Question 1

Many studies measure inequality with the 90-10, 50-10, or 90-50 wage gaps rather than with the Gini coefficient. Why?

Accepted Answer

The 90-10, 50-10, and 90-50 wage gaps provide specific points in the earnings distribution where inequality can be measured and compared, whereas the Gini coefficient gives a summary measure of overall inequality that does not indicate where the inequality is occurring. This makes it more difficult to target policies to address specific areas of inequality.

Question 2

How does the income distribution in the United States compare to other developed countries?

Accepted Answer

The income distribution tends to be more unequal in the United States compared to other developed countries, but not by a huge amount. While income inequality is a problem in many developed countries, the United States has one of the highest levels of income inequality among them. According to the Gini index, which measures income inequality on a scale from 0 (complete equality) to 1 (complete inequality), the United States has a score of 0.39, which is higher than most other developed countries. However, countries such as Chile, Mexico, and Turkey have even higher levels of income inequality.

Question 3

Which of the following measures would best allow one to compare the relative wealth of poor households to the typical household in an economy?

Accepted Answer

The 50-10 wage gap compares the income of the median (50th percentile) household to that of the poorer (10th percentile) households, providing insight into the relative wealth of poor households compared to the typical household.

Question 4

The earnings distribution refers to the distribution of

Accepted Answer

The earnings distribution refers to the distribution of wages or earnings in an economy. It shows how much individuals in different income brackets earn and how that income is distributed among the population.

Question 5

The Gini coefficient in a perfectly unequal society will have a Gini coefficient of _____ while a perfectly equal society will have a Gini coefficient equal to _____.

Accepted Answer

The Gini coefficient is a measure of income inequality ranging from 0 to 1. A score of 0 indicates perfect equality, where everyone receives an equal share of the income, and a score of 1 indicates perfect inequality, where one person receives all the income and everyone else receives none. Therefore, a perfectly unequal society would have a Gini coefficient of 1, while a perfectly equal society would have a Gini coefficient of 0. Option B correctly reflects this relationship.

Question 6

What is the approximate Gini coefficient associated with the following income distribution?

Accepted Answer

The answer of What is the approximate Gini coefficient associated...

Question 7

The positive correlation between ability and human capital investments "stretches out" wages in the population, generating what?

Accepted Answer

A positively skewed wage distribution is generated because individuals with higher ability and human capital investments are able to command higher wages, while those with lower ability and human capital investments earn lower wages. This results in a higher concentration of individuals earning lower wages and a smaller number of individuals earning higher wages, creating a positively skewed distribution.

Question 8

What does it mean for the U.S. economy to have a positively skewed wage distribution?

Accepted Answer

A positively skewed wage distribution means that a larger number of workers earn less than the average wage, pulling the median wage below the mean and indicating that the high wages of a few workers skew the average upward.

Question 9

Wage differentials across individual workers are determined in part by:

Accepted Answer

All of the above factors can play a role in determining wage differentials. Effort and productivity are closely related, as workers who put in more effort and are more productive are often rewarded with higher wages. Social capital, or a worker's connections and networks, can also play a role in determining wages as those with more connections may be more likely to secure higher paying jobs. Luck can also come into play, such as a worker being in the right place at the right time for a high-paying job opportunity. Overall, a combination of these factors and others can lead to wage differentials across individual workers.

Question 10

Consider an economy with a particular distribution of income. Over the next 10 years, the income of all households increases by $20,000. How will the Gini coefficient change over those 10 years?

Accepted Answer

The answer of Consider an economy with a particular distribution...

Question 11

In the United States, the poorest 10 percent of households earn approximately what share of total income?

Accepted Answer

The poorest 10 percent of households in the United States earn approximately 2% of the total income.

Question 12

What is meant by the skill-bias technological explanation of increasing inequality?

Accepted Answer

The skill-bias technological explanation posits that technological advances over the last 40 years have complemented the productivity of skilled labor relative to unskilled labor, leading to increasing inequality.

Question 13

Higher values of the Gini coefficient are associated with

Accepted Answer

The Gini coefficient is a measure of income inequality, with values ranging from 0 (perfect equality) to 1 (perfect inequality). Thus, higher values of the Gini coefficient are associated with greater income inequality.

Question 14

In the United States, the wealthiest 10 percent of households earn approximately what share of total income?

Accepted Answer

The wealthiest 10 percent of households in the United States earn approximately 30% of total income.

Question 15

Which one of the following statements about the Gini coefficient is not true?

Accepted Answer

The Gini coefficient does not necessarily have to fall when the amount of income in an economy increases. In fact, it is possible for the Gini coefficient to increase even as total income in an economy increases. This can happen if the distribution of income becomes more unequal as total income increases, which is often the case in developing countries experiencing rapid economic growth.

Question 16

In general terms, which of the following statements regarding changes in income inequality in the United States is correct?

Accepted Answer

According to multiple sources and reports, including those from the Census Bureau and the Congressional Budget Office, income inequality in the United States has increased slightly over the last 40 years. The Gini coefficient, which is a measure of income inequality where 0 represents perfect equality and 1 represents perfect inequality (where one person receives all the income and everyone else receives none), has increased from below 0.4 in 1970 to over 0.45 in 2010. Therefore, the correct statement is that inequality has increased slightly over the last 40 years.

Question 17

Suppose the distribution of innate ability is distributed symmetrically throughout a population but that the wage distribution is positively skewed. What most likely explains this?

Accepted Answer

Differences in human capital accumulation could explain why the wage distribution is positively skewed despite a symmetrical distribution of innate ability. Individuals with higher levels of human capital (i.e. education, skills, experience) are able to command higher wages even if their innate ability is not significantly different from those with lower levels of human capital. This can lead to a positive skew in the wage distribution.

Question 18

An approximate Lorenz curve shows

Accepted Answer

An approximate Lorenz curve shows the cumulative share of income earned by quintiles of households, which is represented by the curve's shape. The closer the curve is to the diagonal, the more equal the distribution of income is, while the further away from the diagonal, the more unequal the distribution is. Therefore, choice E is the best answer.

Question 19

Which of the following does not measure inequality?

Accepted Answer

The perfect-equality Lorenz curve represents a hypothetical scenario where every person or household has the same income or wealth, and therefore cannot measure inequality as it does not show any variations or differences in the distribution of income or wealth. The other options measure inequality in various ways. The 90-10 and 50-10 wage gaps measure the difference in earnings between the top and bottom percentiles of earners. The Gini coefficient measures income inequality across the entire income distribution. The actual Lorenz curve represents the actual distribution of income or wealth and can be used to measure inequality.

Question 20

What does the Gini coefficient measure?

Accepted Answer

The Gini coefficient measures the degree of inequality in an income distribution. It is a measure of the relative concentration of income among a society's citizens. The coefficient ranges from 0 to 1, with 0 indicating perfect equality (everyone earns the same amount) and 1 indicating perfect inequality (one person earns all the income).

Quiz 7: The Wage Structure