Chapter 15: Income, Inequality, and Poverty

underground economics

composed of markets in which goods or services are traded illegally

human capital

set of skills workers acquire on the job and through education

productivity

the effectiveness of effort as measured in terms of the rate of output per unit of input

How do economists analyze poverty?

- economists determine the poverty rate by establishing a poverty threshold - the poverty rate in the United States is now slightly higher than it was 50 years ago, despite many efforts (welfare, in-kind transfers, and EITC) to reduce it - Efforts to reduce poverty are subject to the Samaritan's dilemma because they can create disincentives for recipients to support themselves

What causes income inequality?

- five factors can contribute to income inequality: ability, training and education, discrimination, wealth, and corruption. The income inequality ration is sometimes use to measure a nation's level of inequality. Another measure of income inequality is the Gini index. - Economic mobility reduces income inequality over long periods. Due to the life-cycle wage pattern, distinct borrowing and saving patterns over and individual's life smooth out his or her spending pattern. Therefore, in societies with substantial income mobility, the annual income inequality data overstate the amount of inequality.

What are the determinants of wages?

- supply and demand play a key role in determining wages, along with a number of non-monetary determinants of earnings, such as compensating differentials, education and human capital, location, lifestyle, union membership and efficiency wages - economic studies estimate that wage discrimination accounts for less than 5% of wage differences - despite recent gains, women still earn significantly less than men. Occupational crowding partially explains the wage gap. As long as supply imbalances remain in traditional male and female jobs, significant wage differences will persist

union

a group of workers who bargain collectively for better wages and benefits

medicare

a joint federal and state program that helps low-income individuals and households pay for the costs associated with long-term medical care

Gini Index

a measurement of the income distribution of a country's residents

Lorenz Curve

a visual representation of the Gini Index

strike

a work stoppage designed to aid a union's bargaining position

income inequality ratio

calculated by dividing the top quintile's income percentage by the bottom quintile's income percentage

compensating differentials

difference is wages offered to offset the desirability/undesirability of a job

income mobility

is the ability of workers to move up or down the economic ladder over time

Samaritan's dilemma

occurs when an act of charity creates disincentives for recipients to take care of themselves

winner-take-all

occurs when extremely small differences in ability lead to sizable differences in compensation

wage discrimination

occurs when workers with the same ability as others are not paid the same because of their race, ethnic origin, sex, age, religion, on another characteristic

life-cycle wage pattern

predictable effect that age has on earnings over the course of a person's life. Wages peak for people in their early 60s then slowly fall thereafter

poverty threshold

the income level below which a person or family is considered impoverished

poverty rate

the percentage of the population whose income is below the poverty threshold

occupational crowding

the phenomenon of regulating a group fo workers to a narrow range of jobs in the economy

In-Kind Transfers

transfers (mostly to the poor) in the form of goods or services instead of cash

efficiency wages

wage higher than equilibrium wages, offered to increase worker productivity