Summary
Summary ECO2003 Inequality part 2
- Course
- ECO2003 (ECO2003)
- Institution
- University Of Cape Town (UCT)
ECO2003 inequality part 2 summary
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INEQUALITY19.8 Predistribution
Governments influence the degree of inequality in the economy.
They do this in two ways:
Redistribution: By taxes and transfers that
result in a distribution of disposable income
that differs from the distribution of market
income and by expenditure that provides
public services to households.
Predistribution: By affecting the endowments
that people have and the value of those
endowments, leading to a change in the
inequality in market income
Examples of predistribution that you have already seen include:
Increased education of the workforce: This
changes the endowments of employees,
adding skills and other work relevant
capacities that will affect market incomes.
Eliminating or reducing labour market
segmentation: This will alter the prices
(wages) that a person’s endowment will be
paid in the labour market. In particular, it
raises the value of the endowments of people
who otherwise would suffer discrimination
, Other aspects of predistribution affect the basic institutional
structure of the economy.
By defining and enforcing the legal framework in which the
employers, banks, employees, unions, borrowers, and other key
economic actors interact, governments affect the distribution of
market income.
Using the legal system, governments can also alter which
property rights are protected
All of these measures can change the relative bargaining power
between groups as well as their reservation options, which in turn
will change the distribution of income.
Finally, governments can change the set of contracts that are
allowed, which alters the distribution of income. We discussed
one example in Unit 5, when we saw the effect of legislation that
limited the maximum hours that employees could work.
Another important example of predistribution by limiting the
kinds of contracts that are allowed is a statutory minimum
wage
- which prohibits contracts with wages below a certain
level.
This affects the value of a worker’s endowment of labour, but it
may also affect the likelihood that the worker will be able to find
a job.
The costs of the minimum wage could be fewer jobs.
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