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18.4: Review and Practice
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- Explain how rising demand for college-educated workers and falling demand for high-school-educated workers contributes to increased inequality of the distribution of income.
- Increase the minimum wage each year so that wages for unskilled workers rise as fast as wages for skilled workers.
- Subsidize the wages of unskilled workers.
- Do nothing.
- How would you define poverty? How would you determine whether a particular family is poor? Is the test you have proposed an absolute or a relative test?
- Why does the failure to adjust the poverty line for regional differences in living costs lead to an understatement of poverty in some states and an overstatement of poverty in others?
- The text argues that welfare recipients could achieve higher levels of satisfaction if they received cash rather than in-kind aid. Use the same argument to make a case that gifts given at Christmas should be in cash rather than specific items. Why do you suppose they usually are not?
- Suppose a welfare program provides a basic grant of $10,000 per year to poor families but reduces the grant by $1 for every $1 of income earned. How would such a program affect a household’s incentive to work?
- Welfare reform calls for a two-year limit on welfare payments, after which recipients must go to work. Suppose a recipient with children declines work offers. Should aid be cut? What about the children?
- How would you tackle the welfare problem? State the goals you would seek, and explain how the measures you propose would work to meet those goals.
- Suppose a common but unfounded belief held that people with blue eyes were not as smart as people with brown eyes. What would we expect to happen to the relative wages of the two groups? Suppose you were an entrepreneur who knew that the common belief was wrong. What could you do to enhance your profits? Suppose other entrepreneurs acted in the same way. How would the wages of people with blue eyes be affected?
- The Case in Point on Income Inequality in the United States versus continental Western Europe argues that people get, in effect, what they expect. People in the United States attribute success to hard work and skill, while people in Continental Western Europe attribute success to connections, luck, and corruption. With what set of views do you agree? Explain.
- The Case in Point on welfare reform in Britain versus that in the United States argues that the British system, before it could be adopted in the United States, would require a change in attitudes in the United States. What sort of change would it require? Do you prefer the British approach? Why or why not?
- James Heckman of the University of Chicago advocates a program of early intervention targeted at low income families. What are the advantages of such an approach? The disadvantages?
- Give five reasons that the income distribution in the United States has become more unequal in the last several decades. Do you regard this as a problem for society? Why or why not?
- Suppose that all welfare aid were converted to programs of cash assistance. Total spending on welfare would remain unchanged. How would this affect the poverty rate? Why?
|Poorest 10% ||Poorest 20% ||Richest 20% ||Richest 10% |
|Panama ||0.7 ||2.4 ||60.3 ||43.3 |
|Sweden ||3.6 ||9.1 ||36.6 ||22.2 |
|Singapore ||1.9 ||5.0 ||49.0 ||32.8 |
- Plot the Lorenz curves for each in a single graph.
- Compare the degree of inequality for the three countries. (Do not forget to convert the data to cumulative shares; e.g., the lowest 80% of the population in Panama receives 39.7% of total income.)
- Compare your results to the Lorenz curve given in the text for the United States. Which country in your chart appears closest to the United States in terms of its income distribution?
- How does this affect the employment of black workers?
- How does this the wages of black workers?
- How does this affect their total income? Explain.
|Median Household Income in the U.S. ||Percent of households with income below 60% of median |
|1994 ||40,677 ||30.1 |
|1995 ||41,943 ||30.4 |
|1996 ||42,544 ||29.9 |
|1997 ||43,430 ||29.1 |
|1998 ||45,003 ||27.8 |
|1999 ||46,129 ||27.1 |
|2000 ||46,058 ||26.4 |
|2001 ||45,062 ||27.4 |
|2002 ||44,546 ||27.8 |
|2003 ||44,482 ||28.3 |
|2004 ||44,389 ||28.3 |
- Plot the data on a graph.
- Is this a relative or an absolute definition of poverty?
- Why do you think the percent of households with incomes below 60% of the median fell from 1994 to 2000 and has risen since?
- Discuss the measurement issues involved in the data you have presented.
- Discuss the elements of the system of counting the incomes of low income people in the United States and explain how it relates to your answer in (d).
- Draw the demand and supply curves for the two markets so that they intersect at the wages given above.
- How does increased demand for skilled workers and a reduced demand for unskilled workers affect the initial solution?
- How is the Lorenz curve for the United States economy affected by this development? Illustrate the old and the new Lorenz curves.
- Suppose there is an increase in immigration from Mexico. How will this affect the two markets for labor?
- Suppose Professor Heckman’s recommendation for early intervention for low income children is followed and that it has the impact he predicts. How will this affect the two markets today? In 20 years? Illustrate and explain how the demand and/or supply curves in each market will be affected.
- What would the impact of the change in (d) be on the Lorenz curve for the United States 20 years from now?