INEQUALITY, POVERTY, AND
REDISTRIBUTION
ECO 2023
Principles of Microeconomics
Dr. McCaleb
Inequality, Poverty, and
Redistribution
1
TOPIC OUTLINE
I.
Differences in Earnings
A.
B.
Sources of Earnings Differences
Employment Discrimination
II. Income Inequality in the United States
III. Income Distribution and Economic Status
IV. Poverty and Income Redistribution
A.
B.
C.
Measuring Poverty
Characteristics of the Poor
Poverty and Public Policy
Inequality, Poverty, and
Redistribution
2
Differences in Earnings
Inequality, Poverty, and
Redistribution
3
DIFFERENCES IN EARNINGS
 Sources of Earnings Differences
Earnings are not the same as income
Earnings usually refers to the money income people receive as
compensation for their labor services.
Earnings are not the same thing as income. Income includes not only
compensation for labor services but also rents, interest, dividends,
and profits.
Earnings from labor make up over 70 percent of total income.
Therefore, differences in peoples’ earnings have a significant impact
on the distribution of income.
Inequality, Poverty, and
Redistribution
4
DIFFERENCES IN EARNINGS
 Sources of Earnings Differences
Earnings differ among individuals because of
• Nonhomogeneous workers
• Nonhomogeneous jobs
• Imperfect labor mobility
Inequality, Poverty, and
Redistribution
5
DIFFERENCES IN EARNINGS
 Sources of Earnings Differences:
Nonhomogeneous Workers
Differences in worker productivity cause differences in
earnings
Some workers are more productive than others. The value of their
marginal product is greater.
Because of the greater value of their marginal product, the demand
for more productive workers is greater than the demand for less
productive workers.
Ceteris paribus, greater demand results in higher wage rates and
higher earnings.
Inequality, Poverty, and
Redistribution
6
DIFFERENCES IN EARNINGS
 Sources of Earnings Differences:
Nonhomogeneous Workers
Factors that determine worker productivity
Quantity of complementary inputs
Complementary inputs are capital (equipment and structures) and
land (including natural resources) that are used with labor to produce
output.
Workers who have more complementary inputs with which to work
are more productive. Ceteris paribus, they have higher wage rates
and higher earnings than workers who have fewer complementary
inputs with which to work.
Inequality, Poverty, and
Redistribution
7
DIFFERENCES IN EARNINGS
 Sources of Earnings Differences:
Nonhomogeneous Workers
Technology
Workers who use capital that embodies a higher level of technology
are more productive. Ceteris paribus, they have higher wage rates
and higher earnings than workers who use capital that embodies a
lower level of technology.
Inequality, Poverty, and
Redistribution
8
DIFFERENCES IN EARNINGS
 Sources of Earnings Differences:
Nonhomogeneous Workers
Human capital
Human capital is the knowledge and skill that people obtain from
education, on-the-job-training, and work experience. Indicators or
measures of human capital include:
• Years of schooling
• Years of work experience
• Number of job interruptions
Workers who possess more human capital are more productive.
Ceteris paribus, they have higher wage rates and higher earnings than
workers with less human capital.
Inequality, Poverty, and
Redistribution
9
DIFFERENCES IN EARNINGS
 Sources of Earnings Differences:
Nonhomogeneous Workers
Investment in human capital
Individuals can increase their human capital by investing in it. More
human capital increases worker productivity.
Human capital investment is the acquisition by workers of higher level
skills or more education.
Human capital investment increases wage rates and earnings because
it raises both the demand for and the supply of labor.
Inequality, Poverty, and
Redistribution
10
DIFFERENCES IN EARNINGS
 Sources of Earnings Differences:
Nonhomogeneous Workers
Human capital investment and labor demand
Because more education and higher skills increase workers’ value of
marginal product, the demand for higher-skilled and better-educated
workers is greater than the demand for lower-skilled and less-educated
workers.
Ceteris paribus, the greater demand for higher-skilled and bettereducated workers results in higher wage rates and higher earnings.
Inequality, Poverty, and
Redistribution
11
DIFFERENCES IN EARNINGS
Effects of Human Capital
Investment: Demand
Higher-skilled or better-educated
labor has a higher value of marginal
product than lower-skilled labor or
less-educated labor.
Therefore, the demand curve for
higher-skilled labor, DH, lies above
the demand curve for lower-skilled
labor, DL, by the VMP of skill.
Inequality, Poverty, and
Redistribution
12
DIFFERENCES IN EARNINGS
 Sources of Earnings Differences:
Nonhomogeneous Workers
Human capital investment and labor supply
But there is an opportunity cost to acquiring human capital. Therefore,
the supply of workers with more human capital is lower than the
supply of workers with less human capital.
