APPLIED ECONOMICS | Group 2 Topic: Economic Problem; Inequality of the Distribution of Income

Historical Background Government Policies Social Causes Private Sector Initiatives Proposed Solution
 Second World War  Redistribution  Wages are If the private market Improving the quality
(1942-1945) Redistribution means determined by fails to provide enough and reach of education
When the Japanese taking income from labor market jobs to achieve full Reforms to increase
occupied the Philippines, those with higher employment, the human capital are
those who were ruthless incomes and providing Wages are a function of government must important for improving
enough to deal with their income to those with the market price of skills become the employer of living standards, and
fellow Filipinos as well lower incomes. Earlier in required for a job. In a last resort. are also likely to reduce
as the Japanese forces this chapter, we free market, the “market When growth is below labour income inequality.
became part of the elite. considered some of the price of a skill” is capacity and the job New analysis shows that
However, the number of key government policies determined by market market is slack, apply a rise in the
people who fell to the that provide support for demand and market fiscal and monetary share of workers with
lower classes increased the poor: the welfare supply. The market price policies aggressively to upper secondary
and thus, became the program TANF, the of a skill, and hence the achieve full employment. education is associated
main problem of the earned income tax wage for the job that Right now, this means with a decline in labour
post-war period. The credit, SNAP, and requires the skill, is low not raising interest rates earnings inequality
number of people who Medicaid. If a reduction if a large number of pre-emptively at the Fed (Fournier and Koske,
fell into poverty in inequality is desired, workers (high supply) and investing in public 2012). Examples of
increased because of the these programs could are willing and able to infrastructure. policy initiatives to raise
fighting which led to receive additional offer that skill but only a Take actions against upper secondary
personal and property funding. few employers need it countries that manage education attainment
loss, monumental (low demand). On the their currencies to include inter alia
destruction, and social The programs are paid contrary, when there is subsidize their exports enhanced accountability
upheaval. for through the federal low supply but high to us and tax our for
income tax, which is a demand for a skill, the exports to them. Such schools, better teacher
Since production was progressive tax system wage for a job requiring actions can include recruitment and training,
practically destroyed designed in such a way the skill goes up. revoking trade and special support for
people engaged in the that the rich pay a privileges, allowing for pupils at risk of
buy-and-sell business. higher percent in income  Education affects reciprocal currency dropping out.
To encourage this, the taxes than the poor. wages interventions, and Encouraging more
Japanese created the Data from household levying duties on students to pursue
so-called "Mickey income tax returns in Individuals with different subsidized goods. tertiary studies may
Mouse" Money as their 2009 shows that the top levels of education often Support sectoral have a more ambiguous
currency for the 1% of households had an earn different wages. training, apprenticeships, effect on earnings
occupied Philippines and average income of This is probably related and earn-while-you- inequality. Such reforms
this caused inflation. An $1,219,700 per year in to reason one: the level learn programs. tend to widen income
effect of this inflation pre-tax income and paid of education is often Implement universal dispersion by increasing
was that prices rose to an average federal tax proportional to the level pre-K, with subsidies the share of high-wage

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astronomical levels. A rate of 28.9%. The of skill. With a higher that phase out as earners (the composition
good example of this effective income tax, level of education, a incomes rise. effect). On the other
would be matches being which is total taxes paid person often has more Raise the minimum wage hand, new research
sold at 100 "Mickey divided by total income advanced skills that few to $12/hour by 2020 and suggests that this effect
Mouse" Pesos.[14] This (all sources of income workers are able to raise the overtime salary may be more than offset
kind of money caused such as wages, profits, offer, justifying a higher threshold (beneath by a decline in the
inflation because the interest, rental income, wage. which all workers get returns to tertiary
Japanese had no way of and government overtime pay) from education relative to the
backing it, thus it was transfers such as The impact of education $455/week to returns to lower levels
worthless. veterans’ benefits), was on economic inequality $970/week and index it of education (Koske et
much lower. The is still profound in to inflation. al., 2012). Tuition fees
By the end of the war, effective tax paid by the developed countries and Provide better oversight that make students share
