income inequality © 2003 south-western/thomson learning
TRANSCRIPT
Income InequalityIncome Inequality
© 2003 South-Western/Thomson © 2003 South-Western/Thomson LearningLearning
Why Do Wages Why Do Wages Differ?Differ?
•An Imaginary WorldAn Imaginary World•Compensating DifferentialsCompensating Differentials
•Differences in AbilityDifferences in Ability•Barriers to EntryBarriers to Entry
•Union Wage SettingUnion Wage Setting
An Imaginary An Imaginary WorldWorld
Imagine an unreal world with three Imagine an unreal world with three features:features:•except for differences in wages, all jobs are except for differences in wages, all jobs are equally attractive to all workersequally attractive to all workers
•all workers are equally able to do any joball workers are equally able to do any job
•all labor markets are perfectly competitiveall labor markets are perfectly competitive
An Imaginary An Imaginary WorldWorld
Numberof Executive Assistants
HourlyWage
20
$26
LD
L 2S
L 1S
Numberof Carpenters
HourlyWage
$30
26
LD
L 1S
L 2S
A'
A
(a)
B
(b)
B'
Why Do Wages Why Do Wages Differ?Differ?
Compensating Wage Compensating Wage DifferentialDifferential
A difference in wages that A difference in wages that makes two jobs equally makes two jobs equally attractive to a workerattractive to a worker
Why Do Wages Why Do Wages Differ?Differ?
•Nonmonetary job Nonmonetary job characteristics give rise to characteristics give rise to
compensating wage compensating wage differentials. differentials.
•Jobs considered Jobs considered intrinsically less attractive intrinsically less attractive
will tend to pay higher will tend to pay higher wages, other things being wages, other things being
equal.equal.
Why Do Wages Why Do Wages Differ?Differ?
Cost of Living DifferencesCost of Living Differences
Can cause compensating wage Can cause compensating wage differentialsdifferentials
Why Do Wages Why Do Wages Differ?Differ?
Differences in Human CapitalDifferences in Human Capital
Differences in human capital Differences in human capital requirements can cause requirements can cause
compensating wage differentials.compensating wage differentials.
Why Do Wages Why Do Wages Differ?Differ?
Differences in AbilityDifferences in Ability
Those with greater talent, Those with greater talent, intelligence, or perseverance will be intelligence, or perseverance will be more productive and generate more more productive and generate more revenue for firms, so firms will be revenue for firms, so firms will be willing to pay them a higher wage. willing to pay them a higher wage.
Barriers to EntryBarriers to Entry
In some labor markets, In some labor markets, barriers (e.g., occupational barriers (e.g., occupational licensing laws) keep out licensing laws) keep out
would-be entrants, resulting would-be entrants, resulting in higher wages in those in higher wages in those
markets.markets.
Union Wage SettingUnion Wage Setting
Through an increase in Through an increase in member wages and a member wages and a
decrease in nonmember decrease in nonmember wages, unions create a wage wages, unions create a wage differential between union differential between union
and nonunion markets.and nonunion markets.
Union Wage SettingUnion Wage Setting
Numberof Long-Haul
Truckers
Wage
W 1
W 2
(a)
LD
LS
250,000 300,000
350,000
Numberof Short-Haul
Truckers
Wage
W3
W1
LD
200,000 225,000
LS1
L 2S
A'
A
(b)
B
B'
Discrimination and Discrimination and WagesWages
•Employer PrejudiceEmployer Prejudice•Employee and Customer Employee and Customer
PrejudicePrejudice•Statistical DiscriminationStatistical Discrimination
•Dealing with DiscriminationDealing with Discrimination•Discrimination and Wage Discrimination and Wage
DifferentialsDifferentials
DiscriminationDiscrimination
When a group of people When a group of people have different have different
opportunities because of opportunities because of personal characteristics personal characteristics
that have nothing to that have nothing to do with their abilitiesdo with their abilities
Employer PrejudiceEmployer Prejudice
When prejudice originates When prejudice originates with employers, market with employers, market
forces work to discourage forces work to discourage discrimination and reduce discrimination and reduce or eliminate any wage gap.or eliminate any wage gap.
Employer PrejudiceEmployer Prejudice
Numberof Workers
Wage
W 1
W 3
LD
Sector A(Discriminating)
Numberof Workers
Wage
W 2
W 1
Sector B(Nondiscriminating)
LD
L 1S
L 2S
L 2S
L 1S
Employee and Employee and Customer PrejudiceCustomer Prejudice
When prejudice originates When prejudice originates with the firm’s employees or with the firm’s employees or
its customers, market its customers, market forces forces encourage encourage
discrimination and can lead discrimination and can lead to a permanent wage gap.to a permanent wage gap.
