Chapter 20

Income inequality and poverty

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 Learning objectives
• Examine economic inequality in our
society (different in income)
• Problems when measuring economic
inequality
• Government’s role in redistributing income
• Policies aimed at helping the poor

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 Efficiency vs. fairness
• Marketplace acts to allocate resources
efficiently, but it does not necessarily ensure that
recourses are allocated fairly

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 Measurement of inequality
1. How much inequality in our society?
2. How many people live in poverty?
3. What problems arise in measuring the
amount of inequality?
4. How often do people move among
income classes?

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Income distribution in Canada:
1976 - 2010

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 Gini coefficient
• It calculates the extent to which the
distribution of income among individuals
within a country deviates from a perfectly
equal distribution
• Gini=0, perfect equality (same amount of
income for everyone)
• Gini=1 (or 100%), perfect inequality (one
person has all the income)

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Income inequality around the world

33.7%, 2018

Gini Coefficient in %

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 Poverty
• Poverty rate: % of the population whose family
income falls below an absolute level called the
poverty line (Canada: 8.7%, 2018)
• Poverty line: an absolute level of income set by
the federal government for each family size,
below which a family is deemed to be in poverty
(Canada, 3.2 million people, 2018)
• Use Market Basket Measure (MBM) since 2019,
see next few slides.

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 Low-income cutoff (LICO)
• Canada did not have an official measure of the
poverty line until 2019.
• Statistics Canada does, however, produce an
annual estimate called the low-income cutoff (LICO)
• The LICO is calculated as the level of income at
which a household of a given size in a community
with a given population spends 20 percent more
than average on food, shelter, and clothing

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 Low-income measure (LIM)
• The LIM allows for international comparison
• It establishers the poverty threshold as a given
proportion of median income (~50%)

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 Market Basket Measure (MBM)
• MBM is used as Canada’s Official Poverty Line
• Based on the cost of goods and services needed
for a typical family of four
• Basic needs: eat a nutritious diet, buy clothing,
house themselves in their community, and pay
for other necessary expenditures
• They are communities with median after-tax
income of ~$60k (2018)

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 Who is poor?
– Poverty is correlated with ethnicity
– Poverty is high for the work-limited disabled.
– Families headed by a single parent are about
2.5 times as likely to live in poverty than the
average
– Unattached individuals are more than three
times more likely to be poor than average
Source: HUMAN RESOURCES AND SKILLS DEVELOPMENT CANADA (2009), Low Income in Canada: 2000-2007 Using the Market
Basket Measure, Gatineau, Knowledge and Data Management Directorate, SP-909-07-09F, 79 p.
http://www.hrsdc.gc.ca/eng/publications_resources/research/categories/inclusion/2009/sp-909-07-09/page00.shtml

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 Problems in measuring inequality
• Data give an incomplete picture of inequality in
living standards
– In-kind transfers (non-cash)
– The economic life cycle (in school, no income)
– smoothing consumption
– Transitory (random) versus permanent
income (normal)

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 Economic mobility
• Economic mobility - the movement of
people among income classes
• A key measure of economic mobility is
intergenerational mobility, which concerns
the persistence of economic success from
generation to generation
• Canada: a 10% increase in the earnings of
a father is associated with a 1.9% increase
in the earnings of the son

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 Political Philosophy
• The previous discussion on poverty and
income distribution was positive in the
sense that it merely described the world as
it is
• What should the government do about
economic inequality? (normative question)

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 Political Philosophy
• Utilitarianism
• Liberalism
• Libertarianism

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 Utilitarianism
• Utilitarianism: The government should
choose policies to maximize the total utility
of everyone in society
• Utility: a measure of happiness or
satisfaction
• Diminishing marginal utility – extra $ of
income to a poor person provides more
additional utility than to a rich person

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 Liberalism
• A liberal would aim to raise the welfare of the
worst-off person in society.
• Maximize the minimum utility - maximin criteria
• Developed by John Rawls - a theory of justice –
we are sitting in an “original position” behind a
“veil of ignorance”
• Designing public policies and institutions to allow
us to be objective about what policies are just

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 Libertarianism
• Libertarianism: the government should
punish crimes and enforce voluntary
agreements but not redistribute income
• Libertarians conclude that equality of
opportunities is more important than
equality of incomes
• Pioneer by Robert Nozick

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 Policies to reduce poverty
• Some policy options to consider.
– Minimum-wage laws
– Welfare (programs that supply income, e.g.
during Covid-19)
– Negative income tax (i.e. receive subsidy)
– In-kind transfers
– Employment Insurance

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 Problems and Applications
• Q7 (tutorial), p. 459

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