Bài giảng Microeconomics - Chapter 16 Income Distribution

Income Distribution0What is Chapter 16 about?1I. Recent Trends in InequalitySlide 16 - 22Trends in Income DistributionSince the early 1980s, some countries have seen an increase in inequalityIn the U.S., incomes of the poorest 20% decreased in absolute $ termsIncomes of Bottom 50% have stagnatedGains of growth have gone to top 10% & 1%Income distribution in Canada has followed a different path up to now3Table 16.1Share of Aggregate Income Received by Each Quintile of Families and Unattached Individuals4Fig. 16.1Canada’s Income Distribution before Taxes, 1997: A Lorenz Curve5How much inequality is there?If everyone had the same income, Lorenz = line of perfect equality (OY)If one person had all the income, Lorenz = line of perfect inequality (OPY)Actual societies are in betweenGini index = ratio of area E to OPYCanada: Gini = 0.287USA: Gini = 0.371Finland & Norway: Gini = 0.226PovertyMost common criterion of poverty in Canada:Statistics Canada’s “low income cut-off”Poverty rate:Percentage of population below the poverty lineAverage poverty gap:Average shortfall between actual incomes of the poor and the poverty line (as % of poverty line)Poverty intensity:(Poverty rate) x (Average poverty gap) x (Inequality in poverty gaps)7Fig. 16.2Poverty Box, before Tax and Transfer and after Tax and Transfers, Seniors and Non-Seniors, 19978Wealth InequalityWealth = Stock; Income = FlowIncome – Consumption = Savings = Change in WealthIncome & Wealth are imperfectly correlatedE.g. elderly, new NHL playerWealth Inequality is considerably greater than Income InequalityBottom 30% have approx zero net worthMiddle 60% pay off home mortgage over work lifeTop 10% start to have significant financial assets 1984-1999: nil gains for bottom 50%; top 10% - up 47% to average net worth of $980,0009II. Concerns Raised by Income InequalitySlide 16 - 1010Market DistributionIn Canada, the vast majority of citizens earn income by selling labour servicesSmall number depend on capital incomeCanada has no Inheritance TaxIssue: Inter-generational equality of opportunity or “freedom to bequeath” ?Market systems do not distribute income or wealth equallyVast differences in income levels occur – can they be justified?11Social JusticeJustice in distribution of income has been a central issue for thousands of yearsJohn Rawls – “Justice as Fairness” If rational individuals were to decide on the rules for distributing income:Rules would be seen as fair if they do not confer any advantage to any particular participantSuppose we had to choose from under a “veil of ignorance” on where we will actually end up in the income distribution? “What rules for distribution would rational people choose as fair, if they did not know how they personally would be affected ?”12Rawl’s Fair Distribution“If I didn’t know whether I might end up at the bottom of society, what would I choose as the income of the least well-off?” If most people are risk averse, they would set up rules to maximize the income of the least well-offComplete equality would weaken incentives. Hence, rational people would choose some income inequality in order to increase well being of least well off, by increasing total outputHow much inequality would people choose? Much less than that created by the current market system13UtilitarianismA moral theory in which the right course of action is the one that results in the highest total utility (of all people in society)Income inequality reduces total utilityDiminishing Marginal Utility of Income (Ch. 5)$1 more income produces less utility for a wealthy person than for a poor personRedistribution - taking money from the rich and giving it to the poor – would increase total utilityGain from redistribution diminishes as approach equality14Poverty and Human Rights Sen: Poverty = deprivation of capabilities Move about / appear in public without shameTransportation / clothes require $In general: the actual exercise of substantive freedoms requires some economic resourcesBasic Human Rights (UN - 1948)“food, clothing, housing & medical care”“Right to privacy” & the homeless15Practical Concerns to Limit PovertyEffect of poverty on the nonpoorUnderdeveloped talent of the poor makes the total labour force less productive A need to pay for the medical treatment of illnesses caused by poverty & inequalityMore poverty means more crime for allInequality of Opportunity implies political illegitimacy16III. Methods of Income RedistributionSlide 16 - 1717Methods of Income RedistributionMinimum wagesSocial AssistanceCPP / QPP & GIS for senior citizensNegative income taxA combination of methods18Fig. 16.3The Effect of Minimum Wage Legislation on EmploymentSDabcEmploymentWage $ per hourWminWL1L019Problems with minimum wages as an anti-poverty strategyIndividuals get wages, but it is families that are poor. Minimum wage does not address the family needsSome minimum wage workers are members of affluent households: Help where it is not needed!Some minimum wage workers have families while others do not: Unequal effects of minimum wage!The poorest families may have no one who can work at all: No help from minimum wage!20Social AssistanceIndividuals must pass a needs testNo source of incomeVery few liquid assetsAdvantage of social assistance:Varies with family size and circumstancesDisadvantages of social assistance:Levels are well below poverty lineEffective tax rates of 75% or more if one moves into labour force from social assistance21Negative Income TaxGovernment would pay every citizen a Basic Guarantee (G) each yearFinanced by an additional tax (at rate t )on earned income – so taxes = tYNet Payment = G - tYBreakeven income level (where G = tY )The level of before-tax income at which a family’s tax liability exactly offsets its initial tax credit22Fig. 16.4A Hypothetical Negative Income Tax Program23Persistent Low-Income of most ConcernLow-income not a permanent trap for many peopleFrom ⅓ to ½ exit within one year Percent leaving low-income after one year Canada Germany U.K. U.S. 38.4% 46.6% 41.1% 36.4%Overall, larger % of population exposed to persistent low-income in U.K./U.S. than Germany/Canada Percent of population in low-income all six years during 1990s Canada Germany U.K. U.S. 2.9% 1.9% 4.4% 5.4%24Percent of low-income population accounted for by five groupsPercent of population 16-64Low-income in 2000Low-income over 5 years 1996-2000Percent: members of at least one group25.9%56.2%62.1%By group:Lone parents3.7%10.3%13.1%Unattached 45-645.5%19.0%16.6%Recent immigrants (10 yrs)5.5%11.7%16.6%Work – limiting disability10.7%22.6%26.3%Off-reserve aboriginal3.1%5.1%5.5%Others not in the 5 groups74.1%43.8%37.9%25How much do Incentives matter ?Steeply progressive taxes weaken the incentive to work hard and take risksIncrease tax avoidance and tax evasionBut work incentives are not relevant if:Work is unavailableUnable to work Social Policy has to find a balance26End of Chapter SlidesConcept Maps meant for student printouts follow.Concept Map slides are also available in pdf format.Slide 15 - 2727What is Chapter 16 about?28I. Recent Trends in Inequality29II. Concerns Raised by Income Inequality30III. Methods of Income Redistribution31Summary of Chapter 1632