irrigation facilities in top 1% of householders cities. Although there of financial markets: at least part of the cost
farms were damaged and was 20.4%, while the are usually policies of mandate adequate of tertiary education
destroyed, and bottom two quintiles free education in capital buffers, enforce a could lower
agricultural lands were actually paid negative developed nations, strong Volcker Rule disposable income
neglected. Livestock effective income taxes, levels of education against proprietary inequality (as the current
also was reduced to because of provisions received by each trading in FDIC-insured financing of education is
65%, thus a scarcity of like the earned income individual still differ, not banks, strengthen the regressive), provided
food resulted and thus, tax credit. News stories because of financial Consumer Financial they are accompanied by
family heads padded the occasionally report on a ability but innate Protection Bureau, and flanking measures so
numbers of their family high-income person who qualities like encourage vigilant that the poor are not
members to get more has managed to pay very intelligence, drive and oversight of systemic excluded from tertiary
food, thus becoming little in taxes, but while personal ability. For risk in the banking education.10
hoarders. Due to this such individual cases example, in Hong Kong, system by the Federal Promoting equity in
hoarding, prices rose exist, according to the 12 years of free Reserve. education
and thus, President Congressional Budget education are provided Level the playing field Raising social mobility
Osmena tried to solve Office, the typical for each citizen, not for union elections to by making educational
this by prescribing the pattern is that people covering tertiary bolster collective outcomes less
maximum prices for with higher incomes pay education, offered only bargaining while dependent on personal
goods. However, in a higher average share when students receive avoiding, at the state- and social circumstances
reality, the real market of their income in certain results on public level, anti-union, so- should boost GDP per
prices were way higher federal income taxes. exams. called “right-to-work” capita by enhancing
than those stated by laws. entrepreneurship, the
Osmeña's order. Due to Of course, the fact that Moreover, receiving the Maintain and strengthen overall quality and
this, people had no some degree of same level of education safety net programs like allocation of human
choice but to follow the redistribution occurs does not mean receiving the EITC and CTC, capital and, ultimately,
higher prices set by now through the federal education of the same SNAP, and Medicaid. productivity. At the
profiteers, since money income tax and quality. This accounts In order to generate same
was already circulating. government antipoverty for the difference in needed revenue and time, a more equitable
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 programs does not settle abilities and hence boost tax fairness: distribution of
Because of lack of food the questions of how wages for individuals all reduce the rate at which educational opportunities
and economic much redistribution is receiving, for example, high-income taxpayers has been shown to result
dislocation, people could appropriate, and whether 12 years of education. can take tax deductions, in a more equitable
be seen on the streets more redistribution Therefore, it seems no impose a small tax of distribution of labour
scavenging for food or should occur. matter how good the financial market income (e.g. De Gregorio
dying from disease while social welfare policy of a transactions, increase and Lee, 2002).
those who were able to  The Ladder of country is at preventing IRS funding to close the Examples
profit from the buy-and- Opportunity denial of education due “tax gap” (the difference of reforms include
sell business and war Economic inequality is to financial difficulties, between what’s owed postponing early
profiteers were able to perhaps most troubling differences in education, and what’s paid), and tracking, strengthening
join the upper class. when it is not the result in terms of levels and repeal “step-up basis” links between school and
Thus, during the Second of effort or talent, but quality, still play a (a tax break for wealthy home to help
World War, the already- instead is determined by prominent role in inheritors). disadvantaged children
present problem of the circumstances under economic inequality. learn, and providing
income inequality grew which a child grows up. early childhood care and
larger to the extent that One child attends a  Growth in basic
its effects, like crimes well-run grade school technology schooling for all. The
such as theft, and high school and widens income latter may yield large
kidnapping, and murder heads on to college, gap positive returns over an
occur regularly. while parents help out individual’s entire
by supporting education Growth in technology lifetime, particularly for
 Republic of the and other interests, arguably renders the most disadvantaged
Philippines paying for college, a joblessness at all skill (Chetty et al., 2011;
(1946-1972) first car, and a first levels. For unskilled OECD, 2006b).
