the essence of a market system as we've
seen before is that people receive an
income which reflects the value of the
output they produce
the free market is best exemplified here
in the United States where incomes vary
greatly and there are unregulated labor
markets we're out here today looking for
work waiting for work waiting for
employers to in contractors in the
construction industry to come by and
pick us up for labor this is a street
market in Denver where unemployed people
and employers meet to negotiate a price
for labor by the hour so this they're
all going up to this point because he's
um he's an employer so they got a chance
to get a job from him yes correct
he's an employer looks like he's
probably in the landscaping business and
so he'll get maybe three or four guys
this morning every day there's about 75
of us come to the corner here what kind
of wages would you expect again the
wages here go anywhere from minimum wage
up to $15 an hour and the minimum wage
the minimum wage would be probably about
525 but most people pay 8 and above on
an average day how many of those 75 of
you are actually gonna find work I would
say probably about at least 25% of us in
a free market the price of that labor
reflects productivity so in a market
system if you're unskilled or unwell you
produce little if you're unable to work
you produce almost nothing so how much
income do you receive almost nothing but
if you're able to work you're clever
motivated and intelligent and clearly
you'll be able to produce a very high
amount of output you're likely to earn a
very high income to enable you to afford
lovely cars like this it's inevitable
that in a market system the distribution
of income will be rather uneven
the first thing we need to do is to take
an objective look at what we mean by the
distribution of income so that we can
see how income is distributed in a
market system sometimes we mean the
functional distribution of income which
means who earns the income that's
produced so typically in a market
economy sixty to seventy percent of
income is earned by labor people working
for it wages and salaries and so on some
smaller part of it goes to capital
people have shares and earn income in
the form of interest and dividend
payments some of it goes to landowners
in the form of rent but there's another
question that is perhaps even more
interesting and that is what is the size
distribution of income
we can get a more accurate picture of
how income is distributed by the use of
a Lorentz curve imagine a society where
everyone has the same income of the
vertical axis we have the percentage of
the income of the society from zero to a
hundred percent along the horizontal
axis we have everyone in the population
again from zero to a hundred percent but
cumulated from the poorest so the
poorest 20% have given that all have the
same income 20% of the income the
poorest 50% have 50% of the income and
so on so we can represent this
distribution by drawing a line of
equality
much more typically we have an uneven
distribution so the poorest 20% might
have only say five percent of the income
and the poorest 50 percent might have
only 25 percent of the income you can
see that the further from the line of
equality the lorentz curve the more
uneven is the distribution of income
indeed we can measure the shaded area as
a proportion of the triangle ABC to give
us a measure of inequality that will be
between zero everyone has the same
income and a hundred percent you might
think of having one person with all the
income and the rest of the population of
millions having nothing
now this measure is called a Gini
coefficient so the Gini coefficient is
given by the shaded area as a proportion
of the triangle ABC the Gini coefficient
will be somewhere between 0 and 100
now we'll be shortly using a formula
that will enables to measure this area
to find the value and this will be
useful because it will enable us to
compare income distributions in
different societies and see how the
distribution of income is changing
within a society over time you need to
be very clear about what the information
is actually conveying there are two
things in particular to look out for the
first one is does the data refer to
income distribution before taxes and
Social Security payments or after it
tends to be the case that higher-income
groups pay a higher proportion of their
income in the form of taxation and lower
income groups tend to receive more in
the form of Social Security payments and
so on so if we take the figures after
the deduction of tax and adding in
Social Security payments the
distribution of income looks less uneven
and Denmark they pay one of the highest
rates of tax in the world and some of it
gets redistributed to benefit
lower-income groups this young mother of
three recently divorced you're studying
at the local college while raising her
children hey you are with kids that
you're trying to bring up on your own
where's the money come from and most of
the money are getting a scholarship from
the state that's a normal thing if you
were going to school then you can get a
loan there's about six thousand a month
you're gonna get that extra every month
when they're born to the age of three
