• Discrimination CoefficientDiscrimination Coefficient• Prejudice & the Market Visible Minority–Prejudice & the Market Visible Minority–

White Wage RatioWhite Wage Ratio• Competition & DiscriminationCompetition & Discrimination



Visible minority employment (millions)Visible minority employment (millions)

Wag

e ra

te (

do

llar

s)W

age

rate

(d

oll

ars)

66

88$9$9

SS

DD11

an increase in prejudice would an increase in prejudice would decrease the demand for visible decrease the demand for visible

minority workersminority workers

an increase in prejudice would an increase in prejudice would decrease the demand for visible decrease the demand for visible





Wag

e ra

te (

do

llar

s)W

age

rate

(d

oll

ars)

66

88$9$9

SS

DD22DD11

a decrease in prejudice would a decrease in prejudice would increase the demand for visible increase the demand for visible


a decrease in prejudice would a decrease in prejudice would increase the demand for visible increase the demand for visible





Wag

e ra

te (

do

llar

s)W

age

rate

(d

oll

ars)

66

88$9$9

SS

DD11

DD33



Statistical DiscriminationStatistical Discrimination• Basic IdeaBasic Idea• Labour Market ExampleLabour Market Example• Profitable, Undesirable, but Not Profitable, Undesirable, but Not

MaliciousMalicious



Occupational Segregation: The Occupational Segregation: The Crowding ModelCrowding Model labour force equally divided labour force equally divided three occupations, X, Y & Z have identical three occupations, X, Y & Z have identical

labour demand curveslabour demand curves men & women have same skills/attributesmen & women have same skills/attributes


Wage rateWage rate

QQ

DDXX

Quantity of labourQuantity of labour33 QQ

DDYY

Quantity of labourQuantity of labour

QQ

DDZZ

Quantity of labourQuantity of labour33 66

MM

WW

Wage rateWage rate Wage rateWage rate

a) Occupation Xa) Occupation X b) Occupation Yb) Occupation Y c) Occupation Zc) Occupation Z


women are crowded into women are crowded into Occupation Z, earning a low rate Occupation Z, earning a low rate of W, while men earn higher rates of W, while men earn higher rates

of M in Occupations X & Yof M in Occupations X & Y

women are crowded into women are crowded into Occupation Z, earning a low rate Occupation Z, earning a low rate of W, while men earn higher rates of W, while men earn higher rates

of M in Occupations X & Yof M in Occupations X & Y


QQ

DDXX


DDYY

Quantity of labourQuantity of labour Quantity of labourQuantity of labour33 66

WW



BB

44 44

elimination of discrimination elimination of discrimination would equalize wage rates at Bwould equalize wage rates at Belimination of discrimination elimination of discrimination

would equalize wage rates at Bwould equalize wage rates at B

44


Wage rateWage rate

MM

DDZZ

QQ


QQ

DDXX


DDYY

Quantity of labourQuantity of labour Quantity of labourQuantity of labour33 66

WW



44 44 44

eliminating occupational eliminating occupational segregation leads to an increase segregation leads to an increase

in output (grey areas minus in output (grey areas minus orange area)orange area)

eliminating occupational eliminating occupational segregation leads to an increase segregation leads to an increase

in output (grey areas minus in output (grey areas minus orange area)orange area)


Wage rateWage rate

MMBB

DDZZ

QQ

© 2005 mcgraw-hill ryerson ltd.microeconomics, chapter 16 1 slides prepared by judith skuce,...

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