ch 15 Income, Inequality, and Poverty
Historically(wages)
1914—Henry Ford: $5.00/day for assembly line workers Daily turnover decreased from 10% to 1% Increase in willing workers; Ford was able to pick out and hire the most productive workers
Union History
1950s One in three jobs was unionized Union wage premiums as high as 30% Today One in eight jobs unionized Wage premiums between 6 and 15% Why the change? Competition from the private sector High labor costs cause firms to use more capital or relocate to nonunion labor areas Unions still common among public sector where cost containment isn't as much of an issue and competition is absent Public school teachers, police, fire, and sanitation workers
Union
A group of workers that bargains collectively for better wages and benefits Able to increase wages by threat of a strike, or work stoppage
equalize wages
All workers would have to have same skills, ability, productivity All jobs must be equally attractive All workers must be perfectly mobile Would that be good or bad? If society's income structure is too equal, the incentive to work is diminished Free riding would occur
Binding arbitration
An impartial third party makes decision in wage and benefit negotiation if workers and employers cannot reach agreement
Other Wage Differential Explanations
Cultural differences Some cultures place more emphasis on education, which leads to higher human capital, higher productivity, and higher wages Location Higher costs of living in cities often translate into higher wages Life cycle Wages rise, peak, and then fall as a worker ages Workers near retirement are less likely to learn new techniques or keep up with technology
In-Kind Transfers
Direct assistance in the form of goods and services Food banks, housing shelters, private charities, health care through Medicaid Why give goods and services rather than cash? Mainly to prevent the misuse of funds Possibility of cash transfers going to alcohol, gambling addictions, or expensive clothes In-kind transfers can be targeted at essential services
shortcomings a serious measurement issue?
Each individual year, probably not Across generations, maybe so Comparing inequality today to 50 years agp would probably violate many ceteris paribus assumptions. Birth rates, tax rates, population age, and technology all change. Need to figure out exactly what causes changes in income inequality; tough to do if many things change
Normative question: what should teacher's unions do?
Ensure decent wages and working conditions for people doing an important job Prevent unfair firings
Legislation to prevent discrimination
Equal Pay Act of 1963 2009 Fair Pay Act—gives employees more time to file a complaint with the government
Compensating Differentials
Extra income that must be paid to perform a job People who do dangerous, stressful, risky, or unpleasant jobs get paid more, ceteris paribus "Fun" jobs may get paid less
Higher levels of income mobility?
Give workers an incentive to improve human capital and work harder Workers have increased change of rewards Poverty may be only temporary
Education and human capital
Human capital are the skills acquired through education and training Generally, more education and human capital lead to higher wages Highly educated or skilled individuals may be more difficult to replace and can command a higher wage
Occupational Crowding
Imagine a community with only two types of jobs: A small number in engineering and a large number in secretarial services. Everyone is equally proficient at both occupations and everyone in the community is indifferent to working either job. Under these assumptions We would expect the wages for engineers and secretaries to be the same Occupational crowding The crowding of a group of workers into a small number of jobs May occur because certain groups may have limited skills or opportunities to enter a larger variety of jobs Results? Supply of labor increases in crowded jobs, decreasing wages for those jobs Supply of labor may decrease in other jobs, increasing wages for those jobs
Implications
Investors less likely to develop a business Short run gains may be achieved at the expense of long run costs People may fight back if the corruption becomes too severe
Corruption
More widespread in less developed countries Bribes may be more valued than innovation and work Assets may not be safe from criminals or government seizure
Welfare
Not a government program but a series of initiatives Monetary payments Subsidies and vouchers Health services, housing Examples: TANF, SSI, SNAP Who receives this? Unemployed, disabled, veterans, dependent children Eligibility is often limited by time and only if income is below a cutoff amount
Samaritan's dilemma
Occurs when an act of charity causes the recipient not to work hard on their own to escape poverty Another example of an unintended consequenceAddressed by Bill Clinton in 1996 as part of welfare reform As part of TANF, he encouraged states to require employment searches as a condition for benefits Also put a five-year maximum on benefits Changed from entitlement to temporary safety net, reducing the samaritan's dilemma
Wage discrimination
Occurs when workers of the same ability are not paid the same as others because of their race, ethnicity, sex, age, religion, or some other group characteristic Today, accounts for 3 to 5% of wage differences. Was a much bigger problem 40 years ago.
