1. Chapter 6: Poverty and Discrimination

2. Poverty Kind: 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

3. Poverty Threshold Level Family SizeThreshold 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

4. Poverty & Income Distribution Percent of Families% of IncomeCum. % of Income Lowest 204.2 Second 209.914.1 Third 2015.729.8 Fourth 2023.052.8 Highest 2047.2100.0

5. Lorenz Curve of Income Distribution 20406080100 4.2 14.1 29.8 52.8 100 % of population % of income Area M Area N L-curve Line of equality

6. 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.

7. Determinants of Income Differential Brains & Brawn Skill levels & creativity Market size & risk taking Capacity utilization = ratio of actual earnings to potential earnings

8. Determinants of Wealth Differential Inheritance: having rich parents Luck: being at the right place at the right time Propensity to accumulate: save and invest

9. Welfare Assistance Aid to Families with Dependent Children Temporary Assistance to Needy Families Welfare-to-work transition Medicaid Child care Housing assistance Income support

10. 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

11. $Tax credit $Earnings 9,390 12,260 30,095 EITC in 1998 3,756

12. Negative Income Tax Government guarantees a minimum level of income Government determines a break-even level of income Subsidies are given to families with income less than break-even level of income Subsidies are reduced by a given percentage as families earn income Taxes are paid by families with income more than break- even level of income

13. NIT Proposal Break-even Guaranteed Income Tax 0 _ + Subsidies received Taxes paid $Income $Tax liability

14. Discrimination Definition: –Equals are treated unequally –Unequal are treated equally Sources: –Monopoly power in hiring labor –Desire to discriminate against others

15. Economic Discrimination Wage discrimination Employment discrimination Price discrimination Occupational segregation

16. 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%

17. Employment Discrimination Workers are not hired (or hired) for non-economic reasons such as gender, race, and/or ethnicity

18. 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

19. 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)

20. Individual Cost of Discrimination Loss of employment & income Unable to find jobs and get loans Find jobs in segregated markets Pay higher prices

21. 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

22. PPC & Cost of Discrimination Good X X D B C Good Y Y D(X,Y): combination with discrimination B and C: combinations without discrimination

23. Policies to Reduce Discrimination Education Legislation Government subsidies Reduce market imperfections End occupational segregation