Chapter 10. Resource Markets and the Distribution of Income. Copyright 2011 Pearson Addison-Wesley. All rights reserved.

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1 Chapter 10 Resource Markets and the Distribution of Income

2 Resource markets differ from markets for consumer goods in several key ways First, the demand for resources comes from firms producing goods and services, and the supply of resources comes from households. This is different from consumer goods markets where the demand for consumer goods comes from households and the supply of consumer goods comes from firms. In resource markets, consumers supply labor, land or capital, and firms purchase these resources. 10-2

3 Resource markets differ from markets for consumer goods in several key ways Second, the demand for resources is an indirect or derived demand: Firms demand resources only because there is a demand for their goods and services. Thus, changes in the demand for a product also cause changes in the demand for the resources used to produce that product. 10-3

4 Resource markets differ from markets for consumer goods in several key ways Third, the demand for a resource is affected by the productivity of that resource. If a resource becomes more productive, then it produces more value for the firm, and the firm will want more of it (assuming the firm can sell more units of output). 10-4

5 Implications of the characteristics of resource markets, such as the market for labor First, households supply labor and firms demand labor. When laborers decide to work more hours to buy more goods, this increases the supply of labor and puts downward pressure on the price of labor (the wage rate). When firms replace laborers with robots, this reduces the demand for labor and puts downward pressure on wages. 10-5

6 Implications of the characteristics of resource markets, such as the market for labor Second, the demand for labor is tied to the demand for the firm s products. For example, when the automobile market is booming, automobile manufactures hire (demand) more laborers, putting upward pressure on the wages of workers who build automobiles. When the demand for automobiles declines, the opposite occurs: the demand for automobile workers declines and there is downward pressure on wages. 10-6

7 Implications of the characteristics of resource markets, such as the market for labor Third, the demand for labor is directly affected by the productivity of labor. If laborers become more productive (due to better technology, or more skills and education), they increase the firm s output and lower the firm s average variable costs of production. Firms usually respond to such events by increasing the demand for labor because of the increased revenues from the additional productivity, which then causes upward pressure on wages. 10-7

8 FIGURE 10.1 The Market for Unskilled Labor 10-8

9 TABLE 10.1 Marginal Physical Product and Marginal Revenue Product of Unskilled Labor 10-9

10 FIGURE 10.2 The Firm s Use of a Resource 10-10

11 FIGURE Effect of Minimum Wage Laws on Unskilled-Labor Market: surplus of unskilled labor Surplus 10-11

12 Fair Labor Standards Act of 1938 Workers paid at least enough to maintain a minimum standard of living necessary for health, efficiency, and general well-being without substantially curtailing employment

13 TABLE 10.2 The Real Value of the Minimum Wage,

14 FIGURE 10.3 The Real Value of the Minimum Wage,

15 THE DEBATE What do supporters claim? What do opponents claim? 10-15

16 Minimum wage supporters argue Minimum wage values eroded from inflation? Escape poverty Few jobs destroyed Increased work ethic Increased consumption Popular Support Does not primarily affect teens 10-16

17 Those opposed to the minimum wage argue Law of supply and demand More unemployment More inflation More outsourcing and incentive to mechanize More illegal immigration Helps people that don t really need it 10-17

18 Graph of the Minimum Wage job market as proponents see it: W D S Min Wage W* Q1 Q2 L 10-18

19 Graph of the Minimum Wage job market according to some studies (higher min. wage did not reduce employment): W D S Min. Wage W* Q1 L 10-19

20 QUESTIONS What are other options to help unskilled laborers? Stricter Immigration Laws? Negative Income Tax? Payroll Tax Laws? Better Education? Better Technology? How would each of these policies affect the market for unskilled labor? 10-20

21 Forms of Market Failure 1) Inequality and Poverty 2) Unsafe products (imperfect information) 3) Mistreatment of Laborers (unequal bargaining power) 4) Externalities 5) Exploitation of the Environment/Preserving Resources for Future 6) Public Goods 7) Lack of Competition 8) Increasing Costs of Services 9) Macroeconomic Instability/Unemployment and Inflation 10-21

22 Each form of market failure has resulted in some sort of government reaction Regulation or law to correct behavior Regulatory agency to monitor behavior Direct government intervention in a particular market We will be analyzing why economists have identified these cases as market failures, and what remedies our government has chosen to enact. But we must also keep in mind the dangers associated with government regulation, which can create problems (and market failures) of their own

23 TABLE 10.4 Changes in the U.S. Distribution of Income Since 1950 Since 1970, the share of national income going to the richest 20% has increased dramatically, while the share of national income going to all other groups has declined

24 FIGURE 10.5 Real Family Income Growth by Quintile, : All families did well and the least well-off Americans benefitted most from rapid growth and expanding social programs : Rich are richer; poor and middle class incomes are stagnant 10-24

25 TABLE 10.5 Income Distribution of Selected Developed and Developing Nations The US is more unequal than other developed countries; less unequal than most less developed countries

