© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16 1 SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE Income Inequality, Poverty, and Discrimination

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

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

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16 4 Facts About Income Inequality uDistribution 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 categoriesone way to measure income inequality is to look at the percentages of families in a series of income categories

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

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16 6 Facts About Income Inequality uDistribution of Personal Income by Quintiles (Fifths) look at the percentage of total income received by each quintilelook at the percentage of total income received by each quintile

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16 7 Distribution of After-Tax Income Received by Each Quintile Group, 2000 Table 16-2 Quintile % of income of families and unattached persons in this quintile Lowest 20% Second 20% Third 20% Fourth 20% Highest 20%

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16 8 uThe Lorenz Curve the area between the diagonal (the line of perfect equality of income distribution) & the Lorenz Curve shows income inequalitythe area between the diagonal (the line of perfect equality of income distribution) & the Lorenz Curve shows income inequality Facts About Income Inequality

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 16 9 Perfect Equality 40% of the families receive 40% of total income

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Lorenz Curve (actual distribution) (actual distribution) bottom 40% of the families receive 16.1% of total income

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Area between the lines shows the degree of income inequality Area between the lines shows the degree of income inequality

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter A B

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter uIncome Mobility: The Time Dimension over a longer time period, incomes are more equally distributedover a longer time period, incomes are more equally distributed Facts About Income Inequality

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Lorenz Curve over longer time period

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter uEffect of Government Redistribution government transfers have been the most important means of alleviating poverty in Canadagovernment transfers have been the most important means of alleviating poverty in Canada Facts About Income Inequality

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 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

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Causes of Income Inequality uAbility uEducation & Training uDiscrimination uPreferences & Risks uUnequal Distribution of Wealth uMarket Power uLuck, Connections, & Misfortune

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Trends in Income Inequality uincomes in Canada have moved up, in absolute terms uthe relative distribution of income is largely unchanged uincome inequality tends to be highest in developing nations

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter GLOBAL PERSPECTIVE 16.1

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Trends in Income Inequality uCauses of Growing Inequality greater demand for highly skilled workersgreater demand for highly skilled workers demographic changesdemographic changes international trade, immigration, & decline in unionisminternational trade, immigration, & decline in unionism

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 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

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Equality Versus Efficiency uThe Case for Equality: Maximizing Total Utility distributing income more equally can increase combined utilitydistributing income more equally can increase combined utility an example…

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter THE CASE FOR EQUALITY Unequal distribution means lower total utility MU A a MU B IncomeIncome Anderson Brooks UtilityUtility Figure 16-2 b

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter THE CASE FOR EQUALITY The gain to Anderson outweighs the loss to Brooks MU A 5000 a MU B IncomeIncome Anderson Brooks UtilityUtility 5000 a'a' b'b' b 2500 Figure 16-2 Redistribute the income… G L 7500

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Equality Versus Efficiency uThe Case for Inequality: Incentives & Efficiency the way income is distributed is an important determinant of the amount of incomethe way income is distributed is an important determinant of the amount of income uThe Equality–Efficiency Tradeoff

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 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

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter The Economics of Poverty uDefinition of Poverty absolute povertyabsolute poverty relative povertyrelative poverty ufamilies that spend 53% or more of their income on food, shelter & clothing are below the “low income cut-off”

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter The Economics of Poverty uWho Are the Poor? the poor are heterogeneousthe poor are heterogeneous

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter The Economics of Poverty uThe “Invisible” Poor many people are temporarily poormany people are temporarily poor permanently poor are increasingly geographically isolatedpermanently poor are increasingly geographically isolated poor are politically invisiblepoor are politically invisible

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter The Income Maintenance System There is a wide variety of income- maintenance programs, including uCanada Pension Plan (CPP) uOld Age Security (OAS) uGuaranteed Income Supplement (GIS) uEmployment Insurance (EI)

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 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

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Welfare Policy: Goals & Conflicts uAn ideal welfare program should simultaneously achieve three goals: 1.get people out of poverty 2.adequate incentives to work 3.reasonable cost

