Chapter 6: Poverty and DiscriminationPovertyPoverty Threshold LevelPoverty & Income DistributionLorenz Curve of Income DistributionThe Gini IndexDeterminants of Income DifferentialDeterminants of Wealth DifferentialWelfare AssistanceEarned Income Tax CreditEITC in 1998Negative Income TaxNIT ProposalDiscriminationEconomic DiscriminationWage DiscriminationEmployment DiscriminationPrice DiscriminationOccupational SegregationIndividual Cost of DiscriminationSocietal Cost of DiscriminationPPC & Cost of DiscriminationPolicies to Reduce DiscriminationChapter 6: Poverty and Discrimination Chapter 6: Poverty and DiscriminationPovertyPovertyKind: Absolute vs. RelativeAbsolute: inability to satisfy basic human needs (food, shelter, clothing, education, etc.)Incident: –over 7 million of families (10%) are absolutely poor–poverty is gender and race biasedPoverty Threshold Level Poverty Threshold Level Family Size Threshold Level (1999)1 $ 8,5012 $10,8693 $13,2904 $17,0295 $20,1276 $22,7277 $25,9128 $28,9679 and more $34,417Poverty & Income DistributionPercent of Families % of Income Cum. % of IncomeLowest 20 4.2 4.2Second 20 9.9 14.1Third 20 15.7 29.8Fourth 20 23.0 52.8Highest 20 47.2 100.0Lorenz Curve of Income Distribution20 40 60 80 1004.214.129.852.8100% of population% of incomeArea MArea NL-curveLine of equalityThe Gini IndexThe farther the L-curve from line of income equality the higher is the degree of income inequalityGini Index = Area N / Area M 0 < Gini Index < 1 Gini Index = 0.45 for the U.S.Determinants of Income DifferentialBrains & BrawnSkill levels & creativityMarket size & risk takingCapacity utilization = ratio of actual earnings to potential earningsDeterminants of Wealth DifferentialInheritance: having rich parentsLuck: being at the right place at the right timePropensity to accumulate: save and investWelfare AssistanceAid to Families with Dependent ChildrenTemporary Assistance to Needy FamiliesWelfare-to-work transitionMedicaid Child careHousing assistanceIncome supportEarned Income Tax CreditFamilies with two or more childrenRefundable tax credit = 40% of earnings up to $9,390 for a max. credit of $3,756Above earnings of $12,260, tax credit is reduced by 21.06% for each additional dollar earnedNo tax credit at earnings of $30,095$Tax credit$Earnings9,39012,26030,095EITC in 1998 3,756Negative Income TaxGovernment guarantees a minimum level of incomeGovernment determines a break-even level of incomeSubsidies are given to families with income less than break-even level of income Subsidies are reduced by a given percentage as families earn incomeTaxes are paid by families with income more than break-even level of incomeNIT ProposalBreak-evenGuaranteed Income Tax0_+Subsidies receivedTaxes paid$Income$Tax liabilityDiscriminationDiscriminationDefinition:–Equals are treated unequally –Unequal are treated equallySources:–Monopoly power in hiring labor–Desire to discriminate against othersEconomic DiscriminationWage discriminationEmployment discriminationPrice discriminationOccupational segregationWage DiscriminationLegitimate due to difference in labor productivity: skilled workers command higher wages–College gap = 75%Illegitimate caused by discrimination–Gender gap = 30%–Race gap = 20%Employment DiscriminationWorkers are not hired (or hired) for non-economic reasons such as gender, race, and/or ethnicityPrice DiscriminationCertain members of the society are charged –higher prices on goods and services they buy–higher interest rates on loans they obtainRed-lining: a practice of rejecting loan applications to qualified borrowers because of ethnicity or raceOccupational SegregationWomen are channeled into low skill, low wage occupations (e.g., beauticians)Men are channeled into high skill, high wage occupations (e.g., auto mechanics)Individual Cost of DiscriminationLoss of employment & incomeUnable to find jobs and get loansFind jobs in segregated marketsPay higher pricesSocietal Cost of DiscriminationCost of discrimination is estimated at 3 to 4 percent of the GDP per year. In 1998, the cost was more than $600 million of lost outputPPC & Cost of DiscriminationGood XXDBCGood Y YD(X,Y): combination with discriminationD(X,Y): combination with discriminationB and C: combinations without discriminationB and C: combinations without discriminationPolicies to Reduce DiscriminationEducationLegislationGovernment subsidiesReduce market imperfectionsEnd occupational