Chapter 20 Income Inequality and Poverty Because labor earning make up about of the total income in the US economy the factors that determine wages are also largely responsible for determining how the economy s total income is distributed among the various members of society The Measurement of Inequality Recently increases in international trade and changes in technology has tended to reduce the demand for unskilled labor and raise the demand for skilled labor unskilled workers wages have fallen and skilled workers wages have risen inequality Hard to measure inequality between countries bc countries collect data in different ways Poverty rate the percentage of the population whose family income falls below the absolute level called the poverty line Poverty line an absolute level of income set by the federal government for each family size below which a family is deemed to be in poverty Poverty is correlated with race Hispanics and Blacks are about 3 times more likely to live in poverty than are whites Poverty is correlated with age Children are more likely than average to be members of poor families and the elderly are less likely than average to be poor Poverty is correlated with family composition Families headed by a female adult and without a spouse present are almost 6 times as likely to live in poverty as a family headed by a married couple Interpreting income distribution and the poverty rate is not always straight forward o In kind transfers transfers to the poor given in the form of goods and services rather than cash measurements of inequality do not take these into account o Life cycle the regular pattern of income variation over a person s life peak at 50 o Permanent income a person s normal income a family s ability to buy goods and services depends on this Economic mobility the movement of ppl among income classes The Political Philosophy of Redistributing Income Utilitarianism the political philosophy according to which the government should choose policies to maximize the total utility of everyone in society o Utility a measure of happiness or satisfaction o Diminishing marginal utility as income increases an extra dollar means less therefore gov should try to achieve a more equal distribution of income but not complete equalization of incomes bc utilitarian ppl believe in ppl respond to incentives o Utilitarian government must balance the gains from greater equality against the losses from distorted incentives to maximize total utility the government stops short of making society full egalitarian Liberalism the political philosophy according to which the government should choose policies deemed just as evaluated by an impartial observer behind a veil of ignorance o Maximin criterion the claim that the government should aim to maximize the well being of the worst off person in society helping the least fortunate person in society calls for more income redistribution than utilitarianism but not complete equalization o Social insurance government policy aimed at protecting ppl against the risk of adverse events Libertarianism the political philosophy according to which the government should punish crimes and enforce voluntary agreements but not redistribute income o As long as the process determining the distribution of income is just the resulting distribution is fair no matter how unequal Polices to Reduce Poverty Most ppl believe the government should try to help those most in need provide a safety net Minimum wage laws Welfare government programs that supplement the incomes of the needy Negative income tax a tax system that collects revenue from high income households and gives subsidies to low income households o Based only on who has a low income o Does not encourage illegitimate births or the breakup of families like the critics of welfare say but would subsidize not only the unfortunate poor but also the lazy In kind transfers o Charities food stamps Medicaid o Advocates ensure that the poor get what they need most o Against inefficient and disrespectful Antipoverty programs work incentives o
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