ECON 2302: CH. 15 Study Guide

Suppose that income earners in the top 20% of a certain nation earn an average of $120,000 per year and that the income inequality ratio is 8. How much do workers in the bottom 20% earn in a year, on average?

$15,000 $120,000 divided by 8 equals $15,000. Inequality ratio = (Top quintile's income/Bottom quintile's income)

The Earned Income Tax Credit, established in _____, is designed to help lower-income workers. It gives them _____ to work more, because they must _____ income to get the credit. As their earnings go up, the credit is phased out _____ rather than _____.

1975, an incentive, earn, gradually, abruptly

In the 500-citizen nation of Blek, 100 citizens earn $5,000 per year; 90 citizens earn $8,000 per year; 110 citizens earn $12,000 per year; and 200 citizens earn $40,000 per year. If the poverty threshold is $9,500, what is the poverty rate in Blek?

38% (100+90/500) = 38%

One year, a family earns $25,000 and receives $8,000 in cash assistance from the government. The next year, an additional family member finds part-time work and earns $4,000, so now the family's total income is $29,000. Because of the increased income, cash assistance from the government drops to $5,000. The reduction of benefits that resulted from the additional family income effectively feels like a tax of what percentage?

75% The family earned $4,000 more, but their benefits were reduced by $3,000. Therefore, the effective tax equals (-$3000/+$4000)×100 or 75%. The "tax," which consists of money that essentially has to be given up, creates a major disincentive to the second family member continuing to work.

The following graph shows the poverty rate for U.S. households from 1960-2017. Select the area of the graph representing the four-year period after which Congress passed the Equal Opportunity Act and a number of other measures to combat poverty.

Click area right before "1970" The rate fell from 19% when the War on Poverty began in 1964, to about 13% four years later.

The table below summarizes the income mobility of America's highest and poorest quintiles between 1970 and 2005. By clicking on the image, select the two 10-year periods in which both the highest and the poorest quintiles had the greatest income mobility.

Click on "1975-1985" and "1980-1990" This was a time of comparatively high mobility.

The following pie graph shows the distribution of income in the United States (by quintile). Click the two pieces of the pie that were used to determine the income inequality ratio in the United States for the year 2017.

Click on pieces labelled "Top fifth 51.4%" and "Bottom fifth 3.1%" This piece of the pie represents the percentage of all income earned in the United States by those households in the highest earnings quintile (51.4%). The inequality ratio is calculated then by dividing the percentage of income earned by households in the top fifth (51.4%) by the percentage of income earned by households in the bottom fifth (3.1%). So the inequality ratio is 51.4/ 3.1, which equals 16.5.

Which items are common bases for bias-related wage discrimination?

Common Bases: ~ beauty Attractive people earn perhaps 10% more than they would if they were merely average looking. However, in some professions, being beautiful is simply a form of human capital that makes workers more productive. ~ gender In the United States, the median weekly earnings of females is 19% less than their male counterparts. Not Common Bases: ~ education Paying workers differently based on their educational qualifications is not a form of bias. ~ experience It is reasonable to pay an experienced worker more than an inexperienced one. ~ willingness to be exposed to danger Higher wages for dangerous jobs are an example of a compensating wage differential.

Twenty people live on a tiny, privately owned island: 10 groundskeepers and 10 gamekeepers. Gamekeepers receive a higher salary than groundskeepers. Which of the following events would tend to decrease the island's income inequality ratio (as traditionally defined)?

Correct Answer(s): ~ All 10 gamekeepers retire. After the gamekeepers retire, the top and bottom quintiles will each consist of two groundskeepers. The inequality ratio will be 1. ~ Groundskeepers get a raise, while the gamekeeper salary remains the same. The bottom income quintile consists of groundskeepers. If their earnings increase, the income inequality ratio will decrease. Incorrect Answer(s): ~ Gamekeepers get a raise, while the groundskeeper salary remains the same. The top quintile consists of gamekeepers. If their earnings increase, the income inequality ratio will increase. ~ One gamekeeper switches to groundskeeping. Given the initial conditions, one person switching jobs would impact neither the earnings of the top income quintile nor the bottom income quintile (even though it would impact the top half of earners). ~ One groundskeeper switches to gamekeeping. Given the initial conditions, one person switching jobs would impact neither the earnings of the top income quintile nor the bottom income quintile (even though it would impact the bottom half of earners).

