Chapter 12 Income Inequality
Review Questions
2.
a. Higher cost of living in New York.
b. Greater human capital investment for the attorney.
c. Differences in ability. (Larry King is an example of a superstar—someone regarded
as “the best” in his field.)
d. Nonmonetary job characteristics might be more pleasant for the professor
of philosophy.
e. Barriers to entry keep German construction workers’ wages high.
4.
True. One example is statistical discrimination, which can persist even when those who
practice it have no trace of prejudice (emotional dislike for members of a group).
6.
Statistical discrimination occurs when individuals are excluded from some opportunity
(e.g., a job) based on the statistical probability of behavior in their group rather than their
personal characteristics. The market, on its own, does not eliminate statistical
discrimination. Government intervention such as affirmative action programs or tough
enforcement of anti-discrimination laws) are solutions often proposed for statistical
discrimination.
8.
Unions can raise the wage above the equilibrium level. Ordinarily, excess supply of labor
would drive the wage back down, but the union can prevent this by limiting membership
in the union.
10.
Our chief measures (the poverty rate and the Lorenz curve and its associated Gini ratio)
measure earned income, rather than available income (which is influenced by transfer
payments, transfers in kind, and fringe benefits). They also are static measures. They do
not tell us whether the same families are stuck in the same relative position year after
year, or whether there is substantial mobility so that families are constantly moving up
and down. In the latter case, income inequality measured over peoples’ lifetimes would
be much less severe than income inequality measured in a given year.
12.
The use of grievance procedures and other forms of communications with management
can raise worker morale and reduce labor turnover. If this leads to greater productivity,
the demand for labor in the union sector could increase, reducing or eliminating the drop
in employment caused by higher union wages.
Problems and Exercises
2.
ca.
b. The Gini coefficient for the curve without transfer payments [curve (a)] is roughly
0.5.
c. The poverty line for those living alone would be three times the food budget, or an
annual income of $9,000. Four of Dismal Seepage’s 10 citizens are below this line,
yielding a poverty rate of 40 percent.
4.
See graphs on next page.
a. In panel b we see that firms will continue to hire N1 unskilled workers, although the
higher wage rate being paid in the covered sector leads to an excess supply of labor
there.
b. The higher wage rate in the covered sector entices some workers to leave the
uncovered sector and move to the covered sector. This decrease in labor supply leads
to a higher wage rate in the uncovered sector.
c. There will be no effect in the market for skilled workers, since there is no possibility
of substitution between skilled workers and unskilled workers.
6.
The Lorenz Curve is horizontal and corresponds to the horizontal axis until it reaches the
point “100 Percent of Households” and then it becomes vertical and corresponds to the
right vertical axis.
The Gini coefficient is 1.
Challenge Questions
2.
[Appendix Required]
a. Q* workers will be hired by the monopsonist. This wage rate would maximize
employment at the firm.
b. Q* workers will be hired by the monopsonist. Employment will increase, although
not by the maximum possible.
c. If the wage rate is set above the MRP of the last worker hired by the
monopsonist, then employment will fall. If the union cares only about making some
subset of its workers happy (those who vote in union elections, or its most senior
members, for example), then it may indeed bargain for such a high wage rate.
d. Compared with the initial situation with no minimum wage, employment will not be
reduced so long as the union wage rate is set at or above the wage rate found at the
intersection of the Ls curve and the MRP, and at or below the wage rate found at the
MRP of the last worker hired by the monopsonist in the absence of a union.
Economic Applications Exercises
2. Answers may vary.