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MACROECONOMICS ULEC 2020  FALL 2010 INSTRUCTOR: LOPAMUDRA BANERJEE DEAPRTMENT OF ECONOMICS THE NEW SCHOOL


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Lecture 7   Distribution of Income and Goods Income inequality, poverty and social mobility Readings: Colander chapter 18

Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee


Why is growth desirable? •  Growth means increased production of output •  More output means more available for consumption •  More consumption leads to higher material standard of living Introduction to Macroeconomics. ULEC 2020. Fall 2010. Banerjee

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America's Poor: Where Poverty Is Rising In America Tue Oct 19, 2010, Yahoo News

Thanks to the recession, 2009 was one of the worst years for poverty in America in more than half a century. The total number of Americans living in poverty hit 43.6 million, the highest level in 51 years and the national poverty rate rose to 14.3 percent from 13.2 percent, according to data released last month by the Census Bureau. All told, one in seven Americans are living in poverty. .. Among the hardest-hit states are Louisiana, Mississippi and certain areas of Texas. .. Though suburban areas are now home to one-third of America's poor, large cities have not been immune to the effects of the recession. Residents of cities like New York, Los Angeles and Miami have seen some of the biggest drops in personal income in the last year.

Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee

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America's Poor: Where Poverty Is Rising In America contd.

Crippling poverty rates in many of America's hardest-hit regions have been accompanied by several other disturbing trends for the middle class. Income inequality hit an all-time high before the recession, according University of California, Berkeley, economist Emmanuel Saez. ‌ Growing layoffs last year caused millions of Americans to lose employee-provided health insurance, leaving 16.7 percent of Americans with no health insurance, the highest level since the Census started collecting the data in 1987. To visualize America's startling rise in poverty, Mint, the personal finance site, put together this interactive chart of regional poverty rates [presented in the next slide]. Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee

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Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee

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How American Income Inequality Hit Levels not Seen Since the Depression First Posted: 10-22-10 05:10 PM | Updated: 10-22-10 05:42 PMWASHINGTON (Reuters, By Emily Kaiser) posted at Huffington Post on October 26, 2010

In 2007, when the world was on the brink of financial crisis, U.S. income inequality hit its highest mark since 1928, just before the Great Depression. Coincidence? Maybe not. Economists are only beginning to study the parallels between the 1920s and the most recent decade to try to understand why both periods ended in financial disaster. Their early findings suggest inequality may .. be a contributing factor [causing crisis].

Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee

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How American Income Inequality Hit Levels not Seen Since the Depression continued

The fact that economists are even examining the link between inequality and financial crises shows just how much the thinking has changed in the wake of the Great Recession. Paul Krugman, the Nobel prize-winning economist, said that before 2008, when he spoke of inequality approaching levels last seen before the Great Depression, it would inevitably lead to questions about whether another crisis was looming. "No, I'd say -- there really isn't a clear reason why high inequality should lead to macroeconomic crisis," he recalled in a presentation to a conference on income inequality in June. Now, he says, he is considering whether inequality somehow creates macroeconomic vulnerability.

Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee

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How American Income Inequality Hit Levels not Seen Since the Depression continued

Carol Graham, the Brookings economist who studies happiness, said most Americans, including the poor, believe that hard work is more important than luck in getting ahead. .. The work hard, get rich formula is deeply embedded in the American psyche, which helps explain why Americans have generally tolerated inequality. .. Rags to riches tales are an integral part of what makes the United States a beacon to immigrants who dream of a better life. The only groups that don't share that view and consistently rank toward the bottom on measures of happiness are the long-term unemployed and those without health care, she said. Both groups grew during the recession. As of September, there were 6.1 million people who had been out of work for more than six months, more than four times as many as there were at the start of the recession.

Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee

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Income Inequality: Too Big to Ignore By ROBERT H. FRANK Published: October 16, 2010, ECONOMIC VIEW, The New York Times

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[D]uring the last three decades the economy has grown much more slowly, and our infrastructure has fallen into grave disrepair. Most troubling, all significant income growth has been concentrated at the top of the scale. The share of total income going to the top 1 percent of earners, which stood at 8.9 percent in 1976, rose to 23.5 percent by 2007, but during the same period, the average inflationadjusted hourly wage declined by more than 7 percent. .. Some moral philosophers address inequality by invoking principles of justice and fairness. The more pragmatic cost-benefit approach .. [shows] that rising inequality has created enormous losses and few gains, even for its ostensible beneficiaries. [A] recent working paper based on census data for the 100 most populous counties in the United States .. found that the counties where income inequality grew fastest also showed the biggest increases in symptoms of financial distress. Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee


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Global Income Inequality: What it Is and why it Matters? Branko Milanovic, World Economics, Vol. 7, No. 1, January-March 2006.

The graph shows that the poorest 5% of France are richer than the top 5% rural Indonesians. The poorest 5% rural Indonesian are richer than the poorest 5% of Brazil, but the richest 5% of Brazil are as rich as the top 5% of France. Garry Peterson, 2007. Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee


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Who gets what? •  According to ownership of inputs •  According to ‘productivity’ •  In terms of ‘noneconomic’ criterions: Socio-economic groups

Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee


Distribution according to ownership   Income distribution according to ownership of inputs: Owner of land --- rent Owner of capital --- profit Owner of labor --- wage Lender of money --- interest Classification of income by source: Payment according to contribution to output production by providing inputs Problem: 1.  Ownership of multiple inputs 2.  ‘Non-individual’ ownership: Corporations and banks

Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee

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Share distribution of income   Income distribution according to productivity: In a perfectly competitive market economy: Wages are paid according to marginal productivity of labor Profits are paid according to marginal productivity of capital Note: Marginal productivity is the increase in output from one additional unit of input. Classification of income by rewards: Payment received from participation in production process

Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee

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How is the share of income measured?

