Download Appendix - Cengage

Poverty, Inequality, and
Discrimination
The white man knows how to make everything, but
he does not know how to distribute it.
SITTING BULL
PowerPoint Slides prepared by:
Andreea CHIRITESCU
Eastern Illinois University
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
1
Trade-off: equality and efficiency
• Trade-off
– To reap gains on one front, society often
must make sacrifices on another
• Trade-off between equality and efficiency
– Tax cuts that favor the rich
• Income inequality
• May enhance economic efficiency
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2
The Facts: Poverty
• Poverty line
– Amount of income below which a family is
considered poor
• 1964: $3,000
• 2009: $22,000
• 2009: 14.3% of population
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
3
The Facts: Poverty
• Who are the poor?
– More likely to be black than white
– More likely to be women than men
– Less educated and in poorer health than
the population as a whole
– 35% of the poor are children
• Poverty – often associated with
– Homelessness, illegitimacy
– Drug dependency, and ill health
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Figure 1
Progress in the War on Poverty
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5
The Facts: Poverty
• Absolute concept of poverty - optimistic
– If you fall short of a certain minimum
standard of living, you are poor
• Once you pass this standard, you are no
longer poor
– Arbitrary
• Relative concept of poverty
– A more pessimistic definition
– The poor are those who fall too far behind
the average income
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6
The Facts: Inequality
• Market system
– Tends to allow or even foster inequality
• Basic source of efficiency is the system of
rewards and penalties
• Income distribution
– Lowest 20% - poor
– Middle 60% - middle class
– Highest 20% - rich
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7
Table 1
Distribution of Household Income in the United States in
2009
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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The Facts: Inequality
• 2009
– “Rich” - income above $100,000
– Median family income: $50,000
– Income distribution
• Poorest one fifth of population
– 3.4% of total income
• Richest one fifth of population
– 50.3% of total income
• Historically – income distribution, U.S.
– Grown more unequal since 1980
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9
Table 2
Income Shares in Selected Years
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Reasons for Unequal Incomes
• Differences in ability
– Some people are more adept at earning
income
• Differences in intensity of work
– Some people work longer hours
– Or labor more intensely
• Risk taking
– Most people who acquire large sums of
money do so by taking risks
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Reasons for Unequal Incomes
• Compensating wage differentials
– Some jobs are more arduous than others,
or more dangerous, or more unpleasant
• Schooling and training
– Investment in human capital
• Work experience
– Experienced workers earn higher wages
• Inherited wealth
• Luck
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
12
The Facts: Discrimination
• Economic discrimination
– Occurs when equivalent factors of
production
– Receive different payments
– For equal contributions to output
• Incorrect measure of discrimination
– Compare typical incomes of different
groups
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Table 3
Median Incomes in 2009
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
14
Trade-off: equality and efficiency
• Policies that redistribute income
– Reduce rewards of high-income earners
– Raise rewards of low-income earners
– Reduce incentive to earn high income
• Trade-off
• Policies – increase economic equality
– Reduce economic efficiency
– Reduce society’s total output
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
15
Trade-off: Equality and Efficiency
• To promote equality
– Income redistribution
– Further income equality
– Fight poverty
– Seek policies that do the least possible
harm
• Incentives
• Efficiency
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Trade-off: Equality and Efficiency
• Equality is bought at a price
– Rationally decide how much to “purchase”
– Spend some potential income on equality
• But not all of it
– Society’s optimal choice
• Not complete laissez-faire
• Not complete equality
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Policies to Combat Poverty
• Education as a way out
– More education boosts earnings
– Difficult to deliver quality education to
poor children
• Children - are ill-equipped to learn
• Schools – are ill-equipped to teach
• High dropout rates
– Not an effective way to lift adults out of
poverty
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Policies to Combat Poverty
• Welfare programs
– Specifically designed to alleviate poverty
• Help adults and children
• Have quick effects
– Aid to families with dependent children,
AFDC
– Temporary assistance to needy families,
TANF
– Food stamps
– Transfers in kind
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Policies to Combat Poverty
• AFDC
– Direct cash grants to families that had
children but no breadwinner
– Inefficient redistributive program
