1. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 1 Chapter 18 Inequality and Poverty

2. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 2 Learning Objectives Examine data on the distribution of household and individual incomes in Australia and changes in this distribution during the last two decades. Develop an understanding of the use of Lorenz curves and Gini coefficients in describing the degree of income inequality in our society.

3. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 3 Learning Objectives (cont.) Describe the effects of taxes and transfer payments on the extent of inequality in the distribution of income and poverty in the Australian economy. Discuss the sources of an unequal distribution of income, the cases for and against income inequality, the trade-off between equality and efficiency, and major criticisms of the welfare system.

4. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 4 Learning Objectives (cont.) Identify the groups in which poverty is concentrated and trends in the poverty rate over time, and outline the major types of social security programs in Australia.

5. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 5 Income Inequality in Australia Distribution of income – the allocation of economic welfare between households, individuals, regions or nations Trend in Household income 1999–2000 – Median gross household income was $538 – 20% of households received less than $231 per week – Top 20% received more than $1103 per week

6. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 6 Trend in Income Inequality: Australia Considerable inequality in (pre-tax) income Inequality has risen over the last two decades Inequality increased most in the top quintile In 1999–2000, only 4.5% of income share accrued to the lowest quintile, and 46.7% to the top quintile

7. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 7 The Lorenz Curve 10 20 30 40 50 60 70 80 90 100 0 Cumulative per cent of population Cumulative per cent of income a b c d e Lorenz Curve Perfect equality

8. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 8 The Gini Coefficient The ratio representing the area between the Lorenz curve and the line of perfect equality relative to the area between the vertical and horizontal axes and the line of perfect equality, in the graph of the Lorenz curve

9. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 9 Problems in Measuring Observed Income Inequality Factors that affect observed income inequality: Taxes Transfers Non-monetary or in-kind transfers Time

10. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 10 Causes of Income Inequality Differences in ability Education and training Job tasks and risks Property ownership Market power Luck, connections, misfortune and discrimination

11. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 11 Equality versus Efficiency Arguments for equality – income inequality impedes the maximisation of consumer satisfaction – inequality impairs productivity – inequality fosters non-economic inequalities

12. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 12 Equality versus Efficiency (cont.) Arguments for inequality – conducive to a high rate of saving, a rapid rate of capital accumulation and therefore rapid economic growth – essential as an incentive to work and invest – essential to a viable, progressive society

13. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 13 Equality versus Efficiency (cont.) The trade-off between equality and efficiency – The recognition that the move towards egalitarianism in the distribution of income will have adverse effects on incentives and hence on economic efficiency

14. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 14 Economics of Poverty Who are the poor? – defined as those who fall below an absolute poverty line – poverty in Australia is a relative concept The ‘invisible’ poor: poverty in Australia is largely invisible – the aged and the infirm – hidden in the big cities, e.g. sole parents – large proportion of poverty is located in the rural areas

15. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 15 Discrimination and Poverty Economic discrimination – inferior treatment with respect to hiring, occupational access, promotion etc. of female or minority workers Dimension of discrimination – wage discrimination – employment discrimination – occupational discrimination – human capital discrimination Cost of discrimination – Foregone production

16. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 16 Social Security System Age, sickness and disability pensions – age pensions – disability support pensions – sickness allowance Unemployment benefits

17. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 17 Social Security System (cont.) Family allowances and supporting parents benefits – family allowance supplements – sole parent pensions Medicare

18. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 18 The Welfare Mess: Criticism of Australian System Administrative inefficiencies Abuses and inequities – Fraudulent claims and inefficient handling of programs Incentives – Many programs impair incentives to work

19. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 19 Next Chapter: Trade, Free Trade and Protection