Location
People may be willing to accept lower wages to work in areas that are more desirable to live in Areas with a high cost of living will pay higher wages as a compensating differential
Long-term poor
People who lack the skills to advance to higher income levels
Poverty rate
Percent of population whose income is below the poverty threshold
Marginal poor
Poor at a point in time, but have skills to move up the ladder Low earnings are the exception Willing to borrow to make a big purchase Fit well into life-cycle theory model Student straight out of college
Early unions
Protected workers from monopsony employers Classic example: company town, coal mining Established worker protection laws for dangerous jobs
Why does the United States have a higher inequality ratio than Germany or Canada?
Similar poverty rate (26.3%) to other developed countries However, the top earners in the United States earn much more compared to other countries
Unintended consequence
Some believe the unions have become TOO powerful Has become nearly impossible to fire bad teachers Teachers paid to NOT teach because it's cheaper than trying to take on the union and fire them
Earned Income Tax Credit
The EITC is a refundable tax credit designed to encourage low-income people to work more Can lower taxes as much as $6,000 per year Helps over 20 million families, making it the largest poverty-fighting policy Benefits are phased out over higher incomes, so there is no sizeable work disincentive at a specific cutoff The EITC is a form of a negative income tax This is a tax credit that is paid to poor households out of taxes collected from middle- and upper-income taxpayers
Income mobility
The ability to move up and down the economic ladder over time
Poverty threshold
The income level below which a person (or family) is considered impoverished Adjusted each year for inflation Does not include in-kind transfers Does not include geographic cost-of-living differences
Problems with Traditional Aid
There is one glaring problem with assistance for low-income individuals. Many welfare programs create work disincentives! Often when income is increased, many benefits are severely reduced or eliminated People may consciously work less to keep their benefit eligibility The EITC does the best at addressing the work incentive problem by having phased-out assistance
Gender Wage Gap
Today Female workers earn 23% less than males Mostly due to compensating differentials rather than discrimination Explanations Men more likely to work outdoors (road work, construction) or in more dangerous conditions Women leave the labor force more (child or elder care) Trends Wage gap is shrinking Women have a 3-to-2 majority in college degrees
Lifestyle
Wage is not top priority for some individuals Workers of nonprofits, religious organizations, caretakers, musicians, artists, etc.
Efficiency Wages
Wages higher than equilibrium Offered in hopes of increasing worker productivity Reduce shirking, reduce turnover Hopefully efficiency gains are greater than the increase in wage costs
Two conflicting motivations
We want to give generously We want the poor to become self-sufficient
Poverty Policy
Welfare In-kind transfers Earned income tax credit (EITC) Minimum wage
poverty rate has remained stagnant for about 40 years
Why? Gains from growth have accrued to the middle and upper class rather than the poor Many low-income workers continue to lack skills to earn higher wages Solution? Not easy—perhaps long run investment in education and skills aimed at poor Job retraining for structurally unemployed
Today's unions
With increased safety, increased labor mobility, and increased private competition, are unions needed? Some fear that unions have outlived their purpose and remain an inefficient and costly relic of the past Mandatory breaks, worker slowdowns, etc.
Income inequality
exists when some workers earn more than others. Caused by Compensating differentials Discrimination Corruption Differences in marginal product of labor
High-income inequality
occurs in countries that are very poor and less developed This is due to the lowest income people having much less income (compared to low-income individuals in developed countries)
Minimum Wage
previously—a price floor on wages in labor markets However, the same problems can be discussed Low-skill people may be less productive Firms may hire less low-skill workers Minimum wage doesn't guarantee employment
Income inequality numbers
unreliable and misinterpreted Data reflects pretax income, rather than disposable income Does not account for in-kind transfers, (goods and services given to poor rather than cash) Does not account for unreported or illegal income. Black markets may play a larger role in less developed countries, further skewing this. No (monetary) value is placed on goods or services produced at home—child-rearing or growing vegetables
