McConnell Campbell R., Brue Stanley L., Barbiero Thomas P. Microeconomics. Ninth Edition

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There are several causes of income inequality in Canada. In general, the market sys-

tem is an impersonal mechanism that embodies no conscience concerning what is

an equitable or just distribution of income. It is permissive of a high degree of

income inequality because it rewards individuals based on the contribution that

their resources make to producing society’s output.

The factors that contribute to income inequality follow.

Ability

People have different mental, physical, and aesthetic talents. Some have inherited

the exceptional mental qualities that are essential to such high-paying occupations

as medicine, corporate leadership, and law. Others are blessed with the physical

capacity and coordination to become highly paid professional athletes. A few have

the talent to become great artists or musicians or have the beauty to become top

fashion models. Others have very weak mental endowments and may work in low-

paying occupations or may not be able to earn any income at all. The intelligence

and skills of most people fall somewhere in-between.

Education and Training

Ability alone rarely produces high income; people must develop and reﬁne their

capabilities through education and training. Individuals differ signiﬁcantly in the

amount of education and training they obtain and thus in their capacity to earn

income. Such differences may be a matter of choice: Chin enters the labour force

after graduating from high school, while Rodriguez takes a job only after earning a

university degree. Other differences may be involuntary: Chin and her parents may

simply be unable to ﬁnance a postsecondary education.

People also receive varying degrees of on-the-job training, which contributes to

income inequality. Some workers learn valuable new skills each year on the job and,

therefore, experience signiﬁcant income growth over time; others receive little or no

on-the-job training and earn no more at age 50 than they did at age 30. Moreover,

ﬁrms tend to select for advanced on-the-job training those workers who have the

highest level of formal education. That added training magniﬁes the education-

based income differences between less-educated and better-educated individuals.

Discrimination

Discrimination in education, hiring, training, and promotion undoubtedly con-

tributes to income inequality in Canada, although the degree is uncertain. If dis-

crimination restricts ethnic minorities or women to low-paying occupations, the

supply of labour will be great relative to demand in those occupations. Wages and

incomes will remain low. Conversely, discrimination reduces the competition that

whites or men face in the occupations in which they are predominant. Thus, labour

supply is artiﬁcially limited relative to demand in those occupations, with the result

that wages and incomes are high.

Preferences and Risks

Incomes also differ because of differences in preferences for market work relative to

leisure, market work relative to work in the household, and types of market work.

chapter seventeen • income inequality and poverty 441

Causes of Income Inequality

People who choose to stay home with children, work part time, or retire early usu-

ally have less income than people who make other choices. For example, those who

are willing to take arduous, unpleasant jobs, such as underground mining or heavy

construction, to work long hours with great intensity, or to moonlight will tend

to earn more.

Individuals also differ in their willingness to assume risk. We refer here not

only to the race car driver or the professional boxer but also to the entrepreneur.

Although many entrepreneurs fail, many of those who develop successful new

products or services realize very substantial incomes. That contributes to income

inequality.

Unequal Distribution of Wealth

Income is a ﬂow; it represents a stream of wage and salary earnings, along with rent,

interest, and proﬁts, as depicted in Chapter 2’s circular ﬂow diagram. In contrast,

wealth is a stock, reﬂecting at a particular moment the ﬁnancial and real assets an

individual has accumulated over time. A retired person may have very little income

and yet own a home, mutual fund shares, and a pension plan that add up to con-

siderable wealth. A new university graduate may be earning a substantial income

as an accountant, middle manager, or engineer but have yet to accumulate signiﬁ-

cant wealth.

The ownership of wealth in Canada is more unequal than the distribution of

income. This inequality of wealth leads to inequality in rent, interest, and dividends,

which in turn contributes to income inequality. Those who own more machinery,

real estate, farmland, stocks and bonds, and savings accounts obviously receive

greater income from that ownership than people with less or no such wealth.

