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  1. Introduction Reading: Schiller, Chapter 1: Views of Inequality and Poverty

  2. Today’s Topics • Hot issues • Analytical framework for causes of poverty • How poverty is related to inequality • The complexities of measuring well-being

  3. Hot Issues • What is economic inequality? • What is economic justice? • What is poverty? • Are there really poor Americans? • If so, are they deserving of our assistance? • What form should assistance take? • Who should provide assistance? • Is there an optimal level of redistribution? • Are we providing too much or too little assistance?

  4. Analytical Framework for Identifying the Causes of Poverty • Flawed Character • Personal characteristics responsible for poverty • Human Capital theory supports this perspective • Individuals can enhance with labor market value with investments in education and training • Flawed Character affects the supply side of labor market

  5. Upward sloping supply curve represents workers willing to work at each wage rate. Within a single market (eg. accountants), workers are ranked by their reservation wages. Reservation wages are positively correlated with ability and skills Representation of Supply in the Labor Market S Wages Workers

  6. Analytical Framework for Identifying the Causes of Poverty, cont. • Restricted Opportunity • Obstacles restrict opportunities for earnings • Restricted Opportunity affects the demand side of the labor market

  7. Downward sloping demand curve represents number of jobs available at each wage rate Upward sloping supply curve represents workers willing to work at each wage rate. Representation of Supply and Demand in the Labor Market S Wages D Workers (hours)

  8. Analytical Framework for Identifying the Causes of Poverty, cont. • Big Brother • Government policies induce rational but undesirable behaviors that keep people poor • Work disincentives • Encourage births outside of marriage • Encourage family breakup • Big Brother affects the supply side of the market

  9. Analytical Framework for Identifying the Causes of Poverty, cont. • Caveats • Schiller’s “Causes” are not mutually exclusive. Avoid the mistake of choosing sides • Not everyone employs Schiller’s framework • How policymakers perceive the causes of poverty influences the design of policies • Flawed Character--supply side policies to change personal characteristics • Restricted Opportunities--demand side policies to increase employment and earnings • Big Brother--eliminate government programs

  10. How is poverty related to economic inequality? • The poor take their place in the lower extremes of the distribution of income and wealth • Poverty and inequality share causal factors

  11. Complexities of Measuring Well-being • Should well-being be measured in material terms alone? • Can money buy happiness? • What other dimensions should be considered? • Should we focus the social as well as the material dimensions of well-being? • If we agree upon a single material measure of poverty, how should this measure be defined? • Should we focus on income or wealth?

  12. Complexities of Measuring Well-being • Once we agree upon a measure, what is the relevant time period for assessing inequality and poverty? A month? A year? 5 years? Over a life time? • Should our measure include the value of publicly provided goods and services?