Econ Mod 13-14

Poverty

Measured by the number of people who fall below the poverty line and is based on a percentage of the median income. Poverty can change even when inequality does not move at all.

Quintiles

Measuring inequality by ranking all households by income, from lowest to highest, and then to divide all households into five groups with equal numbers of people. Allows for measuring the distribution of income among the five groups compared to the total.

Nominal wages

Not adjusted for inflation.

Vertical equity

People who earn more should pay at least as much as those who earn less.

Income maintenance programs:

1. Social Security 2. Unemployment compensation 3. Welfare programs

Winner-take-all labor market theory

Argues that the salary gap between the median and the top 1 percent is not due to educational differences.

Human capital

The improvement in labor created by education and knowledge that is embodied in the workforce. The accumulated skills of a worker or workforce. An increase in the amount of human capital that a worker or group of workers has will result in a higher marginal product of labor and a higher marginal revenue product of labor. The higher the marginal product of labor, the greater the demand for labor is. The higher the demand for labor, the greater the wage will be.

Opportunity cost of leisure

Wage

Supply and demand for wages

Workers supply labor and employers demand labor.

High-skilled workers are ______ to computers.

complements

Money income

The dollar amount of income, without regard for purchasing power, inflation, or other factors that may affect an income's value. Includes market income (wages, interest, rent, and profit earned by the household in factor markets, before paying income taxes). Includes cash payments to households by the government.

Temporary Assistance for Needy Families (TANF)

The federal government gives a fixed amount of money to each state. The state can then use the money for almost any program with an antipoverty component.

Near-poor

Those who have incomes just above the poverty line.

The Earned Income Tax Credit (EITC)

A method of assisting the working poor through the tax system. The amount of the tax break increases with the amount of income earned, up to a point.

Monopsony profit maximization

MCL = MRPL and paying the lowest wage rate at which it can attract this quantity of labor.

Amount of labor hired for profit-maximizing firms

MRPL=W. It will hire an additional worker if MRPL>W.

Substitution effect for labor

- A higher wage raises the opportunity cost of leisure and encourages workers to substitute work for leisure, i.e. to work more hours since the rewards are greater. - If the substitution effect dominates the income effect, the quantity of labor supplied increases as wages rise. This means the person is currently on an upward-sloping portion of their labor supply curve. - Generally, the substitution effect is larger than the income effect, and as a result of a wage increase, an individual chooses to work more.

Monopsony labor market

- A labor market with only one employer. - Employer determines wage rate. - MCL>W (In PC, MCL = W). - The marginal cost of a worker is the wage rate plus the increased wage that arises from paying all the workers the higher wage rate. - MRPL is the demand curve. - At monopsony equilibrium, MRPL > W, so firm makes economic profit.

Income effect for labor

- As total income rises, at some point, a worker may decide she can now afford to work less and enjoy leisure more. - If the income effect dominates the substitution effect, the quantity of labor supplied decreases as wages rise.

Minimum wage in a monopsony

- In a monopsony labor market, a minimum wage can increase both the wage rate and employment, and promote efficiency. - If monopsony wants to hire less than the competitive quantity, it must pay the competitive wage because the minimum wage is above the wages workers are willing to work for. - Supply is perfectly elastic (horizontal) along minimum wage line for employment levels up to the competitive quantity and upward sloping for employment levels above the competitive quantity. - To maximize profit, monopsony produces at the competitive quantity/wage.

Minimum wage

- Price floor in the labor market. - An effective/binding price floor in a competitive market generates an excess supply and decreases the quantity sold below the efficient quantity, so it is inefficient.

Market demand for labor

- The horizontal summation of all the firms' demands for labor at each wage. - The total amount of labor all workers are willing to supply at every possible wage. - Because each firm's demand for labor curve slopes downward, the market demand curve also slopes downward. - Possibly backward bending, but in most cases, the substitution effect dominates so there is no backward bend and the graph is upward sloping. - Even if one individual hits the point where their quantity of labor supply will fall if wage rises higher, there are usually many other people willing to supply more labor at those higher wages.

Causes of growing inequality:

1. Changing composition of American households: The pattern of households with two high earners tends to increase the proportion of high-earning households. 2. Shifts in the distribution of wages (unequal labor market outcomes). 3. Unequal ownership of capital.

