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.

5. Review and Practice

5.2. Numerical Problems

  1. Here are income distribution data for three countries, from the Human Development Report 2005, table 15. Note that here we report only four data points rather than the five associated with each quintile. These emphasize the distribution at the extremes of the distribution.


    Poorest 10%

    Poorest 20%

    Richest 20%

    Richest 10%
















    1. Plot the Lorenz curves for each in a single graph.
    2. 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.)
    3. 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?
  3. Looking at Figure 19.7 "Prejudice and Discrimination" suppose the wage that black workers are receiving in a discriminatory environment, WB, is $25 per hour, while the wage that white workers receive, W, is $30 per hour. Now suppose a regulation is imposed that requires that black workers be paid $30 per hour also.
    1. How does this affect the employment of black workers?
    2. How does this the wages of black workers?
    3. How does this affect their total income? Explain.
  4. Suppose the poverty line in the United States was set according to the test required in the European Union: a household is poor if its income is less than 60% of the median household income. Here are annual data for median household income in the United States for the period 1994–2004. The data also give the percentage of the households that fall below 60% of the median household income.

  5.   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
    1. Plot the data on a graph.
    2. Is this a relative or an absolute definition of poverty?
    3. Why do you think the percent of households with incomes below 60% of the median fell from 1994 to 2000 and has risen since?
    4. Discuss the measurement issues involved in the data you have presented.
    5. 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).
  6. Consider the following model of the labor market in the United States. Suppose that the labor market consists of two parts, a market for skilled workers and the market for unskilled workers, with different demand and supply curves for each as given below. The initial wage for skilled workers is $20 per hour; the initial wage for unskilled workers is $7 per hour.
    1. Draw the demand and supply curves for the two markets so that they intersect at the wages given above.
    2. How does increased demand for skilled workers and a reduced demand for unskilled workers affect the initial solution?
    3. How is the Lorenz curve for the United States economy affected by this development? Illustrate the old and the new Lorenz curves.
    4. Suppose there is an increase in immigration from Mexico. How will this affect the two markets for labor?
    5. 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.
    6. What would the impact of the change in (d) be on the Lorenz curve for the United States 20 years from now?