Market Power

The ability to “rig the market” on your own behalf also contributes to income

inequality. For example, in resource markets certain unions and professional groups

have adopted policies that limit the supply of their services, thereby boosting the

incomes of those on the inside. Also, legislation that requires occupational licensing

for, say, doctors, dentists, and lawyers can bestow market power that favours the

licensed groups. In product markets, rigging the market means gaining or enhanc-

ing monopoly power, which results in greater proﬁt and thus greater income to the

ﬁrms’ owners.

Luck, Connections, and Misfortune

Other forces also play a role in producing income inequality. Luck and being in

the right place at the right time have helped individuals to stumble into for-

tunes. Discovering oil on a ranch, owning land along a proposed highway inter-

change, and hiring the right press agent have accounted for some high incomes.

Personal contacts and political connections are other potential routes to attaining

high income.

In contrast, economic misfortunes such as prolonged illness, serious accident,

death of the family breadwinner, or unemployment may plunge a family into the

low range of income. The burden of such misfortune is borne very unevenly by the

population and thus contributes to income inequality. (Key Question 4)

442 Part Three • Microeconomics of Resource Markets

Over a period of years economic growth has raised incomes in Canada: In absolute

dollar amounts, the entire distribution of income has been moving upward. But

incomes may move up in absolute terms while leaving the relative distribution of

income less equal, or unchanged. Table 17-2 shows the relative distribution of per-

sonal income over time. Recall that personal income is before tax and includes cash

transfers but not noncash transfers. As you can see, the distribution of income in

Canada has remained remarkably constant over the past 50 years.

Global Perspective 17.1 compares inequality in Canada (here by individuals, not

by families) with that in several other nations. Income inequality tends to be high-

est in developing nations.

Causes of Growing Inequality

Economists suggest several major explanations for the rise of income inequality of

the past three decades.

GREATER DEMAND FOR HIGHLY SKILLED WORKERS

Perhaps the most signiﬁcant contributor to the growing income inequality has been

an increasing demand by many ﬁrms for workers who are highly skilled and well

educated. Several industries requiring highly skilled workers have either recently

emerged or expanded greatly, such as the computer software, business consulting,

biotechnology, health care, and Internet industries. Because highly skilled workers

remain relatively scarce, their wages have been bid up. Consequently, the wage dif-

ferences between them and less-skilled workers have increased.

The rising demand for skill has also evidenced itself in rapidly rising pay for

CEOs (chief executive ofﬁcers), sizable increases in income from stock options, sub-

stantial increases in incomes of professional athletes and entertainers, and huge for-

tunes for successful entrepreneurs. This growth of “superstar” pay has also

contributed to rising income inequality.

DEMOGRAPHIC CHANGES

The entrance of large numbers of less-experienced and less-skilled baby boomers

into the labour force during the 1970s and 1980s may have contributed to greater

chapter seventeen • income inequality and poverty 443

● Data reveal considerable income inequality in

Canada; in 1997 the richest ﬁfth of all families

receive 41.4 percent of after-tax income, and

the poorest ﬁfth receives 5.5 percent.

● The Lorenz curve depicts income inequality

graphically by comparing percentages of total

families and percentages of total income.

● The distribution of income is less unequal over

longer periods.

● Government taxes and transfers signiﬁcantly

reduce income inequality by redistributing

income from higher-income groups to lower-

income groups; the bulk of this redistribution

results from transfer payments.

● Differences in ability, education and training,

tastes for market work versus nonmarket activ-

ities, property ownership, and market power—

along with discrimination and luck—help explain

income inequality.

Trends in Income Inequality

<www.ccsd.ca/

perception/insite7.htm>

Who beneﬁts from

Canada’s income

security programs?

income inequality in those two decades. Because younger workers tend to earn less

income than older workers, their growing numbers contributed to income inequal-

ity. There has also been a growing tendency for men and women with high earnings

potential to marry each other, thus increasing family income among the highest-

income quintiles. Finally, the number of families headed by single or divorced

women has increased greatly. That trend has increased income inequality because

such families lack a second major wage earner, and also because the poverty rate for

female-headed households is very high.