After the Philippines house, and offering work workers, computers and Reducing the gap
became an independent connections that lead to machinery perform a lot between employment
nation in 1946, the internships and jobs. of tasks these workers protection on temporary
politics of the nation Another child attends a used to be do. In many and permanent work
remained as it was poorly run grade school, jobs, such as packaging If employment
during the period before barely makes it through and manufacturing, protection11 is much
the war even though in a low-quality high machinery works even stricter for regular than
theory, it was a school, does not go to more effectively and for temporary contracts,
constitutional republic college, and lacks family efficiently. Hence, jobs workers at the margin of
similar to that of the and peer support. These involving repetitive the labour market – such
United States. However, two children may be tasks have largely been as young people – risk
the gap in income similar in their eliminated. Skilled getting trapped in
between the wealthy underlying talents and in workers are not immune a situation where they
landlords and their the effort they put forth, to the nightmare of move between
tenants and the landless but their economic losing jobs. The rapid temporary work and
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workers was so great outcomes are likely to development in artificial unemployment without
that it led to the problem be quite different. intelligence may getting into permanent
of agrarian unrest and ultimately allow work. This can have
the Huk movement. This Public policy can attempt computers and robots to adverse implications for
movement was crushed to build a ladder of perform knowledge- human capital and career
by President Ramon opportunities so that, based jobs. progression (OECD,
Magsaysay using even though all children 2004) and, ultimately,
reforms and military will never come from The impact of increasing income equality and
force. During identical families and unemployment is economic growth. New
Magsaysay's term, the attend identical schools, stagnant or decreasing OECD analysis finds that
country began to each child has a wages for most workers, low-income workers on
prosper again due to the reasonable opportunity as there is a low demand temporary contracts
war reparations from the to attain an economic for but high supply of earn less than
Japanese and US Korean niche in society based labor. A small portion of workers with similar
War spending. on their interests, society, usually the characteristics on
desires, talents, and owners of capital, permanent contracts
Despite Magsaysay efforts. controls an ever- (Fournier and Koske,
taking time to listen to increasing fraction of the 2012).
the masses and doing his  Inheritance Taxes economy. The income This is not the case for
best to develop the There is always a debate gap between workers higher-income workers.
impoverished areas of about inheritance taxes. who earn by their skills Tentative evidence on
the country, he failed to It goes like this: On the and owners who earn by the size of the effect
really improve their lot one hand, why should investing in capital has illustrated in Table 5.1
because they became people who have worked widened. suggests, for example,
dependent on him to hard all their lives and that reducing protection
uplift them. This was saved up a substantial Although both skilled for permanent work
because he had failed to nest egg not be able to and unskilled workers from the level observed
tell them that he needed give their money and are adversely affected in Germany (third-
their help and he lacked possessions to their by the technological highest level) to that
a blue print for uplifting children and advance, it seems observed in Finland
them and ending their grandchildren? In unskilled workers are (which
gap with the rich. Thus, particular, it would seem subject to worse is about OECD average)
Magsaysay failed to put un-American if children outcomes. This is while increasing
an end to the inequality were unable to inherit a because the labor protection for temporary
between the masses and family business or a market may still need work from the level
the elites. family home. On the skilled workers to use observed in the United
other hand, many computers and operate Kingdom (second-lowest
When Diosdado Americans are far more the advanced machines. level) to that observed in
Macapagal was elected comfortable with The rightward shift in Finland (which is
president to succeed inequality resulting from the demand for skilled about OECD average)
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Carlos P. Garcia, his high-income people who labor creates an would reduce the 90/10
plan for the economy earned their money by increase in the relative percentile ratio by about
stated that he planned to starting innovative new wages of the skilled 0.24 (which is
resolve income companies than they are compared to the about 7% of the average
inequality by making with inequality resulting unskilled workers. 90/10 percentile ratio in
possible conditions that from high-income Hence, the income gap OECD countries). More
provided more income to people who have among workers also has even job protection
those who need more to inherited money from widened. for temporary and
be able to meet their rich parents. permanent contracts is
basic needs.He also  Gender does also likely to reduce the
planned to continue The United States does matter income gap between
President Garcia's have an estate tax—that immigrants and non-
"Austerity Program" with is, a tax imposed on the In many countries, there immigrants, as previous
his slogan of "simple value of an inheritance— is a gender income gap studies have shown that
living". However, this which suggests a in the labor market. For immigrants suffer
plan was undermined by willingness to limit how example, in America, the disproportionately from
his fellow much wealth can be median full-time salary contract-related labour
Kapampangans and other passed on as an for women is 77 percent market dualism (Causa
members of the elite for inheritance. However, of that of men. However, and Jean, 2007).