Josephine is a savvy restaurant owner who is striving to improve her business. She takes several actions to raise productivity and expand her customer base. Which of the following actions are examples of efficiency wages?

Correct Answer(s): ~ Hoping to reduce turnover and thereby increase productivity, Josephine decides to raise her cooks' wage from the market rate of $15/hour, which is what her competitors pay, to a rate of $20/hour. Efficiency wages are higher than equilibrium wages offered to increase worker productivity. For instance, higher than equilibrium wages may reduce turnover, which over time increases workers' average amount of on-the-job experience. Incorrect Answer(s): ~ Josephine decides to sell alcohol at her establishment, meaning her servers must now be age 21 or older and, therefore, many of her servers must be replaced. While her original servers were paid an average of $8/hour, her new servers are paid an average of $9/hour. The term "efficiency wages" only applies when higher than equilibrium wages are offered to increase worker productivity. Since over-21 servers can work at any restaurant, it may be the case that under-21 servers are paid less due to occupational crowding. ~ Hoping to increase her restaurant's popularity, Josephine decides to stay open later than any of her competitors. However, she is unable to find any cooks willing to work the late shift for $15/hour, so she raises her offer to $20/hour. The term "efficiency wages" only applies when higher than equilibrium wages are offered to increase worker productivity. Paying workers more to incentivize them to work at night is an example of a compensating differential. Employers always have the option to hire workers at the equilibrium wage. However, employers may choose to pay workers a higher wage in order to incentivize productivity.

What are some criticisms of in-kind assistance programs for those in poverty?

Correct Answer(s): ~ In-kind assistance is inefficient. One argument for cash assistance is that people know what they need and therefore can make better buying decisions for themselves than anyone else can on their behalf. ~ It is paternalistic and disrespectful. The whole point of in-kind transfers is to take financial decisions out of the hands of those the programs aim to help. Incorrect Answer(s): ~ Assistance comes in a limited range of forms. In-kind transfers can take the form of food, medical care, or lodgings—in short, any essential good or service. ~ The assistance can be used for undesirable purposes. With cash assistance, there is a concern that the money will be spent on things like drugs and alcohol instead of on necessities like food and rent.

Which of the following are potential sources of income inequality?

Correct Answer(s): ~ compensating differentials Sources of variation in wages are also sources of income inequality. ~ corruption In societies where corruption is common, working hard and being innovative is not enough to obtain economic success. ~ life-cycle wage pattern Even if all workers of the same age earn the same wage, income inequality would exist as long as income varies with age. ~ unequal access to education Human capital is a determinant of wages, so unequal access to education will yield income inequality. ~ winner-take-all competitions Sources of variation in wages are also sources of income inequality. Incorrect Answer(s): ~ ceteris paribus This is a phrase meaning "all other things being equal." ~ high cost of energy Although food and energy costs may fit into a more general discussion of inequality, living costs do not enter into calculations of income inequality. ~ income mobility Economic mobility often reduces inequality over long periods of time. Perfect equality would require all jobs to be equally attractive and all workers (of all ages) to be equally skilled and perfectly mobile.

Which workplace innovations did Henry Ford introduce in 1914?

Correct Answer(s): ~ efficiency wages By paying higher wages than his competitors, Ford greatly reduced worker turnover. ~ shortened working hours Shortening the workday from 9 hours to 8 enabled Ford to add an extra shift. Incorrect Answer(s): ~ cooperation with unions The heyday of unions came later, in the 1940s and 1950s. ~ equal pay for men and women In 1914, the idea of equal pay for men and women had not yet gained widespread support.

What are the causes of persistent poverty in the United States since the 1960s?

Correct Answer(s): ~ lack of skills in low-income workers Improving the poverty rate in the United States will require a long-run investment in education programs targeted at the poor and retraining programs designed to help unemployed workers. ~ technology-based automation of routine workplace tasks Technological advancements have reduced the demand for many low-skill jobs. Incorrect Answer(s): ~ absence of necessary economic growth Although there have been periods of stagnation, over the last 40 years U.S. economic output has roughly doubled. ~ failure of government to enact legislation targeting poverty Starting with the Equal Opportunity Act of 1964, there have been many government measures aimed at fighting poverty. Most of the gains from economic growth in the last four decades have gone to middle- and higher-income families rather than to the poor.

