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