Microeconomics

Income InequalityRich and Poor

Rich and Poor

RelativeSubjective

Measurement limitations

What would you rather be?

Rich in poor countryor

Poor in a rich country

Who is richer?

Cell Phone InternetAir ConditionerJet TravelMedicine

2013 vs. 1953Entertainment CarHousingFoodOpportunities

Income must be created before it can

be distributedEntrepreneurs use capital to create

income

Capital

Financial - MoneyPhysical - Things

Intellectual - IdeasHuman - People

Market is Efficient

May not be fair

Who defines fair?

Milton Friedman(1912 - 2006)

Fairness is not an

objectively determined

concept

Fairness

Two Definitions

Redistributive Fairness

It is fair to equalize rewards.

Inequality is inherently

unfair.

Meritocratic Fairness

Fairness means matching

reward to merit.

Forced equality is inherently unfair

The worst form of inequality is to try to make unequal things

equal.

– Aristotle

THE REAL QUESTION is not whether fairness

mattersit does...

but which definition is correct for public

policy.

Quiz

1. What is Redistributive Fairness?

2. What is Meritocratic Fairness?

Government can make income more

equalDistorts incentivesAlters behaviorLess efficient

allocation

How much inequality?What can government

do?How to help the poor

Quintile

Line up by income

One-Fifth

Divide into five groups

Income Inequality by QuintileMENA

Percentof

IncomePerfect Equality

Poverty Line

A level of income set by the government

below which is deemed to be in

poverty

Poverty Rate

The percentage of the population living

below the poverty line

Percent Below Poverty Line

Egypt 20

Gaza 70

Iran 18

Iraq 25

Jordan 14

Syria 12

UAE 19

Yemen 45

$0

Age

The Income Lifecycle

Born Die

Go to Work

Peak at 50

Retire-

+ LevelSpending

EarningVaries

Consumption GapTop 20%

to Bottom 20%

Unadjusted Income

15 x

After Taxes 14 x

Consumption 4 x

Household Size 2 x

What percent of millionaires inherited

their wealth?

20% Inherited

80% Earned