Which of the following are problems in making accurate assessments of income inequality in the United States?

Correct Answer(s): ~ no accounting for in-kind transfers Noncash assistance to low-income households acts as a form of income. ~ no accounting for the underground economy Income kept off the books does not make it into the data being analyzed. ~ use of pretax rather than disposable income True income inequality is more about the money people are actually able to spend than about the dollar amounts on their paychecks. Incorrect Answer(s): ~ lack of payroll records In the digital age, lack of records is not a big problem. ~ no income data available Several government agencies keep close tabs on people's incomes, including the Bureau of Labor Statistics and, of course, the IRS.

Consider income data for three fictional nations. In Smithland, the top half of earners make $100,000 per year, while the bottom half make $20,000. Hayektopia's bottom half also make $20,000 per year, while its top half make $200,000. In Englestan, everyone earns $45,000 per year. Place these three nations in order of inequality ratio, lowest to highest.

Englestan, Smithland, Hayektopia Although the lowest earners in Smithland and Hayektopia earn the same amount, the greater earnings of Hayektopia's top earners results in a higher income inequality ratio.

Helena owns a clothing boutique and pays each of her four employees a base salary of $3,000 per month. In addition, Helena gives a $3,000 bonus to the employee with the highest sales that month. This is an example of efficiency wages.

False This is an example of a winner-take-all competition, since small differences in sales can yield a very large difference in compensation.

Welfare is a government program that provides cash assistance to the poor.

False Welfare is not a single program but a collection of initiatives, and not all welfare-related assistance is in the form of cash.

Which groups in the United States disproportionately feel the incidence of poverty?

Group(s) in the United States That Disproportionately Feel Poverty: ~ children The most recent census found 19% of children under the age of 18 living in poverty. That is almost 1 in every 5. ~ Hispanic citizens According to the findings from the most recent census, 22% of Hispanic citizens live below the poverty threshold. That is more than 1 in 5. ~ households headed by single females The most recent census revealed that of households of all races headed by a single female, 31% fall below the poverty threshold. That is almost 1 in 3. Not a Group in the United States That Disproportionately Feel Poverty: ~ households headed by married couples Only 6% of households headed by married couples fall below the poverty threshold. ~ the elderly Compared with other age groups, the elderly are statistically less likely to be poor. The most recent census found only 9% living in poverty. ~ white citizens White citizens are less likely to live in poverty than Asian, Hispanic, or Black citizens. Age also correlates with poverty. Children are more at risk than adults in general, and young-to-middle-aged adults are slightly more at risk than the elderly.

Using the data shown by the 2018 household income table below, place the numbers onto the corresponding areas of the graph to identify the key points on the Lorenz curve. U.S. 2018 Quintile | Household Income Share (%) | Cumulative % of Houshold Bottom fifth | 3.1 | 3.1 Second fifth | 8.2 | 11.3 Middle fifth | 14.3 | 25.6 Fourth fifth | 23 | 48.6 Top fifth | 51.4 | 100 I. 20 on X-Axis II. 40 on X-Axis III. 60 X-Axis IV. 80 X-Axis V. 100 X-Axis

I. 3.1 This point plots income earned by the poorest 20% of households. II. 11.3 This point plots income earned collectively by both the bottom fifth and the second fifth. III. 25.6 This point plots income earned collectively by the bottom fifth, second fifth, and the middle fifth. IV. 48.6 This point plots the cumulative income share of all but the top 20%. V. 100 The end point of the Lorenz curve will always be plotted in the upper right corner of the diagram, as this represents the obvious fact that 100% of household income will be distributed to 100% of the population.

Using the data shown by the 1968 household income table below, place the numbers onto the corresponding areas of the graph to identify the key points on the Lorenz curve. I. 20 on X-Axis II. 40 on X-Axis III. 60 X-Axis IV. 80 X-Axis V. 100 X-Axis

I. 4.2 This point plots income earned by the poorest 20% of households. II. 15.3 This point plots income earned collectively by both the bottom fifth and the second fifth. III. 32.9 This point plots income earned collectively by the bottom fifth, second fifth, and the middle fifth. IV. 57.4 This point plots the cumulative income share of all but the top 20%. V. 100 The end point of the Lorenz curve will always be plotted in the upper right corner of the diagram, as this represents the obvious fact that 100% of household income will be distributed to 100% of the population. By cumulatively summing the household income quintiles, beginning with the bottom fifth, we get the data needed to trace out key points along the Lorenz curve.