INTERNATIONAL TRADE, IMMIGRATION, AND DECLINE IN UNIONISM

Other factors are likely at work. Stronger international competition from imports

has reduced the demand for and employment of less-skilled (but highly paid)

workers in such industries as the automobile and steel industries. The decline in

such jobs has reduced the average wage for less-skilled workers. It also has swelled

the ranks of workers in already low-paying industries, placing further downward

pressure on wages there. Similarly, the transfer of jobs to lower-wage workers in

developing countries exerts downward wage pressure on less-skilled workers in

Canada. Also, an upsurge in immigration of unskilled workers increases the num-

ber of low-income families in Canada. Finally, the decline in unionism in Canada

undoubtedly contributes to wage inequality, since unions tend to equalize pay

within ﬁrms and industries.

Two cautions are in order: First, when we note growing income inequality, we are

not saying that the rich are getting richer and the poor are getting poorer in terms

of absolute income. Both the rich and the poor are experiencing rises in real income.

Rather, what has happened is that, while incomes have risen in all quintiles, income

growth was fastest in the top quintile. Second, increased income inequality is not

solely a Canadian phenomenon. The recent move toward greater inequality has also

occurred in several other industrially advanced nations.

Percentage of total

income received by

top one-ﬁfth of

income receivers,

selected nations

The share of income going

to the highest 20 percent

of income receivers varies

among nations. Frequently,

income is less equally

shared in poor nations

than in rich ones.

17.1

South Africa

Brazil

Guatemala

Mexico

Canada

France

United States

Italy

Norway

Percentage of Total Income Earned by

Top Fifth of Income Receivers

30 5040 60 70

Source: World Development Report, 2000, pp. 238–239.

444 Part Three • Microeconomics of Resource Markets

The main policy issue concerning income inequality is how much is necessary and

justiﬁed. While no general agreement exists on the justiﬁable amount, we can gain

insight by exploring the cases for and against greater inequality.

The Case for Equality: Maximizing Total Utility

The basic argument for an equal distribution of income is that income equality max-

imizes the total consumer satisfaction (utility) from any particular level of output

and income. The rationale for this argument is shown in Figure 17-2, in which we

assume that the money incomes of two individuals, Anderson and Brooks, are sub-

ject to diminishing marginal utility. In any period, income receivers spend the ﬁrst

dollars received on the products they value most—products whose marginal utility

is high. As their most pressing wants become satisﬁed, consumers then spend addi-

tional dollars of income on less important, lower-marginal-utility goods. The iden-

tical diminishing-marginal-utility-from-income curves (MU

and MU

in the ﬁgure)

reﬂect the assumption that Anderson and Brooks have the same capacity to derive

utility from income.

Now suppose $10,000 worth of income (output) is to be distributed between

Anderson and Brooks. According to proponents of income equality, the optimal dis-

tribution is an equal distribution, which causes the marginal utility of the last dol-

lar spent to be the same for both persons. We can prove this by demonstrating that

if the income distribution is initially unequal, then distributing income more equally

can increase the combined utility of the two individuals.

chapter seventeen • income inequality and poverty 445

FIGURE 17-2 THE UTILITY-MAXIMIZING DISTRIBUTION OF INCOME

Utility gain

(entire grey area)

Income

Marginal utility

′

$2500 $5000

Utility loss

(entire pale grey area)

Income

Marginal utility

′

$7500$5000

With identical marginal-utility-of-income curves MU

and MU

, Anderson and Brooks will maximize their combined utility when

any amount of income (say, $10,000) is equally distributed. If income is unequally distributed (say, $2500 to Anderson and $7500

to Brooks), the marginal utility derived from the last dollar will be greater for Anderson than for Brooks, and a redistribution

toward equality will result in a net increase in total utility. The utility gained by equalizing income at $5000 each, shown by the

full area G below curve MU

in panel (a), exceeds the utility lost, indicated by the full area L below curve MU

in panel (b).