26 FIGURE 10.6 Lorenz Curve and Gini Coefficient Computation 10-26

27 FIGURE 10.7 U.S. Lorenz Curve, 1970 and

28 TABLE 10.6 Distribution of Financial Wealth in the United States,

29 TABLE 10.7 Distribution of Personal Wealth 10-29

30 FIGURE 10.8 Top 1% Share of Household Wealth,

31 TABLE 10.8 Percentage of Aggregate Income Received by Income Quintiles,

32 Is Inequality a Market Failure? Most economists say it is Greater inequality is associated with: Crime Poverty and homelessness Less social cohesion Greater government spending on social programs Greater private spending on security Less aggregate demand overall (since the rich spend less on average than the poor) and slower growth More criticisms of the market, as it is increasingly difficult to argue that working hard will allow you to get ahead 10-32

33 Life in South Africa, the 2 nd -most unequal country on the planet Cars equipped with flame throwers to thwart carjackings Homes are surrounded by high walls and elegantly arranged razor wire People keep poisonous snakes, hungry lions on their property to thwart thieves No one speaks to a stranger on the street 10-33

34 Causes of Increasing Inequality in the US Globalization Technological change Decline of unions Changes in government policy Decreases in taxes on the rich and corporations, increase in payroll taxes paid mostly by the working class Cuts in welfare and assistance for the poor Changes in social norms Inequality used to be discouraged 10-34

35 Measures used in the U.S. to reduce inequality Progressive income tax Earned Income Tax Credit Free public education Estate taxes 10-35

36 Poverty Persons Below Poverty Level (1000s) Persons Below Poverty Level (%) All Races White Black Hispanic All Races White Black Hispanic , ,420 17,484 7, (NA) ,877 17,770 7,545 2, ,272 19,699 8,579 3, ,064 22,860 8,926 5, ,585 22,326 9,837 6, ,425 24,423 9,872 8, ,581 21,645 7,982 7, ,950 24,872 9,168 9, ,460 24,416 9,048 9, Source: US Census Bureau, Historical Poverty Tables, Table 2

37 TABLE Percentage of Children Under Age 18 Below the Poverty Line 10-37

38 FIGURE 10.9 Child Poverty in Selected Industrialized Countries,

39 The problem of POVERTY is somewhat different from inequality It has to do with the absolute level of deprivation Rather than the relative level Inequality fosters conflict, less social cohesion, but if everyone has at least a decent standard of living, the problems of inequality are not debilitating Poverty is directly correlated with a host of social and economic ills Crime, drug abuse, spousal and child abuse, family break up, poor performance in schools 10-39

40 Poverty Line $20,614 in 2006 for a family of 4. Poverty line is computed as 3 times the basic food budget. Note: this from an era when 1/3 of a family s spending was on food. With increases in rent, transportation, and health care, food is now only 1/6 of a typical family s budget. So a more accurate poverty line might be over $40,000. By that measure, almost 40% of our families would be living in poverty. NSF Study: poverty line should be 40% higher ($25,749) 10-40

41 Programs to alleviate poverty Welfare: Temporary Aid to Needy Families (TANF) Welfare reform imposed time limits on benefits (usually 5 years), work requirements Welfare caseloads dropped dramatically in the late 1990s But homelessness and food insecurity also increased Social Security, Medicare To alleviate poverty among the elderly Food stamps, housing aid, electricity aid, Medicaid, Head Start 10-41

42 Inequality due to race and gender differences The following table shows how occupations are structured based in part on race and gender. Try to identify some reasons why certain occupations might be disproportionately female or disproportionately black as you look at the data 10-42

43 TABLE 10.9 Occupations by Gender and Race in the United States, 1983 and

44 What accounts for these clear disparities in income and occupation? Could be things like: differences in ability, hard work, kind of work people choose, education, experience, luck Could be discrimination: same people receive different payments because of "other" factors like race and gender 10-44

45 Policies to correct racial and ethnic inequality and discrimination Affirmative Action Equal employment opportunity laws (EEOC), which ban discrimination on the basis of race or gender Lawsuits College affirmative action programs 10-45

46 How extensive is racial discrimination in our country? Given our history, are there still vestiges of racism present? Do people still judge others on the basis of skin color? 10-46

47 Inequality due to racial differences Minorities tend to earn less than whites Even with same skills and job performance Blacks twice as likely to be unemployed, three times more likely to live in poverty and more than six times as likely to be imprisoned compared with whites Study by University of Chicago & MIT economists: Applicants with white-sounding names are 50 percent more likely to get called for an interview than applicants with African-American-sounding names with identical resumes. Racial Profiling of police, security Different treatment of teens (Jena 6)

48 TABLE Median Black Family Income as a Percent of White Family Income 10-48

49 TABLE Median Female Worker Income as a Percent of Median Male Worker Income 10-49

50 TABLE 10.3 Size Distribution of Family Income in the United States,

51 10-51