Question

5)

a) Most policies that target inequality either target it at the low end of the income distribution by trying to increase wages of low-income workers, or at the high end of the income distribution by limiting wages of high-income workers. List a few potential policies of each type.

b) In order to better understand how sensitive inequality measures are to the choice of measure, provide a Lorenz curve of an economy with a 90-10 wage gap that is essentially zero but for which the Gini coefficient is close to 1.

Answer 1

Ans:-(a)

Pell grants and guaranteed student loans are designed to fundamentally lessen inequality by
giving children of low-income parents greater access to education. Policies like the minimum
wage, the progressive tax system, and the Earned Income Tax Credit are all designed in part to
partially offset income inequality by transferring resources from the rich to the poor. The estate
tax is a primary policy aimed at alleviating inequality by targeting the high end as it is supposed
to prohibit family dynasties in terms of wealth.

Ans(b):-

Consider an economy where 95% of the economy earns essentially nothing, with 5% of the economic agents earning essentially everything. Such an economy will have a 90-10 wage gap that is essentially zero (as the 90 percentile person earns roughly what the 10 percentile person earns) but also has a Gini coefficient close to 1 as 5% of the agents earn almost all of the income. Earnings Distribution Share of 100% Income 0% 0% Share of Households 95% 100%