The following graph illustrates income distribution. Drag the labels onto the graph to determine the Gini index. I. Numerator II. Denominator

I. B The area between the green line of equality and the orange Lorenz curve represents the amount of household income that is not equally distributed. Hence, it is included as the top numerical value in the Gini index ratio. II. B and C The ratio of area B, to both areas B + C, is then multiplied by 100 to obtain the Gini index. The closer the value of the index is to zero, the greater the equality. The closer the value of the index is to 100, the greater the inequality. The area bounded by the orange Lorenz curve and the horizontal axis measures actual household income distribution by all of the quintiles. Therefore, this must be included as part of the denominator in the Gini index ratio. The area between the green line of equality and the orange Lorenz curve represents the part of all household income that is not equally distributed. It must be included as part of the bottom numerical value in the Gini index ratio.

The table below lists inequality ratios for several nations. Complete the table by matching country names to their respective inequality ratios. I. 5.4 II. 9.9 III. 16.9

I. Japan Although Japan and the United States have similar poverty rates, top-quintile earners in the United States earn more than their Japanese counterparts. II. United States In the United States, the top fifth of income earners makes 51.4% of all income, an amount approximately equal to the combined income of the four remaining quintiles. III. Brazil In Brazil, as in many less-developed nations, the poorest quintile is extremely poor.

Match each program with the appropriate description. I. Financial assistance to families with children II. A floor on labor prices III. A tax credit for the working poor IV. In-kind healthcare assistance

I. Temporary Assistance to Needy Families (TANF) Federal and state rules limit the time during which a family can receive this assistance. II. minimum wage The minimum wage is the lowest hourly wage rate that firms may legally pay their workers. III. Earned Income Tax Credit (EITC) The EITC is designed to encourage low-income workers to work more. IV. Medicaid In-kind assistance is not cash. It cannot be used for anything other than the designated purpose.

Match each phrase to its definition or description. I. the top quintile's income divided by the bottom quintile's income II. the income level below which a person or family is considered impoverished III. a 20%-sized portion of a population IV. a graphical representation of income inequality in an economy V. a quantitative measure of inequality, based on comparing two areas in a graph

I. income inequality ratio II. poverty threshold III. quintile IV. Lorenz curve V. Gini index

Match each of the following terms with the phenomenon it best describes. I. A worker sees his earnings steadily increase for 30 years, and then his earnings steadily decline for the rest of his career. II. A local hospital pays all doctors the same salary. Likewise, all nurses are paid the same salary. Yet the average female at this hospital is paid less than the average male. III. A software company tries to become more profitable by raising its wages above those of its competitors. IV. A group of employees induces a work stoppage as a means for negotiating higher wages.

I. life-cycle wage pattern If a worker's experience follows the life-cycle wage pattern, his wages will peak near the middle of his career. II. occupational crowding When one group of workers is relegated to a narrow range of jobs, those jobs may pay less than other jobs in the economy. As a result, occupational crowding can lead to low average wages for a group. III. efficiency wages Employers always have the option of paying equilibrium wages. If an employer chooses to pay efficiency wages instead, he or she must expect to make a higher profit by doing so. IV. strike A union uses the threat of a strike as a source of bargaining power when negotiating with employers.

Match each nonmonetary wage determinant to the corresponding situation. I. Organized labor enables electricians to make more money for the same work. II. Arianna, a truck driver who spends long periods away from home and family, earns more than Maria, a journalist who telecommutes at home two days per week. III. Geoffrey was recently hired by a coffee shop that pays $13/hour for the same work that other shops pay $10/hour. He has gotten better about showing up on time because he is afraid of losing this job. IV. After three years in the plastering business, Ricky got a raise based on his experience and his demonstrated skill at his trade.

I. unionization Major corporations tend to use union workers more often than small independent shops. II. compensating differential Compensating differential refers to a wage difference that reflects differences in desirability between two jobs. III. efficiency wages Efficiency wages refers to the practice of paying more than the market price in order to obtain above-average performance from employees. IV. human capital Ricky's acquired expertise is a form of human capital. His employer does not want to lose him to another shop.

