Income Inequality Flashcards
What are the sources of income inequality?
- Non competing groups
- Occupational differences
- Human capital investment (education)
- Discrimination
- Inheritance
How are non competing groups a source of income inequality?
Mental, physical ability is not the same for everyone.
How are occupational differences a source of income inequality?
The environment of a job can be more risky even if the same skill set is required.
What is it called when you pay someone in a more dangerous job more for the risk they are putting themselves in?
Compensating wage difference (CWD)
How is human capital investment a source of income inequality?
You have to spend time and money investing in yourself. Not all of us are willing to take these costs.
How is discrimination a source of income inequality?
People are blocked from entering certain jobs or paid less for the same job because of race, sexual orientation or gender.
How is inheritance a source of income inequality?
One incentive to wealth is to pass it down to your children, making them more wealthy with the means to get richer.
What is screening?
The requirement that potential employees possess certain credentials, such as a high school diploma.
How does screening affect inequality?
It adds to it.
Why does screening add to inequality?
It is selective of employees not necessarily because they are more productive but because they have more credentials that qualify for jobs that offer higher lifetime earnings.
How do we measure inequality?
Lorenz curve or Gini coefficient
What is the Lorenz curve?
A graphical measure of inequality.
What angle is the perfect inequality line on the Lorenz curve?
45 degrees
What does the perfect inequality line look like on the Lorenz curve?
Vertical on the right
What does perfect inequality mean?
One family owns all
What does the lorenz curve show?
Where we are
What is our goal?
To move the lorenz curve toward the perfect equality line
Why are we going backwards?
- Technology
- Free trade agreements signed
- Abusing the system
How does technology set us back equality wise?
Th educated can make more money whilst the unskilled make the same or lose their job so the inequality increases.
How does free trade agreements being signed set us back equality wise?
This benefits the educated because demand for them will increase. The unskilled workers suffer because demand for them is taken elsewhere.
How does abusing the system set us back equality wise?
More people have children to get benefits and those children end up being worse off.
What is the Gini coefficient?
A numerical measure of equality. It is the area between the Lorenz curve and the 45 degree line divided by the entire area under the 45 degree line.
What is the Gini coefficient always in between numerically?
0 and 1
How does the government redistribute income?
- Income/direct tax
- income maintenance programme
- Subsidised services
What are the three types of income tax?
- Progressive
- Regressive
- Proportional
What is progressive tax?
Rich pay more (increases with income)
What is regressive tax?
Poor pay more than rich
What is regressive tax?
Tax rate stays the same
What is the marginal tax rate?
The extra or additional tax you have to pay when you earn 1 extra dollar.
How do you calculate marginal tax rate?
Change in tax over change in income
What is average tax rate?
How much tax you pay on average
How do you calculate average tax rate?
T/y
What type of tax is sales tax?
Regressive
Advantages of progressive tax?
Redistributes income
Disadvantages of progressive tax?
Less incentive
Advantages of regressive tax?
Does not redistribute income
Disadvantages of regressive tax?
Adds incentive
Disadvantages of proportional tax?
The burden of tax falls heavily on the poor.
Advantages of proportional tax?
Economic status of everyone stays the same proportionally.
Easy to calculate.
No affect on incentives.
What is an income maintenance programme?
A government program that provides financial assistance to those in need so that they can maintain a certain income level.
What is the objective of these methods of redistribution of income?
To bring the lorenz curve as close to the 45 degree line as possible.
With these redistribution methods there is a trade off between?
Efficiency and fairness.
What are the three ideas regarding this trade off?
- Natural Law
- Utilitarian Equality Caw
- Rawlson
What is the natural law idea also called?
MP, leakly bucket
What does the natural law idea believe in?
Inefficiency
Explain the leaky bucket theory?
If you move water from one bucket to a leaky bucket, you will lose water.
In terms of redistributing income what do you lose? (leaky bucket theory)
In the case of redistributing income you lose productivity, money, firms etc.
What is the utilitarian equality case?
Society as a whole will be better off
The MU of rich will go down and MU of poor will go up
What is the Rawlsian theory?
People will ask for efficiency or fairness because in advance they know what the outcome will be for them
If they were operating behind a veil of ignorance they would chose fairness, just to be on the safe side.
What are the two kinds of poverty?
- Absolute standard
2. Relative poverty
What is absolute standard poverty?
When you cannot afford the necessities
food, shelter, clothing, education
What is relative poverty?
When your income is below average in the neighbourhood/country you’re in.
How can you solve poverty?
- Economic growth
2. Equal distribution of income (tax)
What is income?
flow of economic payments in the form of wages, rent, interest and profit over a period of time
What is wealth?
Stock of economic profit, owned and measured at a point of time: dependent on income.
