Economics: Principles and Applications, 2e by Robert E Economics: Principles and Applications, 2e by Robert E. Hall & Marc Lieberman

Chapter 12: Income Inequality

Compensating Differentials Differences in Ability Why Do Wages Differ? An Imaginary World Compensating Differentials Differences in Ability Barriers to Entry Union Wage Setting

Compensating Wage Differential Why Do Wages Differ? Compensating Wage Differential A difference in wages that makes two jobs equally attractive to a worker.

Why Do Wages Differ? Nonmonetary characteristics give rise to compensating wage differentials. Jobs considered intrinsically less attractive will tend to pay higher wages, other things equal.

Why Do Wages Differ? Those with greater talent, intelligence, or perseverance will be more productive and generate more revenue for firms. Thus, firms will be willing to pay them a higher wage.

Why Do Wages Differ? Through an increase in member wages and a decrease in nonmember wages, unions create a wage differential between union and nonunion markets.

Discrimination and Wages Employer Prejudice Employee and Customer Prejudice Statistical Discrimination

Discrimination and Wages Dealing with Discrimination Discrimination and Wage Differentials

Discrimination and Wages When a group of people have different opportunities because of personal characteristics that have nothing to do with their abilities.

Discrimination and Wages When prejudice originates with employers, market forces work to discourage discrimination and reduce or eliminate any wage gap.

Discrimination and Wages When prejudice originates with the firm’s employees or its customers, market forces encourage discrimination and can lead to a permanent wage gap.

Discrimination and Wages Statistical Discrimination When individuals are excluded from an activity based on the statistical probability of behavior in their group.

Measuring Income Inequality The Poverty Rate The Lorenz Curve Problems with Inequality Measures

Measuring Income Inequality Poverty Line The income level below which a family is considered to be in poverty.

Measuring Income Inequality Poverty Rate The percent of families whose incomes fall below a certain minimum--the poverty line.

Measuring Income Inequality Lorenz Curve When households are arrayed according to their incomes, a line showing the cumulative percent of income received by each cumulative percent of households.

Measuring Income Inequality Gini Coefficient A measure of income inequality; the ratio of the area above a Lorenz curve and under the complete equality line to the area under the diagonal.

Measuring Income Inequality Problems with Inequality Measures Earned Income Versus Available Income Income Mobility Careless Interpretations

Income Inequality, Fairness, & Economics Inequality that results from choices that any of us can make is generally regarded as fair.