Lorenz Curve and Causes of Inequality

Lorenz Curve and Causes of Inequality

• The functional distribution of income - is the distribution of national income among the major factors of production: labour, capital, and land. The size distribution of income is the distribution of income among individuals, without regard to source of income
• Lorenz curve - a graph showing the extent of inequality of income distribution.
• The size of the area between the Lorenz curve and the diagonal line is a measure of the inequality of income distribution.
• If there were complete income equality, the Lorenz curve would coincide with the diagonal line. Taxing higher income families and subsidizing lower income individuals reduces the inequality of income.

Lorenz Curve for the USA

• The Lorenz curve for the USA shows us that while real average per capita income (average salary) has been growing gradually over many years, the majority of the economy’s total income growth in recent years has accrued to the very highest income earners.
• The average incomes among the lowest income individuals have been approximately stagnant.

Causes of Rising Income Inequality

1. Skill based technological change Example: textile workers replaced by machines.
2. Globalization – jobs going to other countries. Some argue that globalization have narrowed income gaps between rich and poor countries but have increased income gaps within countries. Example: Many North American manufacturing jobs have been outsourced to countries like China and India.
3. Decline of labour unions - many industries no longer have labor unions to fight for higher wages.
4. Superstar theory – Superstars earn more today because of the internet and TV.
5. The Piketty Argument – wealth creates more wealth (rate of return on family wealth). Low and middle income groups have incomes that come from labor efforts rather than accumulated assets that grow at the economy’s per capita growth rate. If the growth on capital is higher than the per capita growth then inequality will get worse