Labor Economics Project

Income inequality

Brief introduction to the topic and the economic questions to be addressed

Income inequality refers to the difference in the income that is received by the rich and the poor. In the United States, income inequality has significantly increased since the 1970s after several periods of experiencing stability. This depicts that the share of the nation’s income that is received by the high-income households has rapidly increased. The trend of income inequality is evident where the income is measured before and after taxes and also the transfer payments. After measuring the income for all the households in the United States, the income inequality in the country can be well compared with that of the other developing countries mostly before transfers and the taxes but it is actual among the countries with the highest after transfers and the taxes depicting that the country shifts very less income from the higher to the lower income households in the country (Chen, & Zhou, 2005). After measuring the income for the working-age households, it is clear that the market income inequality is very high and on the other hand the level of redistribution is very low in the country. The comparisons made depict that Americans are shifting from the reliance on the market income to the reliance on the transfer payments of income in the future which is relatively less than households in other developed countries do.

Some of the economic questions to be addressed in this paper include; who are the top 1 percent n the income? How has the middle class been fairing? Does it matter if some people are richer than others? Why has the income inequality increased? Does the distribution of wealth follow a similar pattern? And what is being done to narrow the gap among others?

Why does this topic deserve your research attention?

The topic of income inequality deserves my research attention because it has a very negative impact on the economic growth of a country and this need to be corrected. One of the impacts is that an increase in the level of income inequality in a country results to a lower transitional in the Gross Domestic Product per capita growth (Maxwell, 1990). This has a negative impact on the economy and the growth of a country in the long run because only some people can benefit where the rich continue amassing more wealth while the poor people get to become poorer. The poor people who spend most of their money in the purchasing of the consumption goods have less money to buy the goods thus decreasing the aggregate demand in the economy while the rich people jus save their money in the banks rendering it to be less useful in the economy. The other impact of the increasing income inequality is that it decreases the level of education in a country. Poverty is associated with low level of education since the poor people cannot be in a position to afford to pay school fees for their children so that they can receive the quality education. Increase in the income inequality in a country lender so many people to end up being uneducated since they receive a substantially low income that cannot cater for the high level of education thus reducing the growth of a country.

Brief discussion of economic theory and econometric model if you had taken data analysis courses such as ECO 315 Econometrics (optional)

Economic theory relies upon presumed quantitative economic models that make use of a variety of concepts. The theory continues with the assumption that some variables are being held constant so that they can be used to explain the ones which are under consideration. The main objective when creating the economic theories is to find the ones which are simple in the required information, more accurate in the predictions made and also those that are more effective in generating the performing of more research instead of the previously used theories that were presumed with adequate analysis (Becker, 2007). In explaining information about income inequality in the United States, the variables used are the cumulative income share and the cumulative population share. From the Lorenz curve of income distribution that is used to measure inequality, the Gini-coefficient is used to measure the inequality, and it is the most efficient method (Silber,1999). If the coefficient varies between zero, complete equality is reflected while one, on the other hand, indicates the presence of complete inequality in a country. From the graph, is represented by the area between the line of equality and the Lorenz curve. From the diagram, the Lorenz curve maps the cumulative income curve on the vertical axis against the population distribution which is on the horizontal axis. For example, the graph depicts that about 40% of the population obtains a percentage of about 20% of the total income distributed. If there was equality in the distribution of income, the distribution of income curve could be a straight line that is equal to the line that depicts total equality.

How will you obtain data set for this research if applicable?

I will obtain the data set for this research from the Congressional office where the budget of the United States is formulated. This is because they have a wide range of information that is useful for determining the level of inequality in the country such as the labor income, capital income, business income, capital gains and also the net of transfer payments as well as the taxes.

Some references (at least 5) and brief description of their contents

The following references have been used in the research and construction of this paper.

Becker, G. (2007). Economic theory. New Brunswick: Aldine Transaction.

This article explains more about how some variable tend to be held constant when explaining some economic theories. Most simple economic theories are made use of in finding the most important and relevant information on a subject, making an accurate prediction in the measurement of income inequality and also performing a more effective research since the theories that were previously used to explain income inequality were presumed.

Chen, Z. & Zhou, Y. (2005). Income distribution during system reform and economic development in China: the status and trend of income inequality of Chinese residents. New York: Nova Science Publishers.

This book clearly brings out information on how the United States is the country which has the highest level of income inequality among the developed countries. Despite the fact that the book is published in China, it shows that the United States shifts little amount of income from the rich to the poor thus making the rich to become richer while the poor people become purer thus reducing the aggregate demand in the country and hence less growth will be achieved.

Maxwell, N. (1990). Income inequality in the United States, 1947-1985. New York: Greenwood Press.

This article reveals the impacts that are associated with the high level of income inequality in a country. Income inequality has both positive and negative impacts in a county. The inequality is positive to the developing economies while it has a negative impact on the developed economies.

Poverty Reduction & Equity. (2015). Measuring Inequality. The World Bank.

This article depicts how inequality in the income in a certain country is measured. It outlines the Lorenz curve that shows the variation in the income distribution in the country from the line of total equality.

Silber, J. (1999). Handbook of income inequality measurement. Boston: Kluwer Academic.

This book analyses the different methods of measuring the income inequality in a country. The book stipulates the Gini-coefficient method is the most effective method of measuring the level of income inequality in a country so that the best measures can be taken to alleviate it.

References

Becker, G. (2007). Economic theory. New Brunswick: Aldine Transaction.

Chen, Z. & Zhou, Y. (2005). Income distribution during system reform and economic development in China : the status and trend of income inequality of Chinese residents. New York: Nova Science Publishers.

Maxwell, N. (1990). Income inequality in the United States, 1947-1985. New York: Greenwood Press.

Poverty Reduction & Equity. (2015). Measuring Inequality. The World Bank.

Silber, J. (1999). Handbook of income inequality measurement. Boston: Kluwer Academic.