PART II POVERTY INEQUALITY AND REDISTR

PART II: GOVERNMENT AND THE PROBLEM OF EQUITY Poverty, Inequality and Redistribution policy HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS CHAPTER INEQUALITY HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS II Inequality HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 1 Measuring Inequality  Measuring Inequality    Size distributions Lorenz curves and Gini coefficients Functional distributions HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS  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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS The Lorenz Curve HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS Estimating the Gini Coefficient HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 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? HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 10 Causes of inequality HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 11 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 12 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 13 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 14 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 15 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 16 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 17 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 18 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 19 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 20 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 persist HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 21 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 22 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 23 CHAPTER 2: POVERTY La Pauvreté HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 24 Measuring Poverty  Poverty is     Lack of income; Lack of drinking water Lack of access to health care Lack of protection against adverse shocks HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 25 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 26 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 27 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 28 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 29 Measuring Poverty  Measuring Absolute Poverty  Foster-Greer-Thorbecke measure 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 30 10 Policy Options HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 31 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 32 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 33 11 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 34 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 35 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 36 12 Poverty in Vietnam To see the Pdf file HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 37 Chapter INCOME REDISTRIBUTION HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 38 Some theories of redistribution i ii iii Theory of Utilitarianism Theory of egalitarianism The Rawls’ Theory HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 39 13 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 40 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 41 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 42 14 ii Theory of egalitarianism  The function of social welfare  W = U1 = U2= Ui =…= Un HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 43 Some problems    Perfect equality But what happen if people has different MU functions? Not easy to implement in the real life HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 44 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} HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 45 15 B (UB) E U2 O U1 W* W1 Rawls’ social indifference curve A (UA) Redistribution according to Rawls’ theory HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 46 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 47 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 48 16 Politics, Income Redistribution, and Fairness  Often politics, not value judgments plays a central role in determining what taxes an individual will pay HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 49 Politics, Income Redistribution, and Fairness  Although the poor outnumber the rich, there is limited political support for income redistribution programs:    Many poor not bother to vote Politicians not see the poor as a solid voting block Poor people who vote often cast their votes with other issues in mind HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 50 Income Redistribution Policies in the fact  The government redistributes income through direct and indirect methods HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 51 17 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 52 Income Redistribution Policies  The indirect method involves the establishment and protection of property rights HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 53 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 54 18 Expenditure Program to Redistribute Income  Expenditure programs have been more successful than taxation for redistributing income HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 55 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 56 Public Assistance Programs  Public assistance programs – meanstested social programs targeted to the poor and providing financial, nutritional, medical, and housing assistance HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 57 19 Public Assistance Programs  The main types of public assistance programs are:     Temporary Assistance for Needy Families (TANF) Food stamps Medicaid General assistance HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 58 Supplemental Security Income  Supplemental Security Income (SSI) – a federal program that pays benefits, based on need, to the elderly, blind, and disabled HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 59 Unemployment Compensation  Unemployment compensation – short-term financial assistance, regardless of need, to eligible individuals who are temporarily out of work HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 60 20 Housing Programs  Housing programs – federal and state governments have many different programs to improve housing or to provide affordable housing HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 61 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 HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 62 The Success of Income Redistribution Programs  The most important redistribution decisions the government makes involve the establishment and protection of property rights HOANG PHU LY, FACULTY OF INTERNATIONAL ECONOMICS 63 21 ... INTERNATIONAL ECONOMICS 28 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... 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... INTERNATIONAL ECONOMICS 27 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 HOANG PHU LY, FACULTY