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Welfare Policy: Goals & Conflicts uThree hypothetical welfare plans common featurescommon features –minimum annual income –benefit-reduction rate

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Welfare: Goals & Conflicts uPlan 1: minimum annual income $8,000minimum annual income $8,000 benefit-reduction rate 50%benefit-reduction rate 50% benefit-reduction rate too high: does not provide sufficient incentives to work benefit-reduction rate too high: does not provide sufficient incentives to work break-even income is $16,000

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Welfare: Goals & Conflicts uPlan 2: minimum annual income $8,000minimum annual income $8,000 benefit-reduction rate 25%benefit-reduction rate 25% uPlan 1: minimum annual income $8,000minimum annual income $8,000 benefit-reduction rate 50%benefit-reduction rate 50% costs greatly increased break-even income is $32,000

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Welfare: Goals & Conflicts uPlan 2: minimum annual income $8,000minimum annual income $8,000 benefit-reduction rate 25%benefit-reduction rate 25% uPlan 1: minimum annual income $8,000minimum annual income $8,000 benefit-reduction rate 50%benefit-reduction rate 50% uPlan 3: minimum annual income $12,000minimum annual income $12,000 benefit-reduction rate 50%benefit-reduction rate 50% break-even income is $24,000 still more costly than plan 1

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Welfare: Goals & Conflicts uConflicts among goals of eliminating povertyeliminating poverty maintaining work incentivesmaintaining work incentives holding down program costsholding down program costs

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 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

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Labour Market Discrimination uTypes of Discrimination wage discriminationwage discrimination employment discriminationemployment discrimination occupational discriminationoccupational discrimination human capital discriminationhuman capital discrimination uCosts of Discrimination

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Labour Market Discrimination Figure 16-3 D Discrimination results in productive inefficiency Consumer goods Capital goods CdCdCdCd KdKdKdKd X Y Z

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Economic Analysis of Discrimination uTaste-for-Discrimination Model Discrimination CoefficientDiscrimination Coefficient Prejudice & the Market Visible Minority– White Wage RatioPrejudice & the Market Visible Minority– White Wage Ratio Competition & DiscriminationCompetition & Discrimination

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Figure 16-4 Visible minority employment (millions) Wage rate (dollars) 6 8 $9 S D1D1D1D1 an increase in prejudice would decrease the demand for visible minority workers

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Figure 16-4 Visible minority employment (millions) Wage rate (dollars) 6 8 $9 S D2D2D2D2 D1D1D1D1 a decrease in prejudice would increase the demand for visible minority workers

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Figure 16-4 Visible minority employment (millions) Wage rate (dollars) 6 8 $9 S D1D1D1D1 D3D3D3D3

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Economic Analysis of Discrimination uStatistical Discrimination Basic IdeaBasic Idea Labour Market ExampleLabour Market Example Profitable, Undesirable, but Not MaliciousProfitable, Undesirable, but Not Malicious

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Economic Analysis of Discrimination u Occupational Segregation: The Crowding Model u labour force equally divided u three occupations, X, Y & Z have identical labour demand curves u men & women have same skills/attributes

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Wage rate Q DXDXDXDX Quantity of labour 3 Q DYDYDYDY Q DZDZDZDZ 3 6 M W Wage rate a) Occupation X b) Occupation Y c) Occupation Z Figure 16-5 women are crowded into Occupation Z, earning a low rate of W, while men earn higher rates of M in Occupations X & Y

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Q DXDXDXDX Quantity of labour 3 Q DYDYDYDY 3 6 W Wage rate a) Occupation X b) Occupation Y c) Occupation Z B 44 elimination of discrimination would equalize wage rates at B 4 Figure 16-5 Wage rate M DZDZDZDZ Q

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter Q DXDXDXDX Quantity of labour 3 Q DYDYDYDY 3 6 W Wage rate a) Occupation X b) Occupation Y c) Occupation Z 44 4 eliminating occupational segregation leads to an increase in output (grey areas minus orange area) Figure 16-5 Wage rate M B DZDZDZDZ Q

© 2005 McGraw-Hill Ryerson Ltd.Microeconomics, Chapter 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