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Lecture 19

Economics 1021A/B Lecture 19: Micro- Ch. 19

Course Code
ECON 1021A/B
Michael Parkin

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Paul Dimovski
Principles of Microeconomics- Ch. 19
Economic Inequality
Measuring Economic Inequality
oMarket income
Equals wages, interest, rent, and pro#t earned in factor
markets before paying income taxes
oTotal Income
Equals market income plus cash payments to households
by governments
oAfter-tax Income
Equals total income minus tax payments by households to
oThe Income Lorenz Curve
The income Lorenz Curve graphs the cumulative
percentage of income earned against the cumulative
percentage of households
If everyone has the same income, the income Lorenz curve
is a 45-degree line from the lower left corner to the upper
right corner. This line is called the line of equality.
The Lorenz curve shows the distribution of income
oThe Distribution of Wealth
A household’s wealth is the value of all the things that it
owns at a point in time
The distribution of wealth is another way of examining the
degree of economic inequality
A wealth Lorenz curve measures the distribution of wealth
The distribution of wealth is even more unequally
distributed than income
oWealth of Income?
Wealth is a stock of assets and income is a /ow of earnings
that result from a given stock of wealth
Wealth is more unequally distributed than income because
wealth does not measure the quantity of human capital
Incomes re/ects the quantity of human capital
Because the distribution of wealth excludes human capital,
the distribution of income is a more accurate measure of
economic inequality
oAnnual or Lifetime Income and Wealth?
A household’s income and wealth change over time
A household headed by a young person starts out with
moderate income and accumulates wealth for retirement
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Paul Dimovski
A middle-age headed household is in its highest income
years and enjoys the highest level of wealth
A households headed by an older, retired person has lower
income and is consuming, rather than acuminating, its
The Sources of Economic Inequality
oInequality from unequal labour market outcomes and from
unequal ownership of capital
oThree signi#cant features of labour markets contribute to income
di3erences among individuals:
Human Capital
Contest among superstars
oHuman Capital
The more human capital a person possesses, the more
income that person likely earns, other things remaining the
Demand, Supply, and Wage Rates
On the demand side of the labour market, high-
skilled workers generate a larger value of marginal
product than low-skilled workers
So #rms are willing to pay a higher wage rate for
high-skilled labour
One the supply side of the labour market, high skilled
workers incur a cost of acquiring their skills- money costs
as well as time costs
So high-skilled workers are willing to supply labour only at
wage rates that compensate them for those costs
The supply of high-skilled workers is smaller than the
supply of low-skilled workers
oTrends in Inequality Explained…. Technology and Education
New technology and low-skilled labour are substitutes, so
the demand for low-skilled labour has decreased
Trends in schooling have increased the supply of low-skilled
The wage rate has fallen
New technologies and high-skilled labour are complements,
and the demand for high-skilled labour has increased
Trends in schooling have lowered the growth rate of the
supply of high-skilled labour
The wage rate has risen
The gap between the wage rates of high-skilled and low-
skilled labour has increased
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