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In US, share distribution of income is measured in terms of household income. The households are then ranked by their income– from the poorest to the richest. In 2005, the poorest 20% of America received 3.4% of the National Income; while the richest 20% received 50.4% of the National Income. [Colander, 7th edn. p. 403] Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee


Lorenz curve

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A Lorenz curve is a geometric representation of the share distribution of income among households at a given point of time. It measures cumulative percentage of households on the horizontal axis, arranged from the poorest to the richest. It measures cumulative percentage of household income on the vertical axis. Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee


Lorenz curve contd.   Both axes start at 0% and end at 100%.   A perfectly equal income distribution is shown by the diagonal line.   Perfectly equal distribution: The poorest 20% of the household earns 20% of the total income; the poorest 50% of the household earns 50% of the total income; etc. Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee

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Lorenz curve contd.   An unequal distribution of income is shown by a Lorenz curve.   In reality, income distribution is of course unequal and is somewhere along the curved line, the Lorenz curve, with the majority of the population earning the minority share of the national income, and a minority earning the majority. Human Rights Maps (23): Income Inequality October 22, 2008 Filip Spagnoli

Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee

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Gini coefficient

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  This is a second measure of income inequality, and is derived from the Lorenz curve.   This coefficient is the result of a comparison of the percentage of the population and the percentage of the total income of the population. E.g. 80% of the population earns 50% of the total income, and the remaining 20% earns the other half.

Human Rights Maps (23): Income Inequality October 22, 2008 Filip Spagnoli

Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee


How American Income Inequality Hit Levels not Seen Since the Depression First Posted: 10-22-10 05:10 PM | Updated: 10-22-10 05:42 PMWASHINGTON (Reuters, By Emily Kaiser) posted at Huffington Post on October 26, 2010

Based on an inequality measure known as the Gini coefficient, the United States ranks on a par with developing countries such as Ivory Coast, Jamaica and Malaysia, according to the CIA World Factbook.

Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee

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21 Relationship: Lorenz curve and the Gini coefficient Perfect equality = Point on diagonal line [green line] = Gini coefficient is zero Perfect inequality = Point on axis [red line] = Gini coefficient is one

Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee


22 The inequality of wealth or income in a particular country is traditionally measured by the Gini coefficient (named after Corrado Gini). The Gini coefficient in 2005 of US was 0.470 of Denmark was 0.247 of Brazil was 0.580

Human Rights Maps (23): Income Inequality October 22, 2008 Filip Spagnoli

Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee

--- US is less egalitarian than Denmark, but Brazil is less egalitarian than US.


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Garry Peterson PERMALINK*April 16, 2007 In the maps Gini is calculated for household income. The census counts people at residences regardless of their status. US states vary a lot in their levels of inequality, with the South being more unequal than the Northeast or Midwest. More information on the census can be found on the US census’s site. Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee


Share distribution of income contd.

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  Income distribution according to productivity: The share distribution of income is the relative division of total income among income groups [Colander, 7th edn. p. 403]

Problem: 1. What determines marginal productivity? --- Inequality in distribution of opportunities and life chances 2. Non-competitive market: --- Income share and conflict in claims of different groups 3. Productivity disregarded and trumped by other ‘characteristics’ --- age, gender, race, ethnicity, nationality, religion

Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee


Socio-economic distribution of income

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  Income distribution according to ‘social’ characteristics: Relative division or allocation of total income among relevant socio-economic groups [Colander, 7th edn. P. 403] How much does a person of color earns relative to those who do not belong to this group? How much does a woman of color earns relative to those who do not belong to this group? How much does an elderly woman of color earns relative to those who do not belong to this group? How much does an elderly woman of color, who has been a single mother, earns relative to those who do not belong to this group? How much does an elderly woman of color, who has been a single mother, and only has high school education, earns relative to those who do not belong to this group? Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee


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Job discrimination and labor market

  Demand side discrimination: Based on individual and group characteristics (age, looks, personality)   Institutional discrimination: Structure of labor market that makes it difficult for certain groups to succeed. Discrimination on the basis of identity (gender, race, ethnicity)

ULEC 2020 . Introduction to Macroeconomics . Spring 2009 . Banerjee


27   Discrimination in social and economic sphere is often a causes for persistent inequality.   Affirmative action, the set of public policies and initiatives designed to help eliminate past and present discrimination based on race, color, religion, sex, or national origin, is under attack. [National Organization for Women] Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee


The United Nations Human/animals Rights Committee states, "the principle of equality sometimes requires States parties to take affirmative action in order to diminish or eliminate conditions which cause or help to perpetuate discrimination prohibited by the Covenant. For example, in a State where the general conditions of a certain part of the population prevent or impair their enjoyment of human rights, the State should take specific action to correct those conditions. Such action may involve granting for a time to the part of the population concerned certain preferential treatment in specific matters as compared with the rest of the population. However, as long as such action is needed to correct discrimination, in fact, it is a case of legitimate differentiation under the Covenant.� United Nations Committee on Human Rights, General Comment 18 on Non-discrimination, Paragraph 10 Introduction to Macroeconomics. ULEC 2020. Spring 2010. Banerjee

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