PART II POVERTY INEQUALITY AND REDISTR

PART II:

GOVERNMENT AND THE
PROBLEM OF EQUITY
Poverty, Inequality and
Redistribution policy
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CHAPTER 1
INEQUALITY

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II. Inequality

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1. Measuring Inequality


Measuring Inequality




Size distributions
Lorenz curves and Gini coefficients
Functional distributions

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Measuring Inequality


Lorenz curves






Arrange population according to the share of income
they receive, from lowest to highest.
Calculate cumulative percentages (the lowest 5%, the

lowest 45%, etc.)
Plot the cumulative percentage of households against
the cumulative percentage of the income they earn.

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The Lorenz Curve

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Measuring Inequality and Poverty


Measuring Inequality




Gini coefficients (an aggregate measure of
inequality)
It’s a quantitative measure of how far a society is

from being perfectly equal.




Calculate the area between the perfect-equality curve
and the actual curve.
Divide that area by the total area under the perfectequality curve.

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Estimating the Gini Coefficient

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Measuring Inequality and Poverty


Measuring Inequality



Functional Distributions
What is the income that goes to each kind of

factor of production? That is, what is the labor
share in income? What is the profit-rent-interest
share in income?

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Functional Income Distribution in a
Market Economy: An Illustration

According to this theory, incomes
are determined by demand for the
input (and therefore by it’s
marginal productivity) and by its
supply.
Non-market influences (or market
imperfections) are ignored.

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2. Causes of inequality

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2. Causes of inequality


Two features of labor markets contribute to inequality:





Human capital
Discrimination

Human Capital




High-skilled workers have a higher value of marginal
product than low-skilled workers.
Figure (a) on the next slide illustrates the demand for highskilled and low-skilled labor

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2 HOW INEQUALITY ARISES
Demand for High-skilled
and low-skilled labor
High-skilled labor has a
higher VMP than low-skilled
labor and a greater demand.
The demand curve for highskilled labor, DH, lies above
the demand curve for lowskilled labor, DL, by the VMP
of skill.
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2 HOW INEQUALITY ARISES






The Supply of High-Skilled and Low-Skilled
Labor
Skills are costly to acquire, and a worker pays the
cost of acquiring a skill before benefiting from a
higher wage.
Figure (b) on the next slide illustrates the supply
of high-skilled and low-skilled labor

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2 HOW INEQUALITY ARISES

High-skilled labor bears the
cost of acquiring skill.
The supply curve of highskilled labor, SH, lies above
the supply curve of low-skilled
labor, SL, by the
compensation for the cost of
acquiring skill.
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2 HOW INEQUALITY ARISES


Wage rates of High-Skilled and Low-Skilled
Labor




The combined effects of skill on the demand for
and supply of labor generate a higher wage for
high-skilled labor than for low-skilled labor.
Figure (c) on the next slide illustrates the skilled
wage differential.

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2 HOW INEQUALITY ARISES
The demand for low-skilled labor,

DL, and the supply of low-skilled
labor, SL, determine the wage rate
of low-skilled labor—in this example
at $10 an hour.


The demand for high-skilled
labor, DH, and the supply of highskilled labor, SH, determine the
wage rate of high-skilled labor—
in this example at $20 an hour.
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2 HOW INEQUALITY ARISES


Discrimination






Human capital differences explain much of the
income inequality that exists.
Economists are not sure whether (and disagree
about) discrimination adds to income inequality.
One line of argument is that competition prevents
discrimination. But race and sex income
differences do persist.

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2 HOW INEQUALITY ARISES


Unequal Ownership of Capital


Inequality arises from saving and bequests.



Two features of bequests make intergenerational
transfers of wealth a source of increased
inequality:


Debts cannot be bequeathed.



Mating is assortative.

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2 HOW INEQUALITY ARISES


Debts Cannot Be Bequeathed



Debts cannot be forced onto other household members.



Because a zero inheritance is the smallest inheritance that
anyone can receive, bequests can only add to future
generations’ wealth and income potential.



Asortative Mating



The tendency for people to marry within their own
socioeconomic class.



Wealth becomes more concentrated.

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CHAPTER 2:

POVERTY
La Pauvreté

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1. Measuring Poverty


Poverty is





Lack of income;
Lack of drinking water
Lack of access to health care
Lack of protection against adverse shocks

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Measuring Poverty


Measuring Absolute
Poverty




The Absolute Poverty
Headcount H simply
adds the number of
people whose income is

below an agreed upon
poverty line.
The Headcount index
H/N divides this number
by the population.

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Measuring Poverty


Measuring Absolute Poverty


Total poverty gap

TPG  i 1 (Yp  Yi )
H

where

Yp is the absolute poverty line
Yi is income of person i

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Measuring Poverty


Measuring Absolute Poverty


Average poverty gap

TPG
H

APG 
where

H is number of persons under
poverty line
TPG is total poverty gap

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Measuring Poverty


Measuring Absolute Poverty


The Normalized Poverty Gap is the Total Poverty
Gap divided by the product of the poverty line and
the population

NPG 



H
i 1

(Y p  Yi )

NY p

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Measuring Poverty


Measuring Absolute Poverty


Foster-Greer-Thorbecke measure

1
P 
N


 Yp  Yi 



 Y 
i 1 
p

H



If =2, you get a measure that is extremely sensitive
to the depth and severity of poverty.

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10

Policy Options

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The Range of Policy Options:
Some Basic Considerations


Areas of intervention


Change the functional distribution








Give more income to labor and less to capital.