Equality versus Efﬁciency

Suppose that the $10,000 of income initially is distributed unequally, with Ander-

son getting $2500 and Brooks $7500. The marginal utility, a, from the last dollar

received by Anderson is high, and the marginal utility, b, from Brooks’s last dollar

of income is low. If a single dollar of income is shifted from Brooks to Anderson—

that is, toward greater equality—then Anderson’s utility increases by a and Brooks’s

utility decreases by b. The combined utility then increases by a minus b (Anderson’s

large gain minus Brooks’s small loss). The transfer of another dollar from Brooks to

Anderson again increases their combined utility, this time by a slightly smaller

amount. Continued transfer of dollars from Brooks to Anderson increases their

combined utility until the income is evenly distributed and both receive $5000. At

that time their marginal utilities from the last dollar of income are equal at (a⬘ and

b⬘), and any further income redistribution beyond the $2500 already transferred

would begin to create inequality and decrease their combined utility.

The area under the MU curve, and to the left of the individual’s particular level

of income, represents the total utility of that income. Therefore, as a result of the

transfer of the $2500, Anderson has gained utility represented by the full area G

below the curve MU

, and Brooks has lost utility represented by the full area L

below the curve MU

. Area G is obviously greater than area L, so income equality

yields greater combined total utility than income inequality does.

The Case for Inequality: Incentives and Efﬁciency

Although the logic of the argument for equality is sound, critics attack its funda-

mental assumption that there is some ﬁxed amount of output produced and there-

fore income to be distributed. Critics of income equality argue that the way in which

income is distributed is an important determinant of the amount of output or income that

is produced and is available for distribution.

Suppose once again in Figure 17-2 that Anderson earns $2500 and Brooks earns

$7500. In moving toward equality, society (the government) must tax away some of

Brooks’s income and transfer it to Anderson. This tax-and-transfer process dimin-

ishes the income rewards of high-income Brooks and raises the income rewards of

low-income Anderson; in so doing, it reduces the incentives of both to earn high

incomes. Why should high-income Brooks work hard, save, invest, or undertake

entrepreneurial risks when the rewards from such activities will be reduced by tax-

ation? Why should low-income Anderson be motivated to increase his income

through market activities when the government stands ready to transfer income to

him? Taxes are a reduction in the rewards from increased productive effort; redis-

tribution through transfers is a reward for diminished effort.

In the extreme, imagine a situation in which the government levies a 100 percent

tax on income and distributes the tax revenue equally to its citizenry. Why would

anyone work hard? Why would anyone work at all? Why would anyone assume

business risk? Or why would anyone save (forgo current consumption) in order to

invest? The economic incentives to get ahead would be removed, greatly reducing

society’s total production and income. In other words, the way the income pie is dis-

tributed affects the size of that pie. The basic argument for income inequality is that

inequality is essential to maintain incentives to produce output and income—that

is, to get the pie baked year after year.

The Equality–Efﬁciency Tradeoff

The essence of this income equality–inequality debate is that there is a fundamen-

tal tradeoff between equality and efﬁciency. The problem for a society that is

446 Part Three • Microeconomics of Resource Markets

tradeoff

between

equality and

efﬁciency

The decrease in

economic efﬁciency

that may accom-

pany a decrease in

income inequality.

The Inﬂuence

of Incentives

inclined toward equality is to redistribute income in a way that minimizes the

adverse effects on economic efﬁciency. Consider this leaky-bucket analogy: Assume

that society agrees to shift income from the rich to the poor, but the money must be

carried from afﬂuent to indigent in a leaky bucket. The leak represents an efﬁciency

loss—the loss of output and income—caused by the harmful effects of the redistri-

bution on incentives to work, to save and invest, and to accept entrepreneurial risk.

This leak also reﬂects the fact that resources must be diverted to the bureaucracies

that administer the redistribution system.

