
Research Paper on Income Inequality: The Causes, Consequences and Solutions.
To do this paper, first you must read Chapter 23 power point that discusses income equality which is at the bottom of the page. Second, you must find at least four additional sources that discuss income inequality. Third, choose a country that has been struggling with economic growth. Fourth, using each of the concepts and theories discussed in chapter 23 as a framework to investigate why there is such a high-income inequality. Finally, explain step by steps how they can apply these concepts and theories can help solving income inequality. The paper must be at least 5 pages and at most 10 pages.
Outline
This paper must be written in many paragraphs of 5 to 8 sentences. Each of the topics in this
outline should be and can be at least a paragraph. Also, this outline is only a guide; you should
change it as you think it may be better to write your paper.
I. Introduction
II. Body
Part 1
A. Define Income Inequality.
B. Causes of Income Inequality
C. Consequences of Income Inequality
Part 2
D. Choose a country with income inequality and explain the causes by using theories
in Ch 23.
E. Causes/ Argument 1 Explanation
F. Causes/Argument 2 Explanation
G. Causes/ Argument 3 Explanation
H. Causes/ Argument 4 Explanation
Part 3
I. Using the deficient found in part 2, explain how the theories in chapter 23 can be
applied to solve income inequality.
J. Application of Solution/ Argumen1
K. Application of Solution/Argument 2
L. Application of Solution/ Argument 3
M. Application of Solution/ Argument 4
III. Conclusion
A. Concluding Statement
1. Analytical Summary
2. Thesis Reworded
B. Recommendations
References
(APA or MLA) I prefer MLA
This is only an example on how to do your work cited. Please do not use these
sources
[1] Agenor, Pierre-Richard. (2000) “Monetary Policy under Flexible Exchange Rates: An
Introduction to Inflation Targeting.” Unpublished manuscript, 2000.
[2] Akaike, H. (1973) Information Theory and an Extension of the Maximum Likelihood
Principle,
in Petrov, B., Csaki, F., eds., Second International Symposium on Information Theory.
[3] Angeriz, A and P. Arestis (2007) “Assessing Inflation Targeting Through Intervention
Analysis”, Oxford University Press, Vol.,60(2), pp. 293-317
[4] Bamidele, A. (2007) Pre-requisite for Inflation Targeting Country Experiences and Lessons
for
Nigeria, Being a Paper delivered at the Inflation Targeting Workshop organized by the Central
Bank of Nigeria Learning Centre Lagos, July
[5] Bakradze, G. & A. Billmeier (2007) Inflation Targeting in Georgia: Are We There Yet? IMF
Working Paper, WP/07/193, International Monetary Fund, Washington, USA.
[6] Barro, R. (1995) Inflation and Economic Growth, Bank of England Quarterly Bulletin, vol.
35
(May 1995), pp. 166-76.
[7] Bernanke, Ben, Thomas Laubach, Frederic Mishkin, and Adam Posen (1999). Inflation
Targeting: Lessons from the International Experience. Princeton, NJ: Princeton University
Press.
[8] Bernanke, Ben S. (2003) “A Perspective on Inflation Targeting,” remarks at the Annual
Washington Policy Conference of the National Association of Business Economists,
Washington, D.C., March 25. Available via the internet:
[9] Bernanke, B. S. & F. Mishkin (1997) Inflation Targeting: A New Framework for Monetary
Policy? Journal of Economic Perspectives11, 97-116.
[10] Bruno, M. and Easterly, W. (1995) Inflation Crisis and Long-Run Growth, Working Paper,
World Bank, September 1995
Specific Instructions
1. Font 12, Times New Roman, double space
2. Margins of 1″ to 1-1/4″ on all sides
3. 5 Pages minimum or 10 pages maximum of written information
4. The paper must have a cover page, an outline, and a reference page
5. Cover page, outline, and work cited pages are not counted towards the 5 pages
6. Paragraphs must have a maximum of 10 sentences.
7. Extra references are accepted.
8. They cannot be Wikipedia, Investopedia, or any open platform.
9. Only books including the textbook and reputable newspapers or magazines such as Wall
Street Journal, New York Times, Financial Times, Forbes Magazine, Money Magazine
etc. will be accepted.