DWL/CS/PS/Net benefit for monopsonies

1. DWL = EF 2. Consumer surplus = profit = area above the wage paid and below the demand curve, up to the monopsony equilibrium quantity (ABC). 3. Producer surplus = area below wage received and above supply curve (D). 4. The net economic benefit is area ABCD.

Factors that affect labor supply:

1. Population: When population increases, the supply of workers increases. This increase causes the labor supply curve to shift out. 2. Changes in tastes: As more and more people want to work and enter the labor market, the labor supply curve shifts rightward. 3. Opportunity costs: If other job opportunities diminish, the workforce of a given market grows.

Factors that can affect a firm's labor demand curve:

1. Price of the good: - Increases MRPL. - Causes the firm to demand more workers. - Demand pivots out, keeping the same y-intercept. - Causes equilibrium wage and employment level to increase. 2. Technology of the firm: A. Implementation of labor-saving technology (ex: robots): - MPL decreases. - Causes labor curve to shift in. B. Implementation of labor-complementary technology (ex: automated processes): - MPL increases. - Causes labor curve to shift out.

Supplemental Nutrition Assistance Program (SNAP)

A federally funded program in which each month poor people receive a card like a debit card that they can use to buy food (AKA food stamps). The amount of food aid for which a household is eligible varies by income, number of children, and other factors.

Labor unions

A group of workers who have organized in an effort to increase wages and improve working conditions. The workers reduce the supply of labor and cause union wages to increase (and nonunion wages to decrease). Alternative approach: increasing demand (less common and less effective). Unions can promote productivity, which increases marginal product, causing firms to demand more labor.

Medicaid

A joint health insurance program that provides medical insurance for certain low-income people, including those below the poverty line, with a focus on families with children, the elderly, and the disabled. The federal government helps fund Medicaid, but each state is responsible for administering the program, determining the level of benefits, and determining eligibility.

Monopsonist

A single buyer that can purchase from many sellers. A monopsonist could be a firm that constitutes the only potential buyer of an input, or it could be an individual or organization that is the only buyer of a finished product.

Diminishing marginal product of labor

As we hire an additional worker, the additional output created by the worker increases total output, but is smaller and smaller for each additional worker.

Marginal product of labor

Change in quantity / change in labor. Diminishes as the firm hires more labor. Profit-maximizing firm will hire the number of workers such that the wage is equal to the value of the marginal product of labor.

Monopsony vs. perfect competition in labor market

Compared with a competitive labor market, a monopsony pays a lower wage rate and employs fewer workers. Monopsony transfers surplus from workers to employer

Income inequality

Compares the share of the total income (or wealth) in society that is received by different groups. Income inequality can be measured by comparing what share of the total income is earned by each quintile. It can also be useful to divide the income distribution in ways other than quintiles; for example, into tenths or even into percentiles. The U.S. economy has a relatively high degree of income inequality by global standards. Any society with people of varying ages will have a certain amount of income inequality.

Poverty line

Defines the income needed for a basic standard of living. Orshansky proposed that the poverty line be the amount needed to buy a nutritionally adequate diet, given the size of the family, multiplied by three. The poverty line is based on cash income, which means it does not take into account government programs that provide assistance to the poor in a non-cash form, like Medicaid. Any poverty line will be somewhat arbitrary, and it is useful to have a poverty line whose basic definition does not change much over time.

Derived demand

Demand that is derived from the demand for something else. The demands for inputs into the production process are derived from the demand for the goods and services that they produce. Consumers are not directly demanding the labor used, but they are demanding the products that are produced by that labor.

Discrimination in the Job Market

Employers sometimes discriminate against minorities, either because they incorrectly believe minorities are less productive, or because they simply do not want to hire them. The group that is discriminated against ends up with lower wages and less employment.

Individual firm's demand for labor

Equals firm's marginal revenue product of labor, AKA the benefit. Cost of hiring an additional unit of labor is market wage. In a perfectly competitive labor market, the firm can hire as much labor as it wants at the market wage.

Gini ratio

Equals the ratio of the blue area to the red area in the two figures below.