Statistical Statistical DiscriminationDiscrimination
Statistical DiscriminationStatistical Discrimination
When individuals are When individuals are excluded from an activity excluded from an activity based on the statistical based on the statistical
probability of behavior in probability of behavior in their grouptheir group
Dealing with Dealing with DiscriminationDiscrimination
•Pure employer Pure employer discrimination has little discrimination has little impact on labor marketsimpact on labor markets•Some types of Some types of discrimination need discrimination need government actiongovernment action–affirmative action programsaffirmative action programs–stricter enforcement of stricter enforcement of existing lawsexisting laws–stiffer penalties for breaking stiffer penalties for breaking the lawsthe laws
Discrimination and Discrimination and Wage DifferentialsWage Differentials
% % White White MedianMedianMaleMale (Weekly)(Weekly) IncomeIncome IncomeIncomeWhite malesWhite males $748$748100%100%Black malesBlack males 553 553 7474Hispanic MalesHispanic Males 488 488
65 65White femalesWhite females 565 565
76 76Black femalesBlack females 484 484 6565Hispanic females Hispanic females 402 402 5454
Source: BLS, 2001, 3rd quarterSource: BLS, 2001, 3rd quarter
Vicious Cycle of Vicious Cycle of DiscriminationDiscrimination
Current Job Discrimination
Lower Wage
Lower Human Capital
Investment
Unemployment
Lower Skill Level
Less Job Experience
Pre-Market Discrimination
Measuring Income Measuring Income InequalityInequality
•The Poverty RateThe Poverty Rate•The Lorenz CurveThe Lorenz Curve
•Problems with Inequality Problems with Inequality MeasuresMeasures
Nonlabor Income Nonlabor Income
•Property IncomeProperty Income–income from supplying income from supplying capital, land, or natural capital, land, or natural resourcesresources
•Transfer PaymentTransfer Payment–payment that is not payment that is not compensation for supplying compensation for supplying goods or servicesgoods or services
The Poverty RateThe Poverty Rate
Poverty RatePoverty Rate
The percent of families The percent of families whose incomes fall below a whose incomes fall below a
certain minimum - the certain minimum - the poverty linepoverty line
The Poverty RateThe Poverty Rate
Poverty LinePoverty Line
The income level below The income level below which a family is considered which a family is considered
to be in povertyto be in poverty
The Lorenz CurveThe Lorenz Curve
Lorenz CurveLorenz Curve
When households are When households are arrayed according to their arrayed according to their
incomes, a line showing the incomes, a line showing the cumulative percent of cumulative percent of
income received by each income received by each cumulative percent of cumulative percent of
householdshouseholds
The Lorenz CurveThe Lorenz Curve
Gini CoefficientGini Coefficient
A measure of income A measure of income inequality; the ratio of the inequality; the ratio of the area above a Lorenz curve area above a Lorenz curve and under the complete and under the complete equality line to the area equality line to the area
under the diagonalunder the diagonal
The U.S. Lorenz The U.S. Lorenz CurveCurve
Percentage of Households
Percentage of Total Income
20 40 60 80 100
20
40
60
80
100
A
B
Line of Complete Equality
Lorenz Curve
U.S. Lorenz Curves for U.S. Lorenz Curves for Income and WealthIncome and Wealth
Percentage of Households
Percentage of Total Income
or Wealth
20 40 60 80 100
20
40
60
80
100
Line of Complete Equality
Income
Wealth
Problems with Problems with Inequality MeasuresInequality Measures
•Earned Income Versus Earned Income Versus Available IncomeAvailable Income•Income MobilityIncome Mobility
•Careless InterpretationsCareless Interpretations
Income Inequality, Income Inequality, Fairness, and Fairness, and
EconomicsEconomics
Inequality that results from Inequality that results from choices that any of us can choices that any of us can
make is generally regarded make is generally regarded as as fair.fair.
Income Inequality, Income Inequality, Fairness, and EconomicsFairness, and Economics
Numberof Workers
HourlyWage
LD3.00
$4.00
L1S
L2S
(c)Unskilled Labor
Not Covered by Law
Numberof Workers
HourlyWage
LD4.00
$5.15 L
S
N2 N1 N3
(b)Unskilled LaborCovered by Law
Numberof Workers
HourlyWage L
S
20.00
$24.00
L2D
L1D
(a)Skilled Labor