Which items are included among the nonmonetary determinants of workers' wages?

Included: ~ cost of living Cost of living is a major aspect of location. ~ efficiency wages Some employers choose to pay workers a little extra in order to boost morale and reduce employee turnover. ~ education Education is a way of acquiring work-related skills, the sum of which is called human capital. ~ lifestyle Some types of work promote workers' happiness and values more than other jobs do. Not Included: ~ gender discrimination The gender-based wage gap is a cultural phenomenon not based on principles of economic theory. Gender-based pay discrimination arises from social or cultural customs and norms in a way that has nothing to do with differences in jobs, worker ability, compensating differentials, or other nonmonetary factors. ~ political affiliation Although union membership is a determinant, membership in a political party is not.

Choose the statement that addresses the impact of minimum wage laws.

They give employers an incentive to hire fewer workers. By increasing the cost of labor, minimum wage laws encourage employers to look for ways to get by with fewer workers—for instance, through greater use of automation. While raising the minimum wage may benefit some low-skilled workers with slightly higher paychecks, economists do not consider this an effective solution to address the needs of the long-term poor, or as a means of reducing overall poverty rates.

Researchers have inferred that "wage discrimination" accounts for less than 5% of differences in wages among individuals. Which of the following are unambiguous examples of wage discrimination?

Unambiguous Example(s) of Wage Discrimination: ~ A fast-food restaurant owner pays gay employees less than their heterosexual counterparts because he is morally opposed to the former's sexual orientation. Wage discrimination occurs when workers of the same ability are not paid the same because of some group characteristic, such as sexual orientation. ~ The owner of an office building pays the janitor with mental disabilities a lower wage rate than other similarly skilled, trained, and experienced janitors on staff without a disability. Federal law protects all employees from such overt discrimination based on sex, race, age, color, creed, national origin, religion, or even based on disability, as is obviously the case here. Not an Unambiguous Example of Wage Discrimination: ~ A male financial analyst makes almost three times as much as his female secretary. Wage discrimination occurs when workers of the same ability are not paid the same because of sex or some other group characteristic. However, since this example considers two distinct professions, we cannot assume that the two workers are of equal ability. ~ A modeling agency pays the highest salaries to the best-looking models because its marketing data show that advertisements featuring the best-looking models are the most effective at generating new sales. Since physical appearance contributes to the effectiveness of an advertisement, the best-looking models have the highest productivity, and it is not necessarily a case of wage discrimination if they are paid the most.

Unions, which have market power over the supply of labor, can threaten strikes as part of negotiating employment contracts on behalf of union members. What is the effect of unions having this power?

Union wages are generally higher than nonunion wages. Early studies found that union workers earned about 30% more than nonunion workers, whereas more recent empirical studies estimate the wage premium to be between 10% and 20%.

Using the data presented in the following table, place the following samples of people in order from the highest poverty rate to the lowest.

a Black teenager who lives in a female-only headed household, an Asian adult who lives in a male-only headed household, an elderly white married couple When we combine at-risk groups, poverty rates can exceed 50%, even with a very strong economy. The poverty rates for Asian American individuals are significantly lower than other minority groups, but when faced with the additional challenge of only one head, whether male or female, rates will be somewhat higher. We can expect rates for the least disadvantaged combination to be the lowest. In 2017, the overall poverty rate for all U.S. households was a little over 12%.

Which of the following four people would economists be most likely to identify as "long-term poor"?

a custodial worker whose income and responsibilities as a single parent make it impossible to return to school Even if this worker is gifted, they may never be able to rise out of poverty on account of their family situation.

Which of the following age groups earns the highest median salary?

ages 55-64 On average, though late-career workers have fewer incentives to become familiar with the newest technologies, these workers often earn the highest median salaries.

When an act of charity creates _____ to rely on others and not to be _____, that is called a _____. Bill Clinton addressed this concern in the mid-1990's when he changed the federal assistance payout structure and encouraged states to require _____ as a condition for receiving aid.

an incentive, self-sufficient, Samaritan's dilemma, employment searches The Samaritan's dilemma can be avoided by linking assistance to incentives that encourage future self-reliance. One example is microloan arrangements that use peer pressure to encourage loan repayment.

