Earnings Capacity, Poverty, and Inequality by Irwin Garfinkel

By Irwin Garfinkel

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96, which suggests that about 4% of the inequality in pretransfer income is attributable to the effect of these other factors on utilization of capacity. Hence, the real costs of labor market activity are estimated to account for about 14% of the observed inequality in pretransfer income (the dif17 ference between 18% and 4%). It should be emphasized, however, that the child care impediments tojabor force activity are rather differently reflected in PTY and NEC*. Hence, this residual of 14% must be interpreted as a very crude estimate of the effect of tastes and labor supply responses on the inequality in the distribution of pretransfer income.

This result is caused by the higher labor force participation rates of married black women relative to married white women. For this group, the CUR is 42% for blacks and 27% for whites. Also, single men have a much lower observed CUR than married men in both racial groups. While some, perhaps even all, of this dif­ ference can be attributed to differences in taste and in social and financial pressure to work between these two groups, a portion of the difference may reflect an overestimation of the earnings capacity of single men relative to married men.

Second, since the end of World War II, the degree of income inequality in the United States 11 It should be emphasized that even if the CUR of blacks were below that of whites, it could not necessarily be concluded that whites use their capacities more fully than blacks. An alternative interpretation would be that, for reasons of either supply or demand (for example, labor market discrimination in the quantity of work offered), the economy fails to utilize the capacities of blacks as fully as those of whites.

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