How much leakage will society accept while continuing to agree to the redistri-

bution? If cutting the income pie into more equal slices shrinks the pie, what

amount of shrinkage will society tolerate? Is a loss of one cent on each redistributed

dollar acceptable? 5 cents? 25 cents? 50 cents? This is the basic question in any

debate over the ideal size of a nation’s income-maintenance programs.

We next turn from the larger issue of income distribution to the more speciﬁc issue

of very low income, or poverty. A society with a high degree of income inequality

can have either a high, moderate, or low amount of poverty. We need to learn about

the extent of poverty in Canada, the characteristics of the poor, and the programs

designed to reduce poverty.

Deﬁnition of Poverty

Poverty does not lend itself to precise deﬁnition, but it helps to distinguish between

absolute and relative poverty. Absolute poverty occurs when the basic material

needs—food, clothing, and shelter—of an individual or a family are not met. Rela-

tive poverty refers to an individual’s or a family’s low income relative to others in

society. While a family’s basic material needs may be met, it would still be consid-

ered poor if its income relative to others is much lower.

While it is possible to eradicate absolute poverty, relative poverty will probably

always be around, at least in a market economy, where some individuals are able to

earn much more than others.

A family’s needs have many determinants: its size, its health, the ages of its

members, and so forth. Its means include currently earned income, transfer pay-

ments, past savings, property owned, and so on. Statistics Canada uses a (revised

1992) low income cut-off: families that spend 54.7 percent or more of their income

on food, shelter, and clothing are considered to be below the cut-off. In 1997, 14.0

percent of families and 39.6 percent of unattached individuals were considered to

be living in poverty in Canada.

Who Are the Poor?

Unfortunately for purposes of public policy, the poor are heterogeneous: they can

be found in all geographic regions; they are whites, non-whites, and Native peoples;

they include large numbers of both rural and urban people; they are both old and

young.

Yet, despite this pervasiveness, poverty is far from randomly distributed, as Table

17-3 demonstrates. An aging widow with four years of schooling living in an

Atlantic town and prevented from seeking paid work by her four under-16 children

still at home—well, she is likely to be poor. When her children have left home and

chapter seventeen • income inequality and poverty 447

The Economics of Poverty

absolute

poverty

situation in which

the basic material

needs of an indi-

vidual or a family

(food, clothing,

shelter) are not met.

relative

poverty

A situ-

ation in which an

individual’s or a

family’s income

is low relative to

others in society.

<www.napo-onap.ca/

nf-ﬁgur2.htm>

Facts and ﬁgures

about poverty in

Canada

she is over 70, her fortunes look no brighter. The strong correlation shown in Table

17-3 between working few weeks in the year and being poor is expected. However,

note that 5.9 percent of families and 17.2 percent of unattached individuals who

worked 49 to 52 weeks were still poor.

The high poverty rate for children is especially disturbing because poverty tends

to breed poverty. Poor children are at greater risk for a range of long-term problems,

including poor health and inadequate education, crime, drugs, and teenage preg-

nancy. Many of today’s impoverished will reach adulthood unhealthy, illiterate, and

unable to earn above-poverty incomes.

From our discussion of income mobility, we know that there is considerable

movement out of poverty. Only slightly more than half of those who are in poverty

