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Income

1. What factors have contributed to increased income inequality since 1969?

2. Should a nation's income be distributed to its members according to their contributions to the production of that total income or according to the member's needs? Should society attempt to equalize income or economic opportunities? Are the issues of equity and equality in the distribution of income synonymous? To what degree, if any, is income equality equitable?

3. Analyze in detail: "There need be no tradeoff between equality and efficiency. An 'efficient' economy that yields an income distribution that many regard as unfair may cause those with meager incomes to become discouraged and stop trying. So efficiency may be undermined. A fairer distribution of rewards may generate a higher average productive effort on the part of the population, thereby enhancing efficiency. If people think they are playing a fair economic game and this belief causes them to try harder, an economy with an equitable income distribution may be efficient as well."

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1. What factors have contributed to increased income inequality since 1969?

Solution:

Beginning in the early 1970s in the United States, inequality in the distribution of household and family income began to rise. Generally, the long-term trend has been toward increasing income inequality. Since 1969, the share of aggregate household income controlled by the lowest income quintile has decreased from 4.1 percent to 3.6 percent in 1997, while the share to the highest quintile increased from 43.0 percent to 49.4 percent .There are several demographic changes that have the potential for causing the amount of income inequality to vary over time. Changes in the relative sizes of different age and ethnic groups; changes in household composition; and the relative decline in traditional families have been identified as likely causes of increased income inequality.

New technology, globalization, and taxes have also been cited as reason for increasing income inequality. Globalization--increased and freer trade that has linked more closely the world's product, labor, and capital markets--and technological progress has led to greater international specialization. The comparative advantage in the production of labor-intensive goods and services that their abundant supply of low cost, unskilled labor gives developing nations a lead to specialize in these kinds of industries. Economic theory predicts that this will put downward pressure on the wages of unskilled workers in developed countries like the United States and upward pressure on the wages of the unskilled in developing countries. Estimates show that contribution of increased trade to the total increase of the wage differential between unskilled and skilled workers range from negligible to 50 percent.

Globalization, declining manufacturing jobs, expanding low-wage service and trade jobs, and weakening of labor market ...

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