Distribution of personal earnings
Distribution of Personal Earnings
De La Salle University – Economics
“Government attempts to improve the distribution of family income through transfers might
inadvertently make the distribution of annual earnings more unequal”.
Do you agree or disagree with the statement?
Government transfers are the payments provided by individuals to redistribute wealth.
Over a period of time, income inequality has been a subject of interest and how it can be reduced.
One of the government attempts is through transfer payments which mainly benefit the poor. At
first glance, this appears to minimize income disparity and raise poor people’s earnings. Numerous
studies also prove that government transfers are one of the factors which mitigate inequality. For
instance, Beach and Slotsve (1996) show that the rise in market income inequality in the 1980s
was offset by a corresponding increase in the redistributive effect of the transfer system, which in
turn prevented an increase in total income inequality in that decade. As measured by the Gini
coefficient, after transfers take effect, the country ranks the highest, demonstrating that the US
government is doing less to reduce inequality than other countries.
In this figure, it is evident that there is a less inequality after taxes and transfers are applied.
However, the long-term effect of government transfers inevitably results in no improvement in
income disparity. In the mid-2000s, Heisz (2007) and Frenette, Green and Milligan (2007) describe
the continued rise in market income inequality in the 1990s, which gave way to an even larger
increase in inequality than was the case in the 1980s. They find that, although the tax-and-transfer
system initially expanded in the early 1990s to offset the higher level of market income inequality,
it then contracted later in the decade. Unfortunately, the poor have become both dependent on and
victims of the transfers, making it politically difficult for government to better the poor’s position
in the long run by abolishing the transfers. Thus, I agree that transfers inadvertently make the
distribution of annual earning more unequal.
Peterson Institute for International Economics. (n.d.). How to Fix Economic Inequality?. An
Overview of Policies for the United States and Other High-Income Economies.
Heisz and Murphy. (n.d.). The Role of Taxes and Transfers in Reducing Income Inequality.