Criteria used for Grading Papers
1. Economic content
2. Analytical depth
3. Organization and Style (pay attention to the specific instructions)
4. Originality
5. 10% penalty for each day the paper is late
6. 10 % penalty for each of the followings (poor grammar, poor sentence structure, length,
number of pages, format, references etc.)
Here is the Power Point on Income Inequality:
C:UsersOmar LewisDocumentsECO 102- Research Paper on Income Inequality.pptx
ECO 102- Research
Paper on Income Inequality.pptx
Chapter 23
Income Inequality, Poverty, and Discrimination
Because learning changes everything.®
©2021 McGraw Hill Education. All rights reserved. No reproduction or further distribution without the prior written consent of McGraw Hill Education.
In this chapter we learn about income inequality and actions that can be taken by the government to try to correct this inequality. We will use the Lorenz curve and the Gini ratio to evaluate income inequality. Next, poverty is defined, and we examine how it affects different groups. The various government programs available to aid families in poverty are discussed next. Then there is an analysis of discrimination and how it impacts wages. The Last Word is about the debate surrounding universal basic income.
1
Facts about Income Inequality
Causes of Income Inequality
Income Inequality over Time
Equality versus Efficiency
The Economics of Poverty
The U.S. Income-Maintenance System
Economic Analysis of Discrimination
Chapter Contents
23-2
©2021 McGraw Hill Education. All rights reserved. No reproduction or further distribution without the prior written consent of McGraw Hill Education.
Learning Objectives
LO23.1 Explain how income inequality is measured and described.
LO23.2 Discuss the extent and sources of income inequality.
LO23.3 Demonstrate how U.S. income inequality has changed since 1980.
LO23.4 Debate the economic arguments for and against income inequality.
LO23.5 Relate poverty to age, gender, and ethnicity.
LO23.6 Identify the major components of the U.S. income-maintenance program.
LO23.7 Discuss labor market discrimination.
2
Facts about Income Inequality
Average household income was $61,372 in 2017, among the highest in the world.
But there is income inequality.
Income distribution by quintiles:
Lorenz curve
Gini ratio
LO23.1
23-3
©2021 McGraw Hill Education. All rights reserved. No reproduction or further distribution without the prior written consent of McGraw Hill Education.
Income inequality is a continuing concern in much of the world, and a debate on how to correct the disparity is ongoing. The United States’ average household income of $61,372 in 2017 is among the highest in the world, but we find that when the population is divided into 5 numerically equal groups, called quintiles, the distribution of income among the different groups varies. The top 20% of households are earning more than 51% of total income. Income inequality is defined as the unequal distribution of an economy’s total income among households. The Lorenz curve is a curve showing the distribution of income in an economy. The Gini ratio is a numerical measure of the overall dispersion of income among households; the higher the number, the more inequality of incomes in the economy.
The Distribution of U.S. Income by Households, 2017
(1) Personal Income Category
(2) Percentage of All Households in This Category
Under $15,000
11.6
$15,000–$24,999
9.8
$25,000–$34,999
9.5
$35,000–$49,999
13.0
$50,000–$74,999
17.7
$75,000–$99,999
12.3
$100,000 and above
26.2
Total
100.0
Source: Bureau of the Census, www.census.gov
LO23.1
23-4
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In this table, we can see the distribution of income among households in 2017. Note that 21.4% of all households have an income of less than $25,000 while over 25% have income of more than $100,000. That means about 50% of households have income between $25,000 and $99,999.
The Lorenz Curve and Gini Ratio
20
40
60
80
100
20
40
60
80
100
0
Perfect equality
Lorenz curve
(actual distribution)
Complete
inequality
A
B
a
b
c
d
e
f
Gini Ratio =
Area A
Area A + Area B
Percentage of households
Percentage of Income
LO23.1
(1) Quintile (2017)
(2) Percentage of Total Income
(3) Upper Income Limit
Lowest 20 percent
3.1
$ 24,625
Second 20 percent
8.2
47,169
Third 20 percent
14.3
75,494
Fourth 20 percent
23.0
121,116
Highest 20 percent
51.5
No limit
Total
100.0
Source: Bureau of Labor Statistics.