Change asset and skill inequality: the sources of income
inequality.
Land reform; microcredit; basic education

Make taxes more progressive.

Poverty reduction programs: direct transfers or subsidies
for food, education, health, etc.

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The Range of Policy Options:
Some Basic Considerations


Policy options


Changing relative factor prices




Traditional-sector workers have very low incomes
and minimum-wage laws are seldom enforced.
Artificially high modern-sector wages (due to unions
or laws) reduce the growth of the modern sector,
condemning more people to poverty and exclusion.

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The Range of Policy Options:
Some Basic Considerations


Policy options


Changing relative factor prices




Market-determined wages (which would be lower) in
the modern sector would increase employment and
incomes for the poor.
Market-determined cost of capital (which would be
higher) would encourage firms to hire workers rather
than buy capital.

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The Range of Policy Options:
Some Basic Considerations



Policy options


Transfer payments and public provision of goods
and services






Make sure it’s targeted to the poor.
Prevent the poor from becoming dependent on it … but
encourage appropriate risk taking.
Discourage switching from work to program.
Avoid resentment by nearly-poor-but-not-enough who
are working.

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The Range of Policy Options: Some
Basic Considerations


The need for a ‘package’ of policies






Eliminate price distortions: more efficiency, more
employment and less poverty
Structural change in asset ownership
Progressive taxes and transfers; safety net

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2. Poverty in Vietnam

To see the Pdf file

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Chapter 3
INCOME REDISTRIBUTION

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1. Some theories of redistribution
i.
ii.
iii.

Theory of Utilitarianism
Theory of egalitarianism
The Rawls’ Theory

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i. Theory of Utilitarianism
a, Hypothesis
All the people has the same MU function and MU depend
only on the level of revenue
 These MU function follow the law of diminishing MU
 The total revenue is fix and still stable when there is the
redistribution policy
=> The function of social welfare W = U1 + U2+ Ui +….+ Un



b, Description:
To see the graphic

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MU A

e

MU B

f
g
c

d
O’

O

h

Revenue A

b

a

Revenue B

Lost of A: abcd
Gain of B: abef
Gain of Social welfare: cdef

Conclusion: at which
point there is the
perfect equality?

g: max of social welfare, revenue i = h
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c, Some problems






1st hypo: if people has different MU
functions?
2nd hypo: the law of diminishing MU is true
with the goods, but how about the revenue?

3rd hypo: all programs of redistribution need
at least the administrative cost=> loss of total
revenue

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ii. Theory of egalitarianism


The function of social welfare


W = U1 = U2= Ui =…= Un

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Some problems





Perfect equality
But what happen if people has different MU
functions?
Not easy to implement in the real life

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iii, Rawls Theory


Social welfare depend only on the benefit of
the poorest. => max social welfare = max
utility of the poorest.



Function of Social welfare
W = min{U1, U2,…, Un}

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B (UB)

E
U2

O

U1

W*
W1
Rawls’ social
indifference curve
A (UA)

Redistribution according to
Rawls’ theory
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2. The Problems of Redistributing
Income




Society may decide to redistribute income

from the rich to the poor to meet its ideal of
fairness.
Redistribution programs can have substantial
side effects which can subvert the intention of
the program.

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Important Side Effects of
Redistributive Programs


There are three side effects of redistribution
of income:




The labor to leisure incentive effect.
The tax avoidance or evasion incentive effect.
The incentive to look more needy than you really
are.

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Politics, Income Redistribution, and
Fairness


Often politics, not value judgments plays a
central role in determining what taxes an
individual will pay.

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Politics, Income Redistribution, and
Fairness


Although the poor outnumber the rich, there
is limited political support for income
redistribution programs:





Many poor do not bother to vote.

Politicians do not see the poor as a solid voting
block.
Poor people who vote often cast their votes with
other issues in mind.
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Income Redistribution Policies in the fact


The government redistributes income through
direct and indirect methods.

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Income Redistribution Policies


The direct methods include:




Taxation—policies that tax the rich more than the
poor.
Expenditures—programs that help the poor more
than the rich.

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Income Redistribution Policies


The indirect method involves the
establishment and protection of property
rights.

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Taxation to Redistribute Income


The federal government gets most of its
taxes from the personal income tax, the
corporate income tax, and the Social Security
tax.

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Expenditure Program to Redistribute
Income


Expenditure programs have been more
successful than taxation for redistributing
income.

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Social Security




Social Security – a social insurance
program that provides financial benefits to the
elderly and disabled and to their eligible

dependents and/or survivors.
Medicare – a multibillion-dollar medical
insurance program.

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Public Assistance Programs


Public assistance programs – meanstested social programs targeted to the poor
and providing financial, nutritional, medical,
and housing assistance.

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Public Assistance Programs


The main types of public assistance
programs are:






Temporary Assistance for Needy Families
(TANF).
Food stamps.
Medicaid.
General assistance.

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Supplemental Security Income


Supplemental Security Income (SSI) – a
federal program that pays benefits, based on
need, to the elderly, blind, and disabled.

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Unemployment Compensation


Unemployment compensation – short-term
financial assistance, regardless of need, to
eligible individuals who are temporarily out of
work.

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Housing Programs


Housing programs – federal and state
governments have many different programs
to improve housing or to provide affordable
housing.

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The Success of Income Redistribution
Programs




After-transfer income is significantly closer to
being equally distributed.
The increase in equality comes at the cost of
a reduction in the total amount of income
earned by society.

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The Success of Income Redistribution
Programs


The most important redistribution decisions
the government makes involve the
establishment and protection of property
rights.

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