Ceteris paribus, the lower supply of higher-skilled and better-educated
workers also results in higher wage rates and higher earnings.
Inequality, Poverty, and
Redistribution
13
DIFFERENCES IN EARNINGS
Effects of Human Capital
Investment: Supply
Individuals incur a cost to acquire
higher skills or better education.
Therefore, the supply curve of
higher-skilled labor, SH, lies above
the supply curve of lower-skilled
labor, SL, by enough to compensate
for the cost of acquiring skills and
education.
Inequality, Poverty, and
Redistribution
14
DIFFERENCES IN EARNINGS
Effects of Human Capital
Investment: Wage Rates
The demand for lower-skilled labor,
DL, and the supply of lower-skilled
labor, SL, determine the wage rate
of lower-skilled labor— $10 an
hour.
The demand for higher-skilled
labor, DH, and the supply of higherskilled labor, SH, determine the
wage rate of higher-skilled labor—
$20 an hour.
Inequality, Poverty, and
Redistribution
15
DIFFERENCES IN EARNINGS
The Value of Education
Median Earnings of Full Time Year Round Workers, 2000
Doctorate degree
$55,620
Professional degree
$56,345
$47,049
Master's degree
$38,208
Bachelor's degree
Associate degree
Some college (no degree)
$75,931
$91,324
$65,052
$53,505
$30,178
$41,067
Women
Men
$27,190
$38,652
$23,719
$32,493
High school diploma or GED
$17,209
$24,437
9th to 12th (no diploma)
$15,599
$20,466
Less than 9th Grade
$0
$20,000 $40,000 $60,000 $80,000 $100,000
Inequality, Poverty, and
Redistribution
16
DIFFERENCES IN EARNINGS
 Sources of Earnings Differences:
Nonhomogeneous Jobs
Differences in the characteristics of jobs
Some jobs are riskier or dirtier or require more travel or have longer
hours or less attractive or less flexible work schedules. These jobs
impose a higher opportunity cost on workers.
Because less attractive or desirable jobs impose a higher opportunity
cost on workers, the supply of labor in these jobs is lower, ceteris
paribus, and these jobs pay above-average wage rates.
Because more attractive or desirable jobs impose a lower opportunity
cost on workers, the supply of labor in these jobs is greater, ceteris
paribus, and these jobs pay below-average wage rates.
Inequality, Poverty, and
Redistribution
17
DIFFERENCES IN EARNINGS
 Sources of Earnings Differences:
Nonhomogeneous Jobs
Compensating wage differentials
Wage differences that compensate workers for differences among
jobs in risk, working conditions, and other non-monetary
characteristics of the job are called compensating wage differentials.
Even though individuals may have the same productivity—the same
education and skill levels, for example—their wage rates may be
different because of compensating wage differentials.
Inequality, Poverty, and
Redistribution
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Compensating Differentials
and Labor Supply
The supply of workers to less
attractive jobs, SLA, is less than the
supply of workers to more attractive
jobs, SMA.
Because of the lower supply, the
wage rate for less attractive jobs is
higher than the wage rate for more
attractive jobs.
Wage rate (dollars per hour)
DIFFERENCES IN EARNINGS
30
25
Compensating
wage differential
20
SLA
15
SMA
10
5
0
0
The difference in wage rates is the
compensating differential.
Inequality, Poverty, and
Redistribution
1
2
3
4
5
6
Labor (000's of hours per
day)
19
DIFFERENCES IN EARNINGS
 Sources of Earnings Differences: Costly Labor
Mobility
Labor mobility is costly
Workers must incur costs to obtain information about differences in
jobs, to relocate, and to readjust from one job to another.
Unless the difference in earnings between two jobs is greater than the
cost of changing jobs, workers lack the incentive to change jobs.
Because of imperfect labor mobility, differences between jobs in
wage rates and earnings can persist even if the jobs have the same
characteristics and employ workers with the same productivity.
Inequality, Poverty, and
Redistribution
20
DIFFERENCES IN EARNINGS
 Does Employment Discrimination Exist?
Earnings of Minority Workers as a Percent of White Workers
1993-1995
Men
Women
White
100
100
African-American
78
91
American Indian
83
89
Asian-American
99
106
Mexican-American
67
77
Other Hispanic
79
88
Inequality, Poverty, and
Redistribution
21
DIFFERENCES IN EARNINGS
 Does Employment Discrimination Exist?
Earnings of Minority Workers as a Percent of White Workers,
Unadjusted and Adjusted, 1993-1995
Men
Women
Unadj Adj Unadj
Adj
White
100
100
100
100
African-American
78
85
91
93
American Indian
83
94
59
96
Asian-American
99
92
106
97
Mexican-American
67
92
77
96
Other Hispanic
79
92
88
97
Inequality, Poverty, and
Redistribution
22
DIFFERENCES IN EARNINGS
 Does Employment Discrimination Exist?
