Chapter 6: Poverty and Discrimination Chapter 6: Poverty and Discrimination
PovertyPovertyKind: 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
Poverty Threshold Level Poverty Threshold Level
Family Size Threshold Level (1999)
1 $ 8,501
2 $10,869
3 $13,290
4 $17,029
5 $20,127
6 $22,727
7 $25,912
8 $28,967
9 and more $34,417
Poverty & Income Distribution
Percent of Families % of Income Cum. % of Income
Lowest 20 4.2 4.2
Second 20 9.9 14.1
Third 20 15.7 29.8
Fourth 20 23.0 52.8
Highest 20 47.2 100.0
Lorenz Curve of Income Distribution
20 40 60 80 1004.2
14.1
29.8
52.8
100
% of population
% of income
Area M
Area N
L-curve
Line of equality
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.
Determinants of Income Differential
Brains & BrawnSkill levels & creativityMarket size & risk takingCapacity utilization = ratio of actual earnings to potential earnings
Determinants of Wealth Differential
Inheritance: having rich parentsLuck: being at the right place at the right timePropensity to accumulate: save and invest
Welfare Assistance
Aid to Families with Dependent ChildrenTemporary Assistance to Needy FamiliesWelfare-to-work transitionMedicaid Child careHousing assistanceIncome support
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
$Tax credit
$Earnings9,390 12,260 30,095
EITC in 1998
3,756
Negative Income TaxGovernment guarantees a minimum level of incomeGovernment determines a break-even level of incomeSubsidies are given to families with income less than break-even level of income Subsidies are reduced by a given percentage as families earn incomeTaxes are paid by families with income more than break-even level of income
NIT Proposal
Break-even
Guaranteed
Income Tax
0
_
+
Subsidies received
Taxes paid
$Income
$Tax liability
DiscriminationDiscrimination
Definition:– Equals are treated unequally – Unequal are treated equally
Sources:– Monopoly power in hiring labor– Desire to discriminate against others
Economic Discrimination
Wage discriminationEmployment discriminationPrice discriminationOccupational segregation
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%
Employment Discrimination
Workers are not hired (or hired) for non-economic reasons such as gender, race, and/or ethnicity
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
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)
Individual Cost of Discrimination
Loss of employment & incomeUnable to find jobs and get loansFind jobs in segregated marketsPay higher prices
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
PPC & Cost of Discrimination
Good XX
D
B
CGood Y
Y
D(X,Y): combination with discriminationD(X,Y): combination with discriminationB and C: combinations without discriminationB and C: combinations without discrimination
Policies to Reduce Discrimination
EducationLegislationGovernment subsidiesReduce market imperfectionsEnd occupational segregation
Top Related