TABLE 17-3 INCIDENCE OF LOW INCOME BY SELECTED

CHARACTERISTICS, 1997

ESTIMATED PERCENTAGE

BELOW LOW INCOME CUT-OFF*

Families Unattached Individuals

All families and unattached individuals 14.0 39.6

By region: Atlantic provinces 14.8 41.6

Quebec 16.4 47.4

By age of household head: 24 years and over 42.8 60.7

25 to 34 years 18.7 30.9

65 and over 6.8 45.0

By sex of household head—female 40.2 44.3

By marital status of household head: neither married nor single

†

29.0 40.6

By weeks worked: none 28.1 57.6

1 to 9 weeks 43.7 85.2

10 to 19 weeks 33.4 71.1

20 to 29 weeks 27.6 52.2

30 to 39 weeks 20.3 44.0

40 to 48 weeks 14.4 37.1

49 to 52 weeks 5.9 17.2

By education of household head: 0 to 8 years of school 18.4 58.7

some secondary 19.0 48.8

By origin of household head: Canadian born 12.4 38.5

non-Canadian born 19.9 45.2

By number of children under 16 years: none 9.7 39.6

1 19.5 —

2 18.0 —

3 or more 24.9 —

Source: Statistics Canada, Income Distribution by Size in Canada, 1997 (Ottawa, 1998), Table 67.

*As deﬁned on page 42 of the source, families that spent 54.7 percent or more of their income on food, shelter, and clothing were con-

sidered to be in straitened circumstances and, therefore, below the 1992 LICO. According to this criterion, it is estimated that 5.2 mil-

lion people were below the LICO in 1997, which represents 17.5 percent of the covered population (of whom 1,397,000 were children).

†

Divorced, separated, or widowed.

448 Part Three • Microeconomics of Resource Markets

one year will remain below the poverty line the next year. However, poverty is

much more persistent for some groups, in particular families headed by women,

those with little education and few labour market skills, and those who are dys-

functional because of drugs, alcoholism, or mental illness.

The Invisible Poor

The facts and ﬁgures on the extent and character of poverty may be difﬁcult to

accept. After all, ours is an afﬂuent society. How do we reconcile the depressing sta-

tistics on poverty with everyday observations of abundance? The answer lies

mainly in the fact that much Canadian poverty is hidden; it is largely invisible.

There are three reasons for this invisibility. First, a sizable proportion of the people

in the poverty pool change from year to year. Research has shown that as many as one-

half of those in poverty are poor for only one or two years before successfully climbing

out of poverty. Many of these people are not visible as being permanently down-

trodden and needy. Second, the “permanently poor” are increasingly isolated geo-

graphically. Poverty persists in depressed areas of large cities and is not readily visible

from the expressway or commuter train. Similarly, rural poverty and the chronically

depressed areas of eastern Quebec and the Atlantic provinces are also off the beaten

path. Third, and perhaps most important, the poor are politically invisible. They often

do not have interest groups ﬁghting the various levels of governments for their rights.

The existence of a wide vari-

ety of income-maintenance

programs is evidence that

alleviation of poverty has

been accepted as a legitimate goal of public

policy. In recent years, income-maintenance

programs have involved substantial monetary

outlays and large numbers of beneﬁciaries.

About one-half of the federal government’s

2001–02 expenditures will be transfer pay-

ments. The government estimates these $83 mil-

lion of expenditures will be disbursed as shown

in Table 17-4. It should be noted, however, that

the bulk of these transfers go to the non-poor,

and only a few of these programs are speciﬁ-

cally targeted at the poor.

In addition to all these programs, there is the

Canada Pension Plan (CPP)—funded by oblig-

atory employee and employer contributions.

increases each year by the percentage increase

in the cost of living in the previous year.

The Old Age Security (OAS) pension is paid

on application at age 65 to everyone resident in

Canada for at least 10 years immediately before

chapter seventeen • income inequality and poverty 449

The Income Maintenance System

<www.statcan.ca/

Daily/English/000306/

d000306a.htm>

Poverty and the elderly

The Quebec Pension Plan, for residents of that province,

is similar.

canada pen-

sion plan

(cpp)

A national

retirement plan

funded by obligatory

employer and em-

ployee contributions.

old age

security

(oas)

A pension

paid on application

at age 65 to every-

one resident in

Canada for at least

10 years immediately

before turning 65.

