ECON 4531, Labor Economics

Text: Labor Economics, Borjas, 8th edition

1.Consider an economy with a hundred people and the following income distribution. 40 people earn $60000 per year (individually) and the other 60 people earn $100000 (individually).

(a) What is the Gini coefficient?

(b) Now assume that those with high income have to pay an income tax of r% whereas low-income workers do not have to pay tax. In fact, tax revenues are redistributed equally to low-income workers. For what values of r do those initially in the bottom 40% of the distribution remain in the bottom 40% of the distribution? In what follows, assume that r satisfies the condition you derive in this part.

(c) What is the Gini coefficient after redistribution (as a function of r )?

(d) Is the change in the Gini coefficient as you expected? Is this true for all values of r? Argue why or why not.