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Chapter 19

Economics 1021A/B Chapter Notes - Chapter 19: Skill, Progressive Tax, Gini Coefficient

Course Code
ECON 1021A/B
Jeannie Gillmore

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Chapter 19
Measuring Economic Inequity
Market income: Wage, interest, rent, and profit earned in factor markets before paying income taxes
Total income: Market income + cash payments to households by governments
After-tax income: Total income tax payments by households to governments
Income Lorenz curve: Graphs the cumulative percentage of income vs the cumulative percentage of households
o Provides a visual clue about the degree of income inequality by comparing it with a line of equality
(what the curve would look like if everybodys income were equal).
o A more accurate measure of economic inequality than wealth distribution.
Wealth: Value of the thing that a household owns at a point in time
o Wealth is much more unequally distributed than income.
o This is partially because wealth does not include the value of human capital, while income measures
income from all wealth.
Gini ratio: Ratio of the area between the line of equality and the Lorenz curve to the entire area beneath the line
o If income is equally distributed, the ratio equals 0.
o If one person has all the income and everybody else has none, the ratio equals 1.
o In Canada, between 1976 and 2009, the Gini ratio increased from 0.37 to 0.45.
Poverty: A state in which a familys income is too low to be able to buy quantities of food, shelter, and clothing
that are deemed necessary.
o Considered both an absolute and a relative concept.
o Low-income cut-off: Income level below which a family normally spends 63.6% or more of its income
on food, shelter, and clothing. The definition of poverty in Canada.
o Sources of income, household type, age of householder, number of children, education and labour
force status are the most important factors influencing incidence of low income.
Sources of Economic Inequality
Human capital:
o Human capital is costly to acquire including expenditures on tuition and textbooks, and forgone
earnings due to time spent in education. The supply of professional jobs is smaller than the demand,
and therefore the pay is high.
o Middle-aged people also tend to have a larger skillset than younger or older generations, which
explains a small portion of the inequality.
o Low skill jobs can be easily replaced by improved information technology (decreasing demand), and
schooling trends increase the supply of labour (increasing supply) decreasing wage.
o High-skill jobs are complements to improved information technology (increasing demand), and
schooling trends decrease the supply of labour (decreasing supply), increasing wage.
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