Economic Inequality Notes
Economic Challenges and Responses
Chapter 8: Economic Inequality
Big Idea
- Geographic, social, political, and demographic factors contribute to economic inequality in Canada.
- There are diverse viewpoints regarding the causes and impact of economic inequality and how to best address it.
Framing Questions
- Why is there economic inequality in Canada?
- How is it addressed?
Overall Expectation
- Students will analyze causes and measures of, as well as responses to, economic inequality in Canada.
- Focus on: Stability and Variability; Economic Perspective
Specific Expectation
- C4.1: Students will explain how various factors contribute to income inequality.
- C4.4: Students will assess the impact that economic fluctuations have had on different communities in Canada.
Success Criteria
- I can define income, disposable income, income inequality, poverty, discrimination.
- I can analyze economic data to conclude how income inequality is changing in Canada.
- I can list and describe 7 reasons for income inequality.
- I can illustrate the market for high & low-skilled labor using a graph.
What is Income?
- Income is the flow of money into the household from employment, state transfers, rents, and earnings from investments.
- Disposable Income is income after taxes and other essential expenses, which can be used for consumption or saving.
What is Income Inequality?
- Income inequality refers to the extent to which income is distributed in an uneven manner among a population.
How Does Income Inequality Affect Society?
Income Group Behavior
- Low Income: May affect their ability to invest in education and lower health levels.
- The Middle Class: May affect consumption of goods and services.
- The Rich: May exercise political power to defeat policies that don’t fit their needs (public health and education).
Income Group Interaction
- Social Capital: The poor are increasingly trapped while the rich may be exclusionary.
- Social Unrest: Can be associated with social conflict and higher security costs.
- Volatility: Hard to reach political consensus, and leaders serve the interests of their supporters at the expense of the public good.
Economic Inequality
- The median income in 2020 was $46,326.
- Education is the single biggest factor affecting household income distribution.
- Size of household, marital status, and age of householder are also important.
- Race and region are the least important.
Household Income Factors
- Education of householder: Professional degree, Doctorate degree, Master's degree, Bachelor's degree, Assoc. degree, Some college, High school, Grade 9-12, <Grade 9
- Type of household: Married couple, Male (wife absent), Female (husband absent), Single male, Single female
- Age of householder: 15-24, 25-34, 35-44, 45-54, 55-64, 65 and over
- Persons of household: 1 person, 2 persons, 3 persons, 4 persons, 5 persons, 6 persons, 7+ persons
- Median Income:
Poverty
- Poverty is a situation in which a household’s income is too low to be able to buy the quantities of food, shelter, and clothing that are deemed necessary.
- Poverty is a relative concept.
- Canada has no official poverty measure because Statistics Canada has stated that unless politicians express a social consensus on the definition of poverty, there will be no measure.
The Sources of Economic Inequality
- Inequality arises from unequal labor market outcomes and from unequal ownership of capital.
- Human capital
- Discrimination
- Entrepreneurial Ability
- Personal and Family Characteristics
- Where one Lives
- Luck & Health
- Market Power & Current Wealth
Human Capital
The more human capital a person possesses, the more income that person likely earns, other things remaining the same.
On the demand side of the labor market, high-skilled workers generate a larger marginal revenue product than low-skilled workers.
So firms are willing to pay a higher wage rate for high-skilled labor.
Figure (a) shows the difference in demand curves for high-skilled versus low-skilled labor.
On the supply side of the labor market, high-skilled workers incur a cost of acquiring their skills—money costs as well as time costs.
So high-skilled workers are willing to supply labor only at wage rates that compensate them for those costs, which exceed the wage rates at which low-skilled workers are willing to supply labor.
Figure (b) shows the difference in supply curves for high-skilled versus low-skilled labor.
Figure (c) shows the difference in equilibrium wage rates.
The higher demand and lower supply for high-skilled workers relative to low-skilled workers creates a higher equilibrium wage rate for those workers with greater human capital.
Discrimination
- The unjust or prejudicial treatment of different categories of people or things, especially on the grounds of race, age, or sex.
Entrepreneurial Ability
- Some people become extremely rich through a combination of hard work and outstanding entrepreneurial ability.
- But others who borrow to create a business, work hard, and have bad luck become extremely poor.
Personal and Family Characteristics
- Personal and family characteristics play a crucial role, for good or evil, in influencing economic well-being.
Where One Lives
- Why do different communities have different employment rates?
Income Inequality Statistics
- The richest 1% of Canadians made 15 times more than the average Canadian made in 2010.
- In 1980, the ratio was 9 times.
- Not a single province has managed to become more equal over the past 30 years.