Minimum wage in a competitive market

If the labor market is competitive, a minimum wage above the equilibrium wage will decreases employment to an inefficient level and generate unemployment (i.e. excess supply of labor).

Income

Income is a flow of money received, often measured on a monthly or an annual basis.

Backward-bending labor supply curves

Labor supply curves with negative slope. Occurs when income effect dominates.

Civil Rights Act of 1964

Made it illegal to discriminate on the basis of race, color, religion, sex, or national origin.

Marginal revenue product of labor (MRPL)

Marginal product of labor times the marginal revenue. The benefit to the firm of hiring one more unit of labor. As more labor is hired, MRPL drops. MR falls as more labor is hired, so MRPL drops even more than in perfect competition.

Flat tax

Marginal rates are the same at all levels of income. Often exemptions and standard deductions are proposed at low levels of income. Because of the initial exemptions, the average tax rate rises as income rises, even though marginal rates remain the same on every dollar of income affected by the tax. Therefore, the flat taxes that have been proposed in the U.S. are progressive taxes.

Horizontal equity

People who have equal incomes should pay the same taxes. Example: One individual may receive all of her income in the form of wages. A second individual may receive his income in the form of returns on investments. Although their incomes may be the same, if the tax code treats those forms of income differently, the two individuals might not be taxed the same.

Poverty rate

Percentage of the population below the poverty line in any given year. About one American in nine is below the poverty line.

Safety-net

Programs that the U.S. government has implemented to assist those below the poverty line and those who have incomes just above the poverty line.

Subsidized services

Services provided by the government at prices below the cost of production. Example: primary and secondary public education, state colleges and universities.

Redistribution

Taking income from those with higher incomes and providing income to those with lower incomes.

Income Lorenz curve

The Lorenz curve shows the cumulative share of population on the horizontal axis and the cumulative percentage of total income received on the vertical axis. A more unequal distribution of income will loop farther down and away from the 45-degree line, while a more equal distribution of income will move the line closer to the 45-degree line.

Regressive tax

The amount of tax paid as a percentage of income decreases as one's income increases. Might prevent some people from dropping out of the labor market and choosing leisure over work. Example: Social Security tax.

Progressive income tax

The amount of tax paid as a percentage of income increases as one's income increases. Example: US federal income tax. If an additional dollar means more to a person with low income than a person with high income, a progressive tax would distribute the tax burden based on its impact on taxpayers rather than taxing every dollar equally and ignoring the value of each dollar to its earner.

Proportional tax

The amount of tax paid as a percentage of income stays the same as one's income increases. Example: An equal sales tax on all purchases and contributions to savings accounts.

Total product of labor

The total quantity of output that a firm is able to produce for each level of labor, holding all other inputs constant. Increasing curve that is concave down. For firms to increase production, they need to increase the amount of labor used.

Labor market equilibrium

There is some wage at which the quantity of labor supplied by individuals will just equal the quantity of labor demanded by firms at that wage. Labor markets are more slow than markets for goods because it takes time to learn about open positions and to produce another worker.

Effective income tax

Total taxes paid divided by total income (all sources of income such as wages, profits, interest, rental income, and government transfers such as veterans' benefits).

Value of the marginal product of labor

VRPL = MPL•P. If market is perfectly competitive, MR=P, so MRPL = MPL•P = VRPL. If the firm has market power, MR<P, so MRPL<VRPL

Compensating differential

Wage differences across jobs that reflect the fact that some jobs are less pleasant or more dangerous than others. If one place is more enjoyable to work, the supply will be greater, wages will be lower, and the quantity hired will be greater in that place. Even though the jobs may indeed require similar skills and training, they are not perfect substitutes. If all labor was homogeneous and all jobs were equally attractive, and all labor markets were perfectly competitive, then all wages would be the same.

Wealth

Wealth is the sum of the value of all assets, including money in bank accounts, financial investments, a pension fund, and the value of a home. Must subtract debts.

Progressive tax system

When the rich pay a higher percent in taxes than the poor.

Low skilled workers are ____ to computer technology. This does what?

substitutes. This decreases marginal product of labor and marginal revenue product of labor, so wages and employment of low skilled workers decrease. Causes a wage differential.