Empirical project 12 Solutions

These are not model answers. They are provided to help students, including those doing the project outside a formal class, to check their progress while working through the questions using the Excel, R, or Google Sheets walk-throughs. There are also brief notes for the more interpretive questions. Students taking courses using Doing Economics should follow the guidance of their instructors.

Part 12.1 Inequality

  1. Separate line charts for each percentile are provided in Solution figures 12.1 to 12.5.

    Real incomes have generally increased over time for all percentiles except the 15th percentile.

Solution figure 12.1 15th percentile of incomes.

Solution figure 12.2 25th percentile of incomes.

Solution figure 12.3 50th percentile of incomes.

Solution figure 12.4 75th percentile of incomes.

Solution figure 12.5 85th percentile of incomes.

Cumulative share of the population (%) Perfect equality line Cumulative share of income in 2011 (%) Cumulative share of income in 2012 (%)
0.00 0.00 0.00 0.00
15.00 15.00 0.00 3.91
25.00 25.00 2.74 8.44
50.00 50.00 15.09 24.53
75.00 75.00 41.42 50.37
85.00 85.00 60.50 67.09
100.00 100.00 100.00 100.00

Solution figure 12.6 Cumulative share of income, for some percentiles of the population.

Solution figure 12.7 Lorenz curves for 2011 and 2012.

Percentile 2011 2012 2013
1 0.00 6,000.00 0.00
2 0.00 6,000.00 0.00
3 0.00 6,000.00 0.00
98 44,516.67 50,544.18 45,270.21
99 44,516.67 50,544.18 45,270.21
100 44,516.67 50,544.18 45,270.21

Solution figure 12.8 Incomes earned by each percentile of the population.

Year Percentage increase (from previous year) Inflation index
2009   1.000
2010 2.40 1.024
2011 5.30 1.078
2012 4.10 1.122
2013 4.30 1.171
2014 4.40 1.222
2015 3.00 1.259
2016 2.40 1.289

Solution figure 12.9 Creating an index-based series from percentage increases.

Part 12.2 Government popularity

  1. Supporters of the scheme could include:

    • citizens who receive the payment, especially the lower-income households, for whom $6,000 would be a substantial increase in annual income
    • government officials and politicians, since the scheme is a visible way to address inequality in society, which could help boost their popularity and help to get them re-elected
    • social welfare groups or related organizations, who could view this scheme as one step towards reducing inequality.

    Opponents of the scheme could include:

    • lower-income people, who may believe that a pay-out independent of need is unfair
    • wealthier or more powerful members of society, such as businesspeople, who may believe they made a larger contribution to economic growth and may therefore not perceive an equal split as being fair
    • policymakers, who may believe that other programs or policies could be more effective at addressing inequality than a one-off lump-sum payment (for example, additional subsidies for lower-income households, or transfers to lower-income households only).

Solution figure 12.10 Overall satisfaction with the government (2006–2017).

Solution figure 12.11 Satisfaction with government’s improvement of people’s prosperity (2006–2017).

  1. There are many possible points to discuss, including:

    • Compared to the 2011 scheme, this scheme is targeted more towards needy households (for example, those who are not homeowners or are not earning enough to pay income tax).
    • Another difference is that the amount received depends on need rather than being the same amount for all eligible households.
    • Administrative costs are higher than the 2011 scheme (possibly because of the need to verify and calculate the amount given to each eligible household), and the maximum amount distributed is smaller.
  1. An example of an argument for recommending the scheme is provided:

    The scheme is a visible and tangible way to reduce income inequality, and giving everyone the same lump-sum amount could be seen as being ‘fair’, which could improve public satisfaction with the government. However, when the scheme was actually implemented, there were huge administrative costs involved with registering citizens and arranging the payment. To reduce the administrative burden, instead of doing a direct transfer, the payment could take the form of a tax rebate (for taxpayers) and an increase in existing transfers or subsidies (for non-taxpayers). Also, the payment could be adjusted for the number of dependents that the adult has to support: even though the scheme seemed fair since every adult received the same amount, households with more children (who have greater financial needs) received the same amount as married couples without children.

    An example of an argument for not recommending the scheme is provided:

    The scheme does not address the root causes of income inequality, so would not affect inequality in the long run. It might be more effective to spend the surplus on providing educational subsidies for low-income households, scholarships for students from low-income households to study at university, or retraining programs for the unemployed.