get three thousand one hundred and
twenty five
kroner every three months and then I get
supplied from the City Hall I get five
thousand
extra and then
the state as well because I'm alone yeah
with two children
I get the half of my rent paid the
health care is that free that's free
we have dentists that's also for free in
that way it's a nice thing and I really
good think it's a good deed say that she
receives free tuition child care health
care dental care a stipend for student
expenses and welfare support so the
Danish distribution of income after tax
and Social Security payments is much
more even than the one before such
redistributed effects are taken into
account the other thing we need to watch
out for is this is the data equivalence
equivalent data takes into account that
larger households clearly need more
income than smaller ones suppose you
have two households one there's just two
people living in it the other there's
mum dad and four children
the nonequivalence data makes no
allowance for the additional needs of
the family but when we equivalent we
recognize that in order to have the same
standard of living the larger family
would need more income than the smaller
family
we're back on my desert island to
consider further our understanding of
income distribution statistics you may
recall from an earlier film how a few of
us live together and traded our goods
and services as our economy developed we
used money as a means of exchange now
what we're going to do is to look at our
earnings from that exchange and
distribution process on our island we
have no taxes and each of us is the same
sized household one so we don't have to
worry about whether incomes are before
or after allowances the taxes Social
Security or indeed about household size
there are just three of us present on
our island at the moment but we're not
all equally productive and that's
reflected in our earnings so of the
three of us one of us earns 60 euros a
week one of us 20 euros a week and the
other one 20 euros a week so what's the
Gini coefficient for our little economy
the data we have is for our three-person
Island economy now here we've arranged
our income groups from the largest but
it'll make no difference to the answer
we get our Gini coefficient whether we
accumulate from the small list or from
the largest because we've only three
people we can calculate quite easily and
the formula that we can use to calculate
it is given as G equals one over n times
Sigma a n minus 2 I plus 1 where I goes
from 1 to N and a
is the proportion of total income
received by the person or income group
then is the number of people or income
groups now if that term I is unfamiliar
to you
it simply means each one in turn we'll
see how that works in just a moment so
substituting into the formula with our
island data we have three people
remember and we're going to look at each
person in turn that's what I means so
we'll set I equal to 1 then 2 2 then 2 3
and so on and remember that 60 is the
income of the first person 20 the income
of the second person 20 the income of
the third person so we start off that G
equals one third because N equals three
times now the first person has 60 so
it's 60 times n is 3 remember 60 times 3
minus now we've set I equal to 1 so 2 I
is 2 so we have 60 times 3 minus 2 plus
1 and now we're going to look at the
second person that has 20 so it's plus
20 times a is again 3 this time 2 times
I where I is now to remember 2 times 2
is 4 so we've got 20 times 3 minus 4
plus 1 plus 20 the income of the third
person times 3 minus I is equal to 3 so
it's 2 threes a 6 3 minus 6 plus 1 so
that gives us that G equals 1 over 3
times 120 plus 0 minus 40
which equals 1/3 times 80 which equals
26.67
so 26.67 is our Gini coefficient the
measure of inequality on our island you
may like to use the formula for say a
four-person economy where each has a 25
euro income and remember that because
the distribution of income is perfectly
even
you should get an answer equal to zero
one of the great advantages of the Gini
coefficient is that it enables us to
make comparisons between countries
even if significantly different levels
of income it's the relative income
differences that we're interested in the
coefficient varies between countries for
example in Europe it's typically around
28 to 30 with Scandinavian countries the
most equal at around 22 to 24 in the USA
it's around 45 in the UK about 34 so the
UK has a more even distribution than the
USA but a less even distribution than in
most European societies income
distribution changes over time also for
example in much of Eastern Europe the
end of communism in the early 1990s led
to the development of a market economy
where people could earn large sums of
money producing what people wanted
others were in a position to buy state
assets very cheaply and earn
considerable profits
as a result of these changes the Gini
index is around 10 points higher than it
was then in the last of our films we'll
return to the subject of the
distribution of income and see some
other aspects of it because it's very
important to social scientists but
already you can see that our knowledge
of statistics enables you to grasp
concepts which would be impossible
otherwise
you