• Provided no incentive for welfare mothers to
earn income
• Bureaucratic, expensive
• Encouraged out of wedlock births
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Policies to Combat Poverty
• TANF
– Replaced ADFC in 1996
– Limits eligibility for welfare checks
• Two years at a time
• Five years over a person’s lifetime
• Recipients – supposed to have found jobs
– Provided a weak safety net during the
severe recession of 2007-2009
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Policies to Combat Poverty
• Food Stamps
– “Stamps” delivered via an electronic
benefits card
– Used to purchase food
– The poorer the family, the greater the
benefit
– 2010, one American in seven was on
Food Stamps
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
22
Policies to Combat Poverty
• Transfers in kind
– Medicaid
– Subsidized public housing
– Significantly enhance the living standards
of the poor
– Offer benefits that decline as family
income rises
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
23
Policies to Combat Poverty
• All of the antipoverty programs together
– Put some poor families in a position
• Where they are taxed extremely heavily if
their earnings rise
– Incentive to work becomes quite weak
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Policies to Combat Poverty
• Negative income tax, NIT
– People below a certain income range
would receive a payment from the
government
– Recipients – some incentive to work
– Guarantee = Tax rate ˣ Break-even level
– Food stamps
– Earned income tax credit, EITC
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Table 4
Illustration of a Negative Income Tax Plan
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Policies to Combat Poverty
• Earned income tax credit, EITC
– As earnings rise from zero to some
threshold
• The federal government gives out grants to
certain families proportional to their earnings
– Once earnings pass a second threshold
• The government starts taking this grant back
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Other Policies to Combat Inequality
• Personal income tax
– Progressive
• Takes a larger share of income from the rich
than from the poor
– Incomes after tax are distributed more
equally than incomes before tax
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Other Policies to Combat Inequality
• Death duties
– Tax on inheritance
– Tax on estates
– Aimed at limiting the incomes of the rich
– Or at least at limiting their ability to
transfer this largesse from one generation
to the next
– 1% of total tax revenue
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Other Policies to Combat Inequality
• Other taxes – are regressive
– Sales taxes
– Payroll taxes
– Property taxes
• U.S. tax system as a whole
– Is only slightly progressive
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
30
Policies to Combat Discrimination
• Governments have made it illegal to
discriminate
• Civil Rights Act of 1964
– Outlawed many forms of discrimination
– Established Equal Employment
Opportunity Commission (EEOC)
– Affirmative action
• Active efforts to locate and hire members of
underrepresented groups
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
31
The economic theory of discrimination
• Questions:
– Must prejudice lead to economic
discrimination?
– Do “natural” economic forces tend either
to erode or to exacerbate discrimination
over time?
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
32
The economic theory of discrimination
• Prejudice
– One group dislikes associating with
another group
• Economic discrimination
– Unequal pay for equal work
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
33
Discrimination by employers
• If firms discriminate
– Smaller labor supply
– Wages – higher
– Costs – higher
– If firms are in effective competition
• Drive discriminators out of market
– If a firm is a protected monopoly
• Stay in market
• Lower profits
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
34
Figure 2
Sa
Wage Rate
Wage Rate
Wage discrimination
D
D
Sb
Wa
Wb
Sa
D
Number of workers
(a) Discriminators
Sb
D
Number of workers
(b) Nondiscriminators
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
35
Discrimination by fellow workers
• Prejudice
– Leads to discrimination
– Firms - Competitive disadvantage
– Market forces will not erode discrimination
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Statistical discrimination
• Statistical discrimination
– Productivity of a particular worker
• Estimated low
• Just because that worker belongs to a
particular group (such as women)
– Can exist when there is no prejudice
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
37
Roles of the market and the government
• Prejudice
– Often, but not always lead to economic
discrimination
• Discrimination
– May occur in the absence of prejudice
• Forces of competition
– Tend to erode some (not all) of inequities
produced by discrimination
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Roles of the market and the government
• Discrimination occurs
– Victims of discrimination – lose
– Society also loses
• Discriminatory practices - impair economic
efficiency
• Government intervention
– Reasonable antidiscrimination policies
• To enhance both equality and efficiency
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
39