The Distribution of U.S. Income by Quintiles, 2017
23-5
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The Lorenz curve is a graphical way to look at the degree of income inequality. The diagonal line that bisects the graph would illustrate perfect income equality, meaning all groups would have an equal distribution of income. Graphing the results of the U.S. income gives us the curved line showing the unequal distribution. The Gini ratio is a numerical measurement of the overall dispersion of income. Lower ratios reflect less inequality while higher ratios indicate more inequality.
Income Mobility
Income mobility
People change quintiles.
Low or high income not a permanent condition.
Government redistribution
Taxes
Cash transfers and non-cash transfers
LO23.1
23-6
©2021 McGraw Hill Education. All rights reserved. No reproduction or further distribution without the prior written consent of McGraw Hill Education.
Income mobility is the movement of individuals or households from one income quintile to another over time. Over an individual’s lifetime, the individual or household may change quintiles as income changes. Data suggests that income is more equally distributed over a 5, 10, or 20-year period than in any single year. The government also attempts to redistribute the income through taxing higher income earners and sending this money in the form of transfer payments to lower income households. Cash transfer examples include welfare assistance, unemployment compensation, and Social Security. Non-cash transfers provide specific goods or services rather than cash such as, food stamps, subsidized school lunches, housing subsidies, Medicare, and Medicaid.
20
40
60
80
100
0
Lorenz curve before taxes and transfers
Percentage of families
Lorenz curve
after taxes and
transfers
The Impact of Taxes and Transfers on U.S. Income Inequality
20
40
60
80
100
Percentage of income
LO23.1
Percentage of Total Income Received, 2015
Quintile
(1) Before Taxes and Transfers
(2) After Taxes and Transfers
Lowest 20 percent
3.7
7.3
Second 20 percent
8.7
11.0
Third 20 percent
13.6
14.7
Fourth 20 percent
20.3
20.3
Highest 20 percent
55.0
48.3
Source: Congressional Budget Office.
23-7
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One economic function of government is to redistribute income. They do this by taxing households in higher income brackets and then distributing that money to households in lower brackets. The effect of these actions is to move the Lorenz Curve closer to the perfect equality line.
Causes of Income Inequality
Ability
Education and training
Discrimination
Preferences and risks
Unequal distribution of wealth
Market power
Luck, connections, and misfortune
LO23.2
23-8
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There are many different causes of income inequality. The market system rewards individuals based on the contributions that they make or the resources that they own and use in producing society’s output. People have different abilities and talents, and this enables some people to perform in high-paying occupations such as being a doctor or star athlete while others can only perform basic tasks. Education and training can also impact a person’s earning capacity. Typically the higher the education level obtained, the higher the earning capacity. Discrimination of all forms as well as personal preferences and risk-aversions can affect an individual’s earnings. Being born into wealth certainly helps, as does just plain being lucky or having connections.
Top 10% of Income Receivers
Source: World Factbook, Central Intelligence Agency
LO23.2
23-9
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In this chart, we see the share of income in various nations that goes to the top 10% of receivers. For example, in Nicaragua, the top 10% of receivers receive more than 40% of the total income of the nation.
Income Inequality over Time
Rising income inequality since 1980
Causes of growing inequality:
Greater demand for highly skilled workers
Demographic changes
International trade, immigration, and decline in unionism
LO23.3
23-10
©2021 McGraw Hill Education. All rights reserved. No reproduction or further distribution without the prior written consent of McGraw Hill Education.
Since 1980, there has been a growing income inequality in the U.S. The most likely reason for this growing inequality has been the increased demand for highly skilled workers. Modern manufacturing requires a highly educated workforce. Demographic changes also contributed; the “baby boomers” were entering the workforce during the 1970s and 1980s, resulting in a large group of less-experienced and less-skilled workers who tend to earn less income than older workers. The growth of international trade and the transfer of jobs to lower-wage workers in other countries were factors as well. While incomes have risen in all quintiles, income growth has been the fastest in the top quintile. This is happening in other industrially advanced nations too.