they threw luxurious according to the Center women who work part Increasing spending on
parties for him. Thus, on Budget and Policy time make more on active labour market
Macapagal's "simple Priorities, in 2015 the average than men who policies
living" turned out to be estate tax applied only work part-time. High social benefits can
mere rhetoric and only to those leaving Additionally, among reduce the incentives for
was true for the poor. inheritances of more people who never marry work and employment.
than $5.43 million and or have children, women Active labour
 Martial Law thus applies to only a make more than men. market policies may limit
(1972-1991) tiny percentage of those these adverse effects by
In 1972, President with high levels of It may be difficult to better matching jobs
Ferdinand Marcos placed wealth. justify such differences. with skills and
the Philippines in a state According to a U.S. enhancing job search
of Martial Law because  The Tradeoff Census report [4], the support and monitoring.
in that time, student between wage gap is not fully Existing empirical
demonstrations were Incentives and explained even after evidence suggests
becoming more violent Income Equality accounting for key indeed
for the demonstrators Government policies to factors that affect that active labour market
and law officers were reduce poverty or to earnings, such as policies raise
becoming too unruly and encourage economic discrimination and the employment (Bassanini
uncontrollable. equality, if carried to tendency of women to and Duval, 2006). This
According to Marcos, his extremes, can injure consider factors other should entail positive
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New Society, which was incentives for economic than pay when looking effects for both GDP per
supposed to be the output. The poverty trap, for work. The only thing capita and labour income
result of Martial Law, for example, defines a we know for sure is that equality.
was based on the situation where gender does contribute Programme design is
discontent of the poor guaranteeing a certain to a difference in wages key to reaping such
which led to their level of income can in society and hence gains, however (Martin
struggle against the eliminate or reduce the economic inequality. and Grubb, 2001).
ruling classes. To help incentive to work. An Promoting the
alleviate the unequal extremely high degree  Personal factors integration of immigrants
distribution of wealth in of redistribution, with Better integration of
the Philippines, Marcos very high taxes on the It is generally believed immigrants in the labour
ordered that all land rich, would be likely to that innate abilities play market can both reduce
holdings that were larger discourage work and a part in determining the inequality and
than 7 hectares were to entrepreneurship. Thus, wealth of an individual. raise GDP per capita
be distributed to it is common to draw the Hence, individuals through higher labour
landless tenants while tradeoff between possessing different sets force participation.
the owners were given economic output and of abilities may have Targeted policies, such
just compensation. equality, as shown in different levels of as
Figure 1 (a). In this wealth, leading to language courses, and
Another reform formulation, if society economic inequality. For transparent systems of
implemented by Marcos wishes a high level of example, more recognising foreign
during the Martial Law economic output, like determined individuals qualifications should
period was that point A, it must also may keep improving help to close the gap
corporations were accept a high degree of themselves and striving between immigrants and
ordered to start selling inequality. Conversely, if for better achievements, non-immigrants’ labour
their shares to the public society wants a high which justifies a higher market
so that these companies level of equality, like wage. performance.
were no longer owned point B, it must accept a Improving labour market
only by a single family lower level of economic Another example is outcomes of women
and their friends, but output because of intelligence. A lot of Women tend to take on
also by those who were reduced incentives for people believe that more caring
willing to become production. smarter people tend to responsibilities than
shareholders by have higher income and men, meaning they work
purchasing stocks. This This view of the tradeoff hence more wealth. This fewer hours and thus
reform helped alleviate between economic is debatable. In the book take home less pay.
