• A person’s wage depends on the supply and demand for the person’s labor.

• The factors that influence wages also help distribute the total income throughout the equality.

• The “invisible hand” distributes resources, but not necessarily fairly. So, the government should help redistribute income to achieve equality.

20-1 Measuring Inequality

• There are four main questions to address.

  • How much inequality is there in our society?

  • How many people live in poverty?

  • What problems arise in measuring the amount of inequality?

  • How often do people move between income classes?

US Income Inequality

• Quintiles: when a statistical group is divided into five equal groups

• Increases in international trade with countries that offer low wages and changes in technology reduce the unskilled labor demand.

• This change in wages has increased inequality in family incomes.

• 2017 Income Distribution (Annual Family Income)

  • Bottom Quintile: $33,551 and below

  • Second Quintile: $33,552–$60,032

  • Middle Quintile: $60,033–$92,358

  • Fourth Quintile: $92,359–$145,380

  • Top Quintile: $145,381 and above

  • Top 5 Percent: $261,508 and above

Inequality Around the World

• Some statistics for countries aren’t available.

• Data collection methods also differ (individual incomes, family incomes, expenditure, etc…)

• Quintile ratio: the income of the richest quintile divided by the income of the poorest quintile

• Pakistan and Sweden are the two most “equal” countries.

• South Africa is the most unequal country.

The Poverty Rate

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

• Poverty line: 3x the cost of providing a fulfilling diet, set by the federal government. It depends on family size and is adjusted every year.

• Poverty is correlated with race, age, and family composition.

  • Blacks and Hispanics are more likely to be in poverty.

  • Children are more likely to be in poverty.

  • Single mothers that lead a family are more likely to be in poverty.

Problems in Measuring Inequality

• Family annual incomes do not measure the standard of living.

• In-kind transfers: goods and services (not cash) given to the poor. Standard inequality measurements do not account for these.

• Data does not count tax credits specifically made to help poor people.

• Life cycle: The regular pattern of income variation, where income rises, peaks at age 50 and falls at a retiring age of 65

• This causes inequality in annual income distribution but does not have to mean true standard of living inequality.

• Permanent income: A family’s average income

• The distribution of permanent income is more important than the distribution of annual income.

• Permanent income and consumption are less affected by transitory changes. So, they are more equally distributed.

• Inequality in material standards of living is lesser than inequality in annual income.

Economic Mobility

• Economic mobility depends on luck and work.

• Economic mobility: the movement of people between income classes.

• Temporary poverty is more common than persistent poverty.

• In a 10 year period, 25% of families fall below the poverty line in at least one year.

• In a 10 year period, less than 3% of families are poor for eight or more years.

• Policies try to differentiate these families to combat permanent poverty.

• One way to determine this is by checking the generational economic success.

  • If a parent earns 20% above the average income for their generation, the child will most likely earn 8% above the average income for their generation.

• About 80% of millionaires made money on their own. 20% inherited the fortune.

• Countries with greater inequality than the US have lower mobility. Countries with lower inequality than the US have higher mobility.

20-2 The Political Philosophy of Redistributing Income

• What should the government do about economic inequality?

Utilitarianism

• Utilitarianism: the political philosophy according to which the government should choose policies to maximize the total utility of everyone in society.

• Utilitarians use individual decisions to question bigger issues dealing with morality and public policy.

• Utility: the level of happiness or satisfaction a person receives from their decisions. It is a measure of well-being and is used as a baseline to solve problems.

• The government should maximize utility for everyone in society.

• Redistributing income is based on diminishing marginal utility. A poor person will benefit more from $1 than a rich person. The government should focus on distributing income equally.

• Utilitarians do not expect complete equality because of incentives, and how people respond to them.

Liberalism

• Liberalism: the political philosophy according to which the government should choose policies deemed as just, as evaluated by an impartial observer behind a “veil of ignorance”

• How can society agree fully on the definition of justice when everyone is influenced by their own experiences?

• Maximin criterion: the claim that the government should aim to maximize the well-being of the worst-off person in society

• Liberalism aims to maximize the minimum utility or raise the poverty line.

• It includes transferring the rich to the poor.

• Liberalism also does not expect complete equality. With complete equality existing, incentives disappear and people are no longer ready to work.

• Social insurance: government policy aimed at protecting people against the risk of adverse events

Libertarianism

• Society does not earn any income, only individual members do.

• The government should not take money from individuals to give to others to achieve a different distribution of income

• Libertarians evaluate the economic outcomes by observing the process where these outcomes arrive.

• The equality of opportunities is more important than the equality of outcomes.

• Everyone has the same chance to succeed, but it is not guaranteed that the outcomes are equals

20-3 Policies to Reduce Poverty

• Poverty is one of the most difficult problems that politics has to face.

• Poverty includes homelessness, drug dependence, health problems, teenage pregnancy, illiteracy, unemployment, low educational attainment, and more relations to crime.

Minimum-Wage Laws

• Minimum wage helps the working poor without costing the government, but others view it to hurt those who it intends to help.

• The cost of labor increases and the demand for labor decreases, causing higher unemployment.

• However, it depends on the elasticity of labor demand. Some perceive the demand for unskilled labor as inelastic, while others think it is more elastic.

Welfare

• Welfare: government programs that supplement the incomes of the needy

• Temporary Assistance for Needy Families (TANF) assists families with children but no adult able to support the family.

• Supplemental Security Income (SSI) helps those who are sick and disabled.

• Some perceive these programs create incentives for people to become “needy”.

  • EX: Families breaking up to qualify for absent father welfare programs

Negative Income Tax

• Negative income tax: a tax system that collects revenue from high-income households and gives subsidies to low-income households

• The only requirement is a low income.

• Earned Income Tax Credit (EITC) allows working families to receive income tax refunds greater than the taxes paid during the year.

In-Kind Transfers

• Providing poor people directly is also an option.

• This includes food, clothing, shelter, and toys at Christmas.

• Supplemental Nutrition Assistance Program (SNAP) gives plastic cards that buy food at stars.

• This ensures the poor get what they need most.

Antipoverty Programs and Work Incentives

• Some policies accidentally discourage the poor from working and therefore escaping poverty.

• Welfare, Medicaid, SNAP, and EITC are all programs aimed to help the poor but are tied to a lower family income.

• Some think reducing benefits to poor families as their incomes rise, gradually, is an easy solution to this.

• However, it increases the cost of these programs.

20-4 Conclusion

• Measuring inequality is difficult.

• A lot of nations have a huge difference in inequality.

• Governments can sometimes improve market outcomes but have intended consequences.

• Policies can accidentally reduce the incentive to succeed. There is a trade-off between equality and efficiency.