According to a recent study, the median earnings of nonmetropolitan workers in the United States was 24% less than the median earnings of metropolitan workers. What is the most likely explanation for this phenomenon?

cost-of-living adjustment To put it another way, nonmetropolitan workers earn about 76% of what metropolitan workers earn, due to a lower cost of living.

In the United States, the share of jobs that are unionized has _____ from about _____ 60 years ago to about _____ in the present. For public sector jobs, however, membership in unions has _____.

declined, one out of three, one out of eight, risen Overall membership in unions has steadily declined in recent decades, whereas public-sector membership has risen to almost 40%.

Differences in human capital (for example, _____) lead to differences in individual earnings. According to a recent Current Population Survey, the median usual weekly earnings of 25-and-over workers with only high school diplomas were _____ the earnings of a worker with a Master's degree. The _____ marginal product of workers that have invested heavily in their own human capital helps to create high demand for their skills.

education, approximately half, higher The median usual weekly earnings for workers with a high school diploma was $730. This is about half the $1,434 earned by the median worker with a Master's degree.

In 2018, the median earnings of female workers in the United States were 19% lower than that of their male counterparts. Which of the following factors is least likely to explain this wage gap?

efficiency wages Efficiency wages occur when an employer offers higher than equilibrium wages to all their employees in order to increase worker productivity. So these wages cannot explain gender pay differences.

The _____ line represents perfect income _____. By examining the other two curves, we can conclude that income inequality in the United States _____ from 1968 to 2018.

green, equality, increased The more the Lorenz curve bows away from the straight green line, the higher is the Gini index and the greater is the income inequality. The more the Lorenz curve flexes away from the straight green line, the higher is the Gini index and the greater is the income inequality for that year.

Prior to the coronavirus outbreak in 2020, food delivery drivers, grocery store clerks, and cashiers at box chain stores were typically considered to be in low-risk occupations. However, once the virus hit, many states worked to enact laws to increase pay for these "essential workers." This is an example of _____ pay, which is a(n) _____ of wages based on the characteristics of the _____.

hazard, compensating differential, job Target, Wegmans, and Costco offered their employees hazard pay and/or bonuses during the COVID-19 outbreak as a way to recognize the work of essential workers who faced greater risk. Hazard pay can be viewed as an example of compensating differentials, where some employers must pay more due to the unpleasant or risky nature of the job.

One statistic economists use to measure income inequality is the _____, which measures the share of pretax income earned by the _____ income quintile divided by the _____ income quintile. However, this measurement can sometimes be misleading. For example, even though the United States has a poverty rate that is quite similar to that of Japan, the U.S. has a markedly higher inequality ratio because there are _____ high income earners in the U.S. than Japan.

income inequality ratio, highest, lowest, more Not only can income inequality numbers be misinterpreted, but they can often be unreliable. The income inequality ratio leaves out the effects of taxes as well as in-kind transfers.

A local security company just hired three guards. The three positions have identical qualifications and duties. However, ~ Position A is at an extremely foul-smelling water-treatment facility. ~ Position B is at a sweet-smelling bakery that is known to give free donuts to its guards. ~ Position C is at a slightly dark and dirty office building. Keeping in mind the concept of compensating differentials, place the following jobs in the most plausible order, from lowest paid to highest paid.

position B, position C, position A Since we assume no differences in responsibilities or qualifications, differences in compensation must reflect differences in desirability of the position.

The Census Bureau tracks the _____, which is the percentage of the country's _____ whose income is below the poverty threshold. The threshold is adjusted every _____ to keep up with inflation.

poverty rate, population, year The poverty rate declined sharply during the 1960s and since then has stayed between 11% and 16%.

Place the following common occupations in order by share of female workers, from most common to least, according to the 2017 U.S. Census Bureau data.

registered nurses, maids and housekeeping, accountants and auditors, software developers, driver/sales workers and truck drivers These positions are still heavily female-dominant today, despite the fact that more males are entering health care services. 88.8% of registered nurse positions are filled by females. 84.3% of maid and housekeeping positions are filled by females. 58.9% of accountant and auditor positions are filled by females. Only 18.4% of software developer positions are filled by females. Only 4.9% of driver/sales workers and truck driver positions are filled by females. Women's earnings as a percent of men's in all of these examples range from a low of 73% to a high of 91%.