1.7 The distribution of income and wealth; poverty and inequality Flashcards
Income
A flow of money received over a period of time (e.g., wages, rent, profits).
Wealth
A stock of assets owned at a point in time (e.g., property, savings, investments).
Distribution of income
How income is shared among individuals/groups in an economy.
Distribution of wealth
How assets (e.g., property, savings) are divided across a population.
Lorenz curve
Economic Analysis
A) Causes of a “Bowed” Lorenz Curve (Inequality)
Income Inequality:
Wage differentials (e.g., CEOs vs. minimum wage workers).
Unemployment/low pay in certain sectors (e.g., gig economy).
Wealth Inequality:
Inheritance & intergenerational wealth transfer.
Asset inflation (e.g., housing booms benefit property owners).
B) Policy Implications
Progressive Taxation: Reduces post-tax income inequality (shifts curve closer to equality).
Benefits & Minimum Wage: Raises incomes for the poorest (e.g., Universal Credit).
Wealth Taxes: Inheritance tax/capital gains tax reduce wealth concentration.
- Limitations
Doesn’t Show Absolute Living Standards: A country with high inequality (e.g., USA) may still have higher incomes than a more equal but poorer nation (e.g., Cuba).
Ignores Non-Monetary Factors: Access to public services (e.g., NHS) affects welfare but isn’t captured.
Gini coefficient
measures equality from the lorenze curve
always between 0-1 the higher the value the more inequality there is.
How is the Gini coefficient calculated?
the ratio of the area between the perfect equality line and the Lorenz curve
Equality
everyone is treated exactly the same. A completely equal distribution of income means that everyone has the same income.
Equity
everyone is treaty fairly
Income tax threshold
the level of income above which people pay income tax
Causes of income inequality (4)
Wage Differentials :
Skills/Education
Unemployment & Underemployment
Structural unemployment (e.g., automation replacing factory jobs) widens gaps.
Technology (Skill-Biased Technical Change)
Automation replaces low-skilled jobs (e.g., self-checkouts).
High demand for STEM skills increases top earners’ wages.
Tax & Benefits System
Regressive taxes (e.g., VAT) hit the poor harder.
Cuts to benefits
Example:
UK tuition fees deter low-income students from higher education.
Wealth & Inheritance:
Asset Ownership
Inheritance
Example:
London’s housing boom benefited property owners, while renters fell behind.
Impacts of income and wealth inequality (4)
- Monopolies can exploit consumers with higher prices, and exploit their consumers with lower wages
- Those who inherit lots have more wealth and can access the best education and therefore the best jobs
- Inequality could discourage and demotivate those on lower incomes from participating in society.
- an individual’s ability to consume goods and services depends upon their income and wealth and an inequitable distribution of income and wealth is likely to lead to a misallocation of resources and hence market failure
Poverty
the state of being poor and not having enough income to meet basic needs
Absolute poverty
the state of being deprived of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education, and information
Relative poverty
the state of having an income below a specified proportion of average income
Causes of poverty (7)
- inequality in wages and employment
- welfare payments
- taxes
- health issues
- wars and conflicts
- corruption and political oppressions
- natural disasters
Impacts of poverty (5)
- health problems
- poor sanitation
- reduced access to education
- hindered economic growth
National Minimum Wage (NMW)
a minimum wage or wage rate that must by law be paid to employees, though in many labour markets the wage rate paid by employers is above the national minimum wage
progressive tax
a tax when, as income rises, a greater proportion of income is paid in taxation
Proportional tax
a tax when, as income rises, an equal proportion of income is paid in taxation
Regressive tax
a tax when, as income rises, a smaller proportion of income is paid in taxation
Income tax
a direct tax levied on wages, pensions, benefits, investment income, and income from rent
Value Added Tax (VAT)
an indirect tax paid at a rate of 20% on most goods and services. This is an example of a tax on expenditure
Inheritance tax
a direct tax which is paid on the value of someone’s estate after they die. This is an example of a tax on wealth.
Corporation tax
a direct tax on company’s profits. This reduces the size of dividends paid to shareholders. This is an example of a tax on income.
Means-tested benefits
the ability to claim these benefits depends on the person’s income or ‘means’ (e.g. income support)
Universal benefits
benefits claimable of right and not dependant on a person’s income (e.g. child benefits)
Describe the relationship between tax revenue and income tax rate
- At an income tax rate of 0%, so no tax revenue is collected.
- At an income tax rate of 100% no-one bothers to work, so no tax revenue is collected.
- If tax cuts cause income to rise (due to incentives) proportionally more than the tax rate has fallen, then tax revenues will increase.
- If tax increases cause income to fall (due to incentives) proportionally more than the tax rate has risen, then tax revenues will decrease.
Marginal income tax rate
the tax rate levied on the last pound of income received
Unemployment trap
occurs when people are better off out of work, claiming benefits than in low-paid jobs and paying income tax, NI contributions and losing some of their means-tested benefits
Inflation
a persistent or continuing rise in the average price level
Disposable income
is the amount of money households have available to spend or save after direct taxes (e.g., income tax, National Insurance) have been deducted and state benefits (e.g., Universal Credit) have been added.
Trade union
A trade union is an organisation of workers that collectively bargains with employers to improve wages, working conditions, and job security.
How Trade Unions Work
Collective Bargaining: Negotiate pay/conditions for all members (stronger than individual bargaining).
Industrial Action: Strikes or work-to-rule if demands aren’t met.
Lobbying: Campaign for laws protecting workers (e.g., minimum wage hikes).
bigger the union mark up ( difference between wages with a tu and without) the bigger the success
pros of trade union
higher wages
improved conditions ( flexible hours safer workplaces)
worker representation ( gives voice in disputes like an unfair dismissal
cons of trade union
unemployment risk
strikes disrupt economy (2023 junior doctor strikes delayed NHS treatments)
inequity - unionised workers gain at non unionised workers’ expense
trade union evaluation
- Legislative Restrictions
Example:
2023 UK Rail Strikes: Despite widespread disruption, the government pushed through minimum service levels law, forcing 40% of trains to run during strikes.
Evaluation:
Unions can no longer paralyze industries as in the 1970s (e.g., Winter of Discontent).
Legal hurdles make large-scale strikes harder to organise.
- Restructuring of the UK Economy
Example:
Royal Mail (2023): Despite CWU strikes, management imposed job cuts and lower pay rises, citing competition from Amazon logistics.
Evaluation:
Unions struggle to organise in fragmented, service-based economies.
Zero-hour contracts and precarious work limit collective bargaining.
- Competitive Pressures from Globalisation
Example:
British Steel (2019): Unions agreed to pension cuts and wage freezes to prevent plant closures, showing weakened bargaining power.
Evaluation:
Unions must accept concessions to retain jobs in competitive industries.
Global capital mobility undermines strike effectiveness.
Trade union in monopsony
mininum wage pros and cons
the more elastic the supply of labour an demand for labour is the higher the unemployment will be
inelastic = no change