Before-Tax Income over Time
Quintile
1980
1985
1990
1995
2000
2005
2010
2015
Lowest 20 percent
4.3
4.0
3.7
3.6
3.4
3.4
3.3
3.1
Second 20 percent
10.3
9.7
9.1
8.9
8.6
8.6
8.5
8.2
Third 20 percent
16.9
16.3
15.2
14.8
14.6
14.6
14.6
14.3
Fourth 20 percent
24.9
24.0
23.3
23.0
23.0
23.0
23.4
23.2
Highest 20 percent
43.7
46.6
48.7
50.4
49.8
50.4
50.3
51.1
Total
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Top 5 percent
15.8
17.0
18.6
21.0
22.1
22.2
22.3
22.1
Source: Income Data Tables. Bureau of the Census, 2018.
LO23.3
Percentage of Total Before-Tax Income Received by Each One-Fifth, and by the Top 5 Percent of Households, Selected Years
23-11
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Note: Numbers may not add to 100.0 percent due to rounding. This is another table showing the income earned by the different quintiles in the U.S. over time. Income was, more and more, unequal for many years, as the percentage of total income in the lowest quintile fell and the percentage of total income earned by the highest quintile rose. In 2015, we do see income slightly decrease in the lowest quintile and an increase in the highest quintile.
Equality versus Efficiency
The case for equality: Maximizing total utility
The case for inequality: Incentives and efficiency
The equality-efficiency trade-off
LO23.4
23-12
©2021 McGraw Hill Education. All rights reserved. No reproduction or further distribution without the prior written consent of McGraw Hill Education.
The main policy issue regarding income inequality is how much is necessary and justified. The basic argument for an equal distribution of income starts with the idea that income equality maximizes total consumer satisfaction from any particular level of output and income. Critics say that the transfer of income required to create income equality is unfair and unwise. They say income inequality reflects rewards to individuals for supplying their talents and resources to the economy, and that proponents of income equality falsely assume that there is some fixed amount of output and therefore income to be distributed. Regardless, there is a fundamental trade-off between equality and efficiency in that greater income equality comes at the opportunity cost of reduced production and income. Society must choose how much redistribution it desires in view of the costs.
(a)
Anderson’s marginal
utility from income
(b)
Brooks’s marginal
utility from income
0
0
Marginal Utility
Marginal Utility
Income
Income
$5,000
$5,000
$2,500
$7,500
MUB
MUA
a
a’
b’
b
Utility gain
(entire blue area)
Utility loss
(entire red area)
The Utility-Maximizing Distribution of Income
LO23.4
23-13
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These graphs illustrate the utility-maximizing distribution of income. Both Anderson and Brooks will maximize their combined utility when any amount of income is equally distributed. If income is unequally distributed, the marginal utility derived from the last dollar will be greater for Anderson than for Brooks.
The Economics of Poverty
Definition of poverty in 2017:
Single person < $12,488
Family of 4 < $24,858
Family of 6 < $32,753
39.7 million Americans
Poverty rate 12.3%
LO23.5
23-14
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Poverty is defined as a condition in which a person or family does not have the means to satisfy basic needs for food, clothing, shelter, and transportation. The federal government has established minimum income thresholds below which a person or family are considered to be “in poverty.” As shown in the slide, in 2017, 12.3% of the population of the U.S. was living in poverty.
Population Groups & Poverty
Source: U.S. Census Bureau
LO23.5
23-15
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Poverty is disproportionately borne by African Americans, Hispanics, children, foreign-born residents who are not citizens, and families headed by women. People who are employed full-time, are age 65 or older, or are married tend to have low poverty rates.