TABLE 17-4 ESTIMATED FEDERAL

GOVERNMENT

TRANSFER PAYMENTS,

2001–2002

Estimated expenditures*,

Program millions of dollars

Major transfers to other levels of government

Fiscal Equalization 10,479

Canada Health ad Social Transfers 17,300

Territorial governments 1,539

Alternative payments for standing programs (2,400)

Other (500)

Subtotal 26,458

Major transfers to persons

Elderly Beneﬁts 25,181

Employment Insurance 12,247

Subtotal 37,428

Other transfer payments and subsidies 18,996

Total transfer payments 82,882

Source: Treasury Board Secretariat 2001–2002 Estimates, Part I:

The Government Expenditure Plan and Part II: The Main Estimates

(Ottawa: Supply and Services Canada, 2001), <www.tbs-sct.gc.ca/

tb/estimate/EstimE.html>. Reproduced with the permission of the

Minister of Public Works and Government Services Canada, 2001.

*Fiscal year ending March 31, 2002

Visit www.mcgrawhill.ca/college/mcconnell9 for data update.

The Role of

Governments

turning 65. The Guaranteed Income Supplement (GIS) is paid on application, sub-

ject to a means test, to those receiving the OAS pension who have an income below

a certain level. Considerably more than half of Canadians over 65 draw the GIS.

Both the OAS pension and the GIS are increased every three months by the per-

centage increase in the cost of living in the previous three months.

Employment insurance (EI) was started in 1940 to insure workers against the

hazards of losing their jobs. Certainly it has lessened the misery of the very large

number of the involuntarily unemployed during recessionary periods. In the early

1970s, employment insurance beneﬁts were greatly increased so a positive incen-

tive was created for marginal workers to enter the labour force, not to work, but to

qualify for beneﬁts. In 1977, beneﬁts were decreased slightly while qualifying for

them was made more difﬁcult. By the early 1990s the federal government had tight-

ened the rules to qualify for EI, as it coped with mounting deﬁcits. By mid-2000

the number of persons receiving EI had fallen signiﬁcantly, partly as a result of a

healthy economy.

An ideal public assistance (welfare) program should simultaneously achieve three

goals. First, the plan should be effective in getting individuals and families out of

poverty. Second, it should provide adequate incentives for able-bodied, nonretired

people to work. Third, the plan’s cost should be reasonable. Unfortunately, these

three goals conﬂict, causing tradeoffs and necessitating compromises. To under-

stand this, consider the three hypothetical welfare plans shown in Table 17-5.

Common Features

We ﬁrst examine the two common elements in each of the three plans (and in real-

world public assistance plans). First, there is a minimum annual income that govern-

ment will provide if the family has no earned income. Second, each plan has a

beneﬁt-reduction rate, which is the rate at which beneﬁts are reduced or lost as a result

of earned income.

Consider plan 1. The minimum annual income provided by government is $8,000,

and the beneﬁt-reduction rate is 50 percent. If a family earns no income, it will receive

cash transfer payments totalling $8,000. If it earns $4,000, it will lose $2,000 ($4,000

of earnings times the 50 percent beneﬁt-reduction rate) of transfer payments; its total

income will then be $10,000 (= $4,000 of earnings plus $6,000 of transfer payments).

If $8,000 is earned, transfer payments will fall to $4,000, and so on. Note that at an

450 Part Three • Microeconomics of Resource Markets

guaranteed

income

supplement

(gis)

Money paid

on application, sub-

ject to a means test,

to those receiving

an OAS pension

who have an income

below a certain level.

employment

insurance

(ei)

A program

that insures workers

against the hazards

of losing their jobs.

Welfare: Goals and Conﬂicts

● The fundamental argument for income equality

is that it maximizes total utility by equalizing the

marginal utility of the last dollar of income re-

ceived by all people.

● The basic argument for income inequality is

that it is necessary as an economic incentive for

production.

● By government standards, more than ﬁve mil-

lion Canadians, or 17.5 percent of the popula-

tion, live in poverty.

● The Canadian income maintenance system in-

cludes both social insurance programs and pub-

lic assistance (welfare) programs.

Facing

Tradeoffs