income inequality to a output and equality may IQ and the Wealth of Arguably, their higher
certain extent for it be too pessimistic, and Nations, Dr. Richard labour supply elasticity
allowed income to be Figure 1 (b) presents an Lynn opined that there is should lead women to be
distributed to the lower alternate vision. Here, a correlation of 0.82 taxed at a lower rate
middle class. the tradeoff between between average IQ and than men. Since this is
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 economic output and GDP. However, Stephen not feasible in
However, the "crony equality first slopes up, Jay Gould, in the book practice, policies to
capitalism" of President in the vicinity of choice The Mismeasure of Man, improve the availability
Ferdinand Marcos only C, suggesting that criticized it for of formal care for
made the gap between certain programs might employing the wrong children and the elderly
rich and poor wider increase both output and methods of evaluation. can
because funds that could economic equality. For serve as an alternative
have been used for example, the policy of In addition to innate solution. Such policies
crucial development providing free public abilities, diversity of should help to reduce
needs were siphoned off education has an preferences, within a gender differences in
to be used for the element of society or among working hours and – at
benefit of Marcos and redistribution, since the different societies, least to the extent that
his allies. Due to this, value of the public contributes to the hourly wages are little
the problem of income schooling received by difference in wealth. affected – pay, and at
inequality that was very children of low-income When it comes to the same time improve
much present even families is clearly higher working harder or long-run living
during the period of the than what low-income having fun, equally standards through higher
Third Republic was families pay in taxes. A capable individuals may participation rates.
made worse. This was well-educated have totally different Fighting discrimination
because in the year population, however, is priorities, resulting in a Since at least part of the
1986, it was said by Rep. also an enormously difference in their earnings gap between
Stephen Solarz of the powerful factor in incomes. Their saving immigrants and non-
13th District of New providing the skilled patterns may also differ, immigrants and
York that more than half workers of tomorrow leading to different between men and
of the Filipino population and helping the economy levels of accumulated women is likely to be
was living in squalor to grow and expand. In wealth. due to discrimination
while Marcos and his this case, equality and (Koske et al., 2012),
allies were living in economic growth may more
luxury. complement each other. effective legal rules (e.g.
legal action against
 EDSA Revolution to Moreover, policies to those who engage in
the Present diminish inequality and discriminatory practices)
(1986- ) soften the hardship of could also help.
Due to the success of poverty may sustain
the EDSA Revolution, political support for a Taxing in a way that
Marcos and his family market economy. After allows equitable growth
would flee to Hawaii and all, if society does not Taxes do not only affect
Corazon Aquino would make some effort toward the distribution of
become the new reducing inequality and income; they also affect
Philippine President. poverty, the alternative GDP per capita by
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When she took power, might be that people influencing labour use
President Aquino was would rebel against and productivity, or both
able to restore market forces. Citizens (Johansson et al., 2008).
democracy and basic might seek economic Some tax reforms
rights such as the writ of security by demanding appear to be win-win
habeas corpus and free that their legislators options – improving
speech. However, when pass laws forbidding growth prospects while
established a employers from ever narrowing the
constitutional convention laying off workers or distribution of income.
to replace the 1973 reducing wages, or laws
constitution, the that would impose price
delegates were mostly floors and price ceilings
from the old elite. Also, and shut off international
when she redistributed trade. From this
the corporations of the viewpoint, policies to
cronies, these reduce inequality may
companies were sold to help economic output by
Chinese businessmen building social support
and members of the old for allowing markets to
elite. President Aquino operate.
was an honest leader,
but she was not able to
solve other issues
because of instability
caused by attempted
coups staged by the
military which tried to
overthrow her
government.

When Fidel Ramos

succeeded Cory Aquino,
he relaxed government
regulations in order to
allow entrepreneurs to
be able to compete with
foreign corporations and
he was able to end the
electricity crisis of his
predecessor's regime.
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Ramos was also able to
make the economy more
transparent by
introducing a banking
reform, which allowed
local and foreign banks
to compete. In his SONA,
President Ramos also
planned to create
socialized housing for
the poor and more
importantly, to give them
the tools to earn a better
living by means of credit
and land reform.
President Ramos also
swore to make the
taxation system more
equitable and
progressive. At the same
time, he also expanded
the VAT in order to
simplify sales taxes.

In 2005, President Gloria

Arroyo implemented the
E-VAT which fixed the
value-added tax at
12%.which ended up
cancelling out the 25
peso raise in the
minimum wage. It was
also said that this
increase in VAT was
supposed to target the
rich who buy more high-
end goods, but they can
pay it. However, the
poor are more affected
because they have to cut
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their expenses. This is
because electricity rates
were also affected by
VAT, which ends up
shrinking the income of
the poor due to more
expenses.

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