Poverty Trends
Poverty rate trends:
Significant decline 1959–1969
Stable in 11–13% range since
Rises with recession
Measurement issues:
Arbitrary income threshold
Consumption versus income
LO23.5
23-16
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In the decade between 1959 and 1969, the poverty rate declined significantly and was fairly stable in the range of 11–13% until the early 1980s when it started to rise. In 1993, the rate peaked at 15.1% and then began declining. The recession that began in December of 2007 increased the poverty rate for all groups, and many economists expected to see the rates rise even further, but they did not. The rates and trends need to be interpreted cautiously. The income levels used to determine the rates are arbitrary thresholds and may not truly measure the extent of poverty in the U.S. The high cost of living in major metropolitan areas means that the official poverty thresholds may exclude many families whose income is slightly above the threshold but inadequate to meet basic needs. Also, non-cash transfers like food stamps and rent subsidies are not included in determining a household’s poverty status. Some economists believe we should use family consumption rather than family income.
The U.S. Income-Maintenance System
Entitlement programs: All those eligible receive aid
Social insurance programs
Social Security and Medicare
Unemployment compensation
Public assistance programs: Welfare
LO23.6
23-17
©2021 McGraw Hill Education. All rights reserved. No reproduction or further distribution without the prior written consent of McGraw Hill Education.
To help those who have very low incomes, the U.S. has a wide array of anti-poverty programs including subsidized employment, education and training programs, and anti-discrimination policies. These programs are referred to as entitlement programs because all eligible persons are legally entitled to receive their benefits.
The social insurance programs such as Social Security and unemployment compensation are designed to partially replace earnings that have been lost due to retirement, disability, or temporary unemployment. They are financed primarily out of federal payroll taxes, and the benefits are viewed as earned rights since the recipients must have worked in order to be eligible to receive them.
Public assistance programs or welfare provide benefits to people who are unable to earn an income because of permanent disabling conditions, or who have no, or very low, income and also have dependent children. These programs are financed out of general tax revenues and are regarded as public charity.
Public Assistance Programs
Supplemental Security Income (SSI)
Temporary Assistance for Needy Families (TANF)
Supplemental Nutrition Assistance Program (SNAP)
Medicaid
Earned-income tax credit (EITC)
LO23.6
23-18
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There are a wide variety of public assistance programs. The SSI program provides a uniform nationwide minimum income for the aged, blind, and disabled who are unable to work and who do not qualify for Social Security aid.
TANF assists families with children and has work requirements and a limit on the time a family can receive benefits.
SNAP, formerly known as the food-stamp program, permits low-income persons to obtain vouchers with which to buy food. Its goal is to ensure all low-income Americans have a nutritionally adequate diet.
Medicaid is a federal program to provide basic medical care to people covered by the SSI and TANF programs.
The earned-income tax credit (EITC) is a refundable federal tax credit provided to low-income wage earners. It is designed to supplement families’ income while encouraging them to work. These are just a few of the many programs administered by the government to assist those families faced with the challenges of poverty.
Characteristics of Major Income-Maintenance Programs
Program
Basis of Eligibility
Source of Funds
Form of Aid
Expenditures,* Billions
Beneficiaries, Millions
Social Insurance Programs
Social Security
Age, disability, or death of parent or spouse; life-time work earnings
Federal payroll tax on employers and employees
Cash
$911
61
Medicare
Age or disability
Federal payroll tax on employers and employees
Subsidized health insurance
706
60
Unemployment compensation
Unemployment
State and federal payroll tax on employers
Cash
28
5
Public Assistance Programs
Supplemental Security Income (SSI)
Age or disability; income
Federal revenues
Cash
55
8
Temporary Assistance for Needy Families (TANF)
Certain families with children; income
Federal-state-local revenues
Cash and services
14
2
Supplemental Nutrition Assistance Program (SNAP)
Income
Federal revenues
Cash via EBT cards
61
40
Medicaid
Persons eligible for TANF or SSI and medically indigent
Federal-state-local revenues
Subsidized medical services
582
63
Earned-income tax credit (EITC)
Low-wage working families
Federal revenues
Refundable tax credit, cash
63
25
Source: Social Security Administration, Annual Statistical Supplement, 2017, www.socialsecurity.gov; U.S. Department of Agriculture, www.fns.usda.gov; Internal Revenue Service, www.irs.gov/taxstats; and other government sources. Latest data.
LO23.6
23-19
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* Expenditures by federal, state, and local governments; excludes administrative expenses.
