Inequality, Poverty, and Discrimination

Read this chapter for a more detailed look at the topic of income inequality and discrimination in the labor markets as these are real examples of market failures. Attempt the "Try It" problems at the end of each section before checking your answers.

2. Income Inequality


  1. Explain how the Lorenz curve and the Gini coefficient provide information on a country's distribution of income.
  2. Discuss and evaluate the factors that have been looked at to explain changes in the distribution of income in the United States.

Income inequality in the United States has soared in the last half century. According to the Congressional Budget Office, between 1979 and 2007, real average household income - taking into account government transfers and federal taxes - rose 62%. For the top 1% of the population, it grew 275%. For others in the top 20% of the population, it grew 65%. For the 60% of the population in the middle, it grew a bit under 40% and for the 20% of the population at the lowest end of the income distribution, it grew about 18%.

Increasingly, education is the key to a better material life. The gap between the average annual incomes of high school graduates and those with a bachelor's degree increased substantially over the last half century. A recent study undertaken at the Georgetown University Center on Education and the Workforce concluded that people with a bachelor's degree earn 84% more over a lifetime than do people who are high school graduates only. That college premium is up from 75% in 1999. Moreover, education is not an equal opportunity employer. A student from a family in the upper end of the income distribution is much more likely to get a college degree than a student whose family is in the lower end of the income distribution.

That inequality perpetuates itself. College graduates marry other college graduates and earn higher incomes. Those who do not go to college earn lower incomes. Some may have children out of wedlock - an almost sure route to poverty. That does not, of course, mean that young people who go to college are assured high incomes while those who do not are certain to experience poverty, but the odds certainly push in that direction.

We shall learn in this section how the degree of inequality can be measured. We shall examine the sources of rising inequality and consider what policy measures, if any, are suggested. In this section on inequality we are essentially focusing the way the economic pie is shared, while setting aside the important fact that the size of the economic pie has certainly grown over time.