Chapter 6: Poverty and Discrimination

1. Chapter 6: Poverty and Discrimination

2. Poverty • Kind: Absolute vs. Relative • Absolute: inability to satisfy basic human needs (food, shelter, clothing, education, etc.) • Incident: • over 7 million of families (10%) are absolutely poor • poverty is gender and race biased

3. Poverty Threshold Level

4. Poverty & Income Distribution

5. Lorenz Curve of Income Distribution % of income 100 Line of equality Area M 52.8 L-curve 29.8 Area N 14.1 4.2 % of population 20 40 60 80 100

6. The Gini Index • The farther the L-curve from line of income equality the higher is the degree of income inequality • Gini Index = Area N / Area M • 0 < Gini Index < 1 • Gini Index = 0.45 for the U.S.

7. Determinants of Income Differential • Brains & Brawn • Skill levels & creativity • Market size & risk taking • Capacity utilization = ratio of actual earnings to potential earnings

8. Determinants of Wealth Differential • Inheritance: having rich parents • Luck: being at the right place at the right time • Propensity to accumulate: save and invest

9. Welfare Assistance • Aid to Families with Dependent Children • Temporary Assistance to Needy Families • Welfare-to-work transition • Medicaid • Child care • Housing assistance • Income support

10. Earned Income Tax Credit • Families with two or more children • Refundable tax credit = 40% of earnings up to $9,390 for a max. credit of $3,756 • Above earnings of $12,260, tax credit is reduced by 21.06% for each additional dollar earned • No tax credit at earnings of $30,095

11. EITC in 1998 $Tax credit 3,756 $Earnings 9,390 30,095 12,260

12. Negative Income Tax • Government guarantees a minimum level of income • Government determines a break-even level of income • Subsidies are given to families with income less than break-even level of income • Subsidies are reduced by a given percentage as families earn income • Taxes are paid by families with income more than break-even level of income

13. NIT Proposal $Tax liability Income Tax + Taxes paid 0 Break-even $Income _ Subsidies received Guaranteed

14. Discrimination • Definition: • Equals are treated unequally • Unequal are treated equally • Sources: • Monopoly power in hiring labor • Desire to discriminate against others

15. Economic Discrimination • Wage discrimination • Employment discrimination • Price discrimination • Occupational segregation

16. Wage Discrimination • Legitimate due to difference in labor productivity: skilled workers command higher wages • College gap = 75% • Illegitimate caused by discrimination • Gender gap = 30% • Race gap = 20%

17. Employment Discrimination • Workers are not hired (or hired) for non-economic reasons such as gender, race, and/or ethnicity

18. Price Discrimination • Certain members of the society are charged • higher prices on goods and services they buy • higher interest rates on loans they obtain • Red-lining: a practice of rejecting loan applications to qualified borrowers because of ethnicity or race

19. Occupational Segregation • Women are channeled into low skill, low wage occupations (e.g., beauticians) • Men are channeled into high skill, high wage occupations (e.g., auto mechanics)

20. Individual Cost of Discrimination • Loss of employment & income • Unable to find jobs and get loans • Find jobs in segregated markets • Pay higher prices

21. Societal Cost of Discrimination • Cost of discrimination is estimated at 3 to 4 percent of the GDP per year. • In 1998, the cost was more than $600 million of lost output

22. PPC & Cost of Discrimination D(X,Y): combination with discriminationB and C: combinations without discrimination Good Y C D Y B X Good X

23. Policies to Reduce Discrimination • Education • Legislation • Government subsidies • Reduce market imperfections • End occupational segregation