A number of income-maintenance programs were devised to reduce poverty and to help those who have very low incomes. Here is a list of the major programs used in the United States.
Economic Analysis of Discrimination
Discrimination
Taste-for-discrimination model
Prejudiced people receive disutility
Willing to pay to avoid
Discrimination coefficient
Prejudice and the market African-American-to-White wage ratio
Competition and discrimination
LO23.7
23-20
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Discrimination is the practice of according people inferior treatment on the basis of some factor such as race, gender, or ethnicity. Discrimination plays an important role in reducing wages for some and increasing wages for others. The taste-for-discrimination model examines prejudice in the emotion-free language of demand theory. It theorizes that discrimination results from a prejudiced person experiencing a subjective cost, a disutility, when they must interact with those they are biased against. Consequently, the discriminator is willing to pay a certain price to avoid interactions with the non-preferred group. The discrimination coefficient attempts to measure this cost in employment. The taste-for-discrimination model suggests that competition will reduce discrimination in the very long run.
Taste-for-Discrimination Model
African-American employment (millions)
D3
D2
D1
S
12
16
18
6
African-American wage rate (dollars)
0
$9
8
LO23.7
The African-American wage and employment level in the taste-for-discrimination model
23-21
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This graph illustrates the taste-for-discrimination model with a white employer discriminating against African-American workers. An increase in prejudice by white employers would decrease the demand for African-American workers from D1 to D2. Conversely, a decrease in the prejudice of the white employers would increase the demand for African-American workers.
Statistical Discrimination
Statistical discrimination
Judged on average group characteristics
Labor market example
Profitable, undesirable, but not malicious
LO23.7
23-22
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The theory of statistical discrimination is based upon the concept that people are judged on the basis of the average characteristics of the group to which they belong, rather than on their own personal characteristics. Insurance rates for teen drivers reflect this type of discrimination. Merely because a driver is a young male, he automatically is charged higher insurance rates because on average, young males tend to have more accidents. The driving history of the individual is not the key factor. In the labor market, statistical discrimination occurs when employers fail to hire someone because of a preconceived notion about the group that the person is from. For example, an employer might hesitate to hire a female of child-bearing age out of concern that if she becomes pregnant, she will need time off or leave the place of employment, which results in lower returns on the employer’s investment in training. The employer is not necessarily being malicious in failing to hire the person but is rather focused on the bottom line which is making as much profit as possible.
Occupational Discrimination
The crowding model
Crowd certain groups into less desirable occupations
Effects of crowding
Eliminating occupational segregation
Costs to society and individuals
LO23.7
23-23
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The third type of discrimination is occupational segregation. This discrimination tends to push certain groups into certain types of jobs. The notion that only men could be doctors and women should be nurses is an example. The easing of occupational barriers has led to a surge of women gaining advanced degrees in some high-paying professions.
B
B
M
W
3
4
3
4
6
4
Dx
Dy
Dz
Quantity of labor (millions)
Quantity of labor (millions)
Quantity of labor (millions)
0
0
0
Wage rate
Wage rate
The Economics of Occupational Segregation
Wage rate
B
M
Occupation X
Occupation Y
Occupation Z
LO23.7
23-24
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In these graphs, we can see how the effects of occupational segregation result in the crowding of one class (women) into one occupation, in this case Z. Because of the crowding, the labor supply is larger, thus driving down the wage rate, W. On the other hand, in occupations X and Y, the labor supplies are smaller resulting in higher wage rates, M. By eliminating occupational segregation, society benefits overall as wage rates equalize at B.
Last Word: Debating Universal Basic Income
Government guarantees minimum monthly income to each citizen.
Pros: reductions in poverty, income inequality, and income insecurity.
Cons: high costs, unfairness, and unintended consequences.
23-25
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The thought of a universal basic income (UBI) is not new. In fact, President Richard Nixon proposed one back in the late 1960s. Other countries have also implemented variations of UBI with limited results. Most trials have focused on providing the income to people with demonstrated financial need, and it remains to be seen if the programs can be replicated in mass.
25
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