Many people are concerned about changes in the distribution of income. 1. Is the

Question

Many people are concerned about changes in the distribution of income.

1. Is there greater inequality in the distribution of annual income or in the distribution of annual consumption? Which distribution is usually more relevant to concerns about inequality?

2. What is “churning” of the income distribution? How does the extent of churning influence your interpretation of the distribution of annual incomes? All else equal, how does the extent of churning affect the size of the credit market?

3. As you know, the distribution of income has become less equal over the last 30 years. What is leading hypothesis that explains this trend? Explain briefly.

4. Empirically speaking, at least two other factors appear capable of explaining at least a portion of the trend in wage inequality. Identify and explain one of them.

Explanation / Answer

1. Distribution of annual income is usually more relevant to concerns about inequality.

2.The duration of time spent on a very low income can have a considerable effect on the deprivation of a person or family. Some people move in and out of low income whilst others remain persistently in low income.As well as those continuously on low income, this indicator begins to measure the extent of those intermittently on low income, experiencing what is usually referred to as 'income churning' - repeated movements into and out of low income.

3. There has been concern about the increasing inequality in the United States over the past 30 years. Because of this concern, there have been many attempts to explain it. Some people have blamed the policies of the government during the administrations of Presidents Reagan and Bush. The claim here was that spending on government programs that aid the poor were reduced. One of these programs, welfare, will be discussed later in this chapter. Another claim against the Reagan and George W. Bush administration involved reductions in taxes. It was argued that the taxes were reduced mainly for the richer people with little tax reduction to the middle and lower income groups. But generally, the research shows that the changes in government programs and in the tax laws were NOT responsible for the increase in inequality. As noted above, most of the rise in inequality of incomes has been due to the increase in inequality of earnings from work, especially for men.

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