Earnings differences alone are not evidence of
employment discrimination
The data on earnings differences are adjusted for (1) years of
schooling, (2) work experience, (3) region, (4) industry, (5) sector of
employment, (6) union status, and (7) marital status.
In most cases, the differences narrow substantially when the data are
adjusted for other factors that can cause some individuals to earn
more than others. Even if employment discrimination exists, it is
much less than the unadjusted data on earnings differences suggests.
Inequality, Poverty, and
Redistribution
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DIFFERENCES IN EARNINGS
 Why Does Employment Discrimination Occur?
Three possible causes of employment discrimination
•
Employers or other employees are prejudiced
•
Consumers are prejudiced
•
Institutional barriers promote discrimination
Inequality, Poverty, and
Redistribution
24
DIFFERENCES IN EARNINGS
 Why Does Employment Discrimination Occur?
Employer prejudice
With employment discrimination, employers must pay higher wages
to favored workers than to workers who are discriminated against.
Therefore, employers who discriminate have higher costs than
employers who are unprejudiced and are willing to hire any available
worker.
With higher costs, profits are lower. In the long run, in competitive
markets, prejudiced employers earn less than a normal profit. They
pay a price for their prejudice either in lower profits or by being
competed out of business by unprejudiced employers.
Inequality, Poverty, and
Redistribution
25
DIFFERENCES IN EARNINGS
 Why Does Employment Discrimination Occur?
Consumer prejudice
Even if employers are unprejudiced, they may discriminate if their
consumers are prejudiced against minority workers.
However, prejudiced consumers also pay a price for their prejudice.
Discrimination raises costs so consumers who buy only from
discriminating sellers pay higher prices than consumers who buy
from non-discriminating sellers.
Discrimination based on consumer prejudice is unlikely to occur in
markets for manufactured goods where the characteristics of
employees are unknown to consumers. It is usually limited to
markets for services.
Inequality, Poverty, and
Redistribution
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DIFFERENCES IN EARNINGS
 Why Does Employment Discrimination Occur?
Institutional barriers
Historically, most long-term employment discrimination has resulted
from institutional barriers to the employment of minority workers.
The most common institutional barriers prohibiting or restricting
employment and earning opportunities for minority workers are
• Laws
• Government regulations
• Union restrictions on training opportunities or entry into
occupations
Inequality, Poverty, and
Redistribution
27
DIFFERENCES IN EARNINGS
 Why Do Women Earn Less Than Men?
Female-male earnings differences
Women who work fulltime year round earn only 74% of the earnings
of men even though they are not significantly different in education
or skills. Why?
One possible explanation is discrimination. But an alternative
explanation is a difference in comparative advantage between men
and women arising from specialization within the household.
Inequality, Poverty, and
Redistribution
28
DIFFERENCES IN EARNINGS
 Why Do Women Earn Less Than Men?
The comparative advantage hypothesis: Specialization
within the household
In many married couple households, both men and women are
employed in the market and also perform domestic services—
housekeeping, childcare, etc. However, married men specialize more
and acquire a comparative advantage in market work and married
women specialize more and acquire a comparative advantage in
domestic services.
Therefore, married women choose jobs that place fewer demands on
their time, require less travel and less overtime, and provide greater
flexibility—that is, more attractive or more convenient jobs that are
characterized by negative compensating wage differentials.
Inequality, Poverty, and
Redistribution
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DIFFERENCES IN EARNINGS
Testing the Comparative
Advantage Hypothesis
We compare the earnings of single
women to the earnings of men and
separately compare the earnings of
married women living with a spouse
to the earnings of men.
The fact that the earnings gap
between married women and men is
much larger than the earnings gap
between single women and men is
consistent with the specialization
and comparative advantage
hypothesis.
Female Earnings as a Percent of Male Earnings
Singles
92
Total
74
Married (spouse
present)
66
0
Inequality, Poverty, and
Redistribution
10
20
30
40 50 60 70
Female/male ratio (percent)
80
90
30
100
DIFFERENCES IN EARNINGS
 Why Do Women Earn Less Than Men?
Additional evidence
The earnings of never-married men and never-married women are
more similar than the earnings of married men and married women.
In fact, when they have the same amount of human capital, the wages
of never-married men and never-married women are not significantly
different.
This also suggests that comparative advantage arising from
specialization of tasks within the household is an important
explanation for the apparent difference in the earnings of men and
women.
Inequality, Poverty, and
Redistribution
31