What did you study last time?

1
(No Transcript)
2
What did you study last time?

• why peoples earnings differ.
• what discrimination is.

3
Do you know

• how income inequality is measured?
• the political philosophies concerning income
  distribution?
• the policies used to reduce poverty?

4
1. How is income inequality measured?

1. Some information about U.S. income inequality
2. How to determine the poverty rate?
3. What are the problems in measuring inequality?

5
a. Some information about U.S. income inequality
Group
Annual Family Income
1970
2000
Bottom fifth
0
5.5
4.3
24,000
to
Second fifth
24,001
12.2
9.8
41,000
to
Middle fifth
41,001
17.6
15.5
61,387
to
Fourth fifth
61,388
23.8
22.8
91,700
to
Top fifth
91,701
40.9
47.4
over

Top 5
160,250
15.6
20.8
over

6
a. Some information about U.S. income inequality

• Reasons for recent increase in income inequality
• 1. Increases in international trade with
  low-wage countries,
• 2. Changes in technology.
• As a result, the wages of unskilled workers have
  fallen relative to the wages of skilled workers.

7
b. How to determine the poverty rate?

• Poverty rate
• The percentage of the population whose family
  income falls below the poverty line.

8
b. How to determine the poverty rate?

• Poverty line
• An absolute level of income set by the federal
  government for each family size below which a
  family is deemed to be in poverty. (17,603 for a
  family of four in 2000).
• The poverty line is at roughly three times the
  cost of providing an adequate diet.

9
U.S. poverty rate
Year
Poverty rate
1960
22
1970
12
1980
15
1990
14
2000
11
Poverty is correlated with (1) age, (2) race,
and (3) family composition
10
c. What are the problems in measuring poverty?

• Data on income distribution and the poverty rate
  give an incomplete picture of inequality in
  living standards.

11
c. What are the problems in measuring poverty?

• Why? Three reasons
• (1) In-kind transfers
• Transfers to the poor given in the form of goods
  and services rather than cash.
• e.g. food stamps, housing vouchers, and medical
  services

12
c. What are the problems in measuring poverty?

• (2) Economic life cycle
• The regular pattern of income variation
  over a persons life.

Age
20
50
60
Income
low
peak
lowest
13
c. What are the problems in measuring poverty?

• (3) Transitory vs. permanent income
• Incomes vary because of random and transitory
  forces
• - Acts of nature,
• - Temporary layoffs.
• A family's ability to buy GS depends largely on
  its permanent income, which is its normal,
  average, income.

14
2. What are the political philosophies concerning
income distribution?

1. Utilitarianism
2. Liberalism
3. Libertarianism

15
a. Utilitarianism

• Government should choose policy to maximize the
  total utility of everyone in society.
• Utility a measure of happiness or satisfaction
• This philosophy is based on the assumption of
  diminishing marginal utility. Income
  redistribution raises total utility.
• Founders Jeremy Bentham John Stuart Mill

16
b. Liberalism

• The government should choose policies deemed to
  be just, as evaluated by an impartial observer
  behind a "veil of ignorance."
• Public policy should be based on the maximin
  criterion, which seeks to maximize the minimum
  utility,
• i.e. to maximize the well-being of the worst-off
  person in society.
• Founder John Rawls

17
c. Libertarianism

• Government should punish crimes and enforce
  voluntary agreements but not redistribute income.
• Equality of opportunities is more important than
  equality of income.
• The government should enforce individual rights
  to ensure that everyone has the same opportunity
  to use his or her talents and achieve success.
• Founder Robert Nozick

18
3. What policies are used to reduce poverty?

• Poverty is associated with various economic and
  social ills.
• e.g. homelessness, drug dependency, domestic
  violence, health problems, teenage pregnancy,
  illiteracy, unemployment, low educational
  attainment, and crimes.
• None of the following policies is perfect.

19
3. What policies are used to reduce poverty?

1. Minimum-wage laws
2. Welfare
3. Negative income tax
4. In-kind transfers

20
a. Minimum-wage laws

• Advocates
• - The demand for unskilled labor is relatively
  inelastic, so that a high minimum wage depresses
  employment only slightly.

21
a. Minimum-wage laws

• Critics
• - Labor demand is more elastic, especially in
  the long run when firms can adjust employment
  more fully.
• - Many minimum wage workers are teenagers from
  middle-class families.

22
b. Welfare

• Government programs that supplement income of the
  needy.
• - Temporary Assistance for Needy Families (with
  children)
• - Supplemental Security Income (SSI)-for people
  with disability

23
b. Welfare

• Criticism of welfare programs
• - They create incentives for people to become
  "needy."
• - They encourage families to break up,
  illegitimate births, etc.
• - They exacerbate the very problems they are
  supposed to cure.
• In 1996, the welfare system was revised. The law
  limited the amount of time recipients could stay
  on welfare.

24
c. Negative income tax

• A tax system that collects revenue from
  high-income households and gives transfers to
  low-income households.
• - High-income families would pay a tax based on
  their incomes.
• - Low-income families would receive a subsidy
  a negative tax.
• - Poor families would receive financial
  assistance without having to demonstrate need.

25
c. Negative income tax

• One actual tax provision what works much like a
  negative income tax is the Earned Income Tax
  Credit (EITC).

26
d. In-kind transfers

• Transfers to the poor given in the form of goods
  and services rather than cash, e.g. food stamps
  and Medicaid.

27
d. In-kind transfers

• Advocates
• - Such transfers ensure that the poor get what
  they most need.
• Critics
• - In-kind-transfers are inefficient and
  disrespectful.
• - It is better to give them cash and allow them
  to buy what they think they need most.

28
The unintended effect of anti-poverty programs

• Many policies aimed at helping the poor can have
  the unintended effect of discouraging the poor
  from escaping poverty on their own.
• i.e. anti-poverty programs tend to create
  disincentive to work.

29
The unintended effect of anti-poverty programs

• Workfare refers to a system that would require
  any person collecting benefits to accept a
  government-provided job.
• A 1996 welfare reform bill advocated providing
  benefits for only a limited period of time.

30
Now you know

• how income inequality is measured.
• about the political philosophies concerning
  income distribution.
• about the policies used to reduce poverty.

31
See You! Take Care!