2.4 Income Inequality and Poverty

Question 1

What is income inequality?

Answer 1

Income inequality is when the distribution of income is not equal, meaning a large share of the income is held by a small proportion of the population.

Question 2

What is poverty?

Answer 2

Poverty occurs when incomes are not high enough to meet basic human needs.

Question 3

What is one cause of income/wealth inequality?

Answer 3

Age is a cause of income/wealth inequality as older individuals have more experience and human capital, raising their productivity and incomes. Younger generations, on the other hand, do not have the same experience and human capital, resulting in lower incomes.

Question 4

How does education impact income/wealth inequality?

Answer 4

Education is a significant factor in income/wealth inequality. Those who are more educated with greater school, college, and university qualifications are much more likely to earn higher incomes in a capitalist economy compared to those with little or no education, given that individuals are paid according to their productivity and how much revenue they can bring in for their employer.

Question 5

What is the impact of a dominant and capital-intensive production sector on income/wealth inequality?

Answer 5

If an economy is highly specialized, with output coming from one dominant sector, workers and capital owners in that specific industry benefit from higher incomes, while the rest of the economy only benefits indirectly, widening income disparities.

Question 6

How has globalisation led to an increase in income/wealth inequality in developed countries?

Answer 6

Globalisation and free movements of labour and trade have led to an increase in income/wealth inequality within developed countries. Immigration decreases wages of the low skilled and the low paid and increases the pay of those already on high salaries, while trade liberalisation leads to an increase in foreign competition, which decreases the wages of low-skilled workers as firms look to fully reduce their costs of production.

Question 7

How has technology impacted income/wealth inequality?

Answer 7

Technology has replaced jobs and made various skills of workers redundant, reducing wages in those industries. This has pushed many workers into low-paid and low-skilled work, but has also created a niche sector of jobs requiring technical expertise and specific skill sets where wages are higher. Furthermore, technology has substantially increased the profit potential of certain industries without the need for large numbers of employees, like banking, increasing incomes drastically in such professions, widening income disparities.

Question 8

How does ownership of financial assets and property contribute to income/wealth inequality?

Answer 8

Those who own financial assets either directly or indirectly through their employer, such as a pension plan, have greater wealth than those who have not received enough income to purchase such financial assets. Those who own property, either as accommodation or as a financial investment, are significantly better off in wealth terms than those who do not.

Question 9

Evaluation: How can corrupt governance worsen income inequality?

Answer 9

Corrupt governments can worsen income inequality by not re-distributing tax revenue to help the poor in the form of transfer payments or spending on healthcare and education, instead pocketing the money themselves in hidden bank accounts. Furthermore, corrupt governments may divert tax money to the elite given the voting power such capital owners possess and the large funding received from such groups for electoral campaigns.

Question 10

How does income inequality lead to higher levels of debt?

Answer 10

Income inequality leads to higher levels of debt as individuals on the lower end of the income spectrum need to borrow to finance expenditures such as their house, car, and furnishings. The free market does not account for needs and would thus exclude the poor from consumption, as they cannot afford the market price. Excessive debt and risk-taking by banks can create instability in the financial system and increase the chances of a financial crisis and deep recession in the economy if there comes a point where loans cannot be paid back.

Question 11

What are the costs to the government of policies to deal with income inequality?

Answer 11

Policies to deal with income inequality are very costly for the government, as is having to deal with the social costs that income inequality can cause. Such spending carries a severe opportunity cost. If the money had to be borrowed, the chances are that taxes in the future would have to rise. If indirect taxes such as VAT or fuel duty did go up to part fund this spending, as regressive taxes, these especially hurt the poor, worsening income inequality, contradicting the intentions of these policies. If the government funds these policies through cutting spending in other areas of the economy such as education, healthcare, and public transport, the negative impacts could once more be suffered by the poor who rely on such services.

Question 12

What are the social costs of income inequality?

Answer 12

Poverty can create social issues such as higher crime rates, more vandalism, more rioting and protests, marital and family breakdown, fractions between class groups, and mental health problems. This can lead to greater pressure on government finances and also the social breakdown of society.

Question 13

How does income inequality impact economic growth?

Answer 13

Income inequality can lead to lower economic growth because those on lower incomes have lower levels of education and health, reducing their productivity and potential economic growth. Additionally, those on lower incomes have a higher marginal propensity to consume than the rich, who have a higher marginal propensity to save. Therefore, greater income inequality, where a greater share of income is held by a small proportion of the wealthy population, will not translate into high levels of consumer spending as if that wealth were more equally distributed to those on low incomes.

Question 14

How can income inequality promote education and skills?

Answer 14

Income inequality can promote very strong incentives for individuals to gain qualifications and skills by improving their level of education. Workers will know that the only way to access a higher paying job is for their human capital and productivity to increase to justify a higher wage. This is beneficial for the individual’s living standards, as well as for businesses and the productive potential of the economy, increasing labour productivity and international competitiveness.

Question 15

How can income inequality encourage enterprise and entrepreneurship?

Answer 15

Income inequality can encourage enterprise and entrepreneurial spirit as there is always an incentive to innovate, take risks, and create new products and services when there is an appropriate reward, i.e. the ability to earn more than others who haven’t taken risks. Successful entrepreneurial activity can lead to technological advances, increasing the productive potential of the economy and long-run growth while also creating employment opportunities for others. Those on lower incomes will benefit through lower prices and greater access to brand new high-quality goods and services if entrepreneurship is allowed to flourish.

Question 16

How does income inequality promote a work and not welfare attitude?

Answer 16

Income inequality promotes a work and not welfare attitude because there is always a strong incentive to get into work and do what is necessary to access higher paying professions rather than living on welfare, which provides a much poorer standard of life. As a consequence, there will be less strain on government finances, with funding of the welfare state remaining sustainable without the need for excessive public borrowing or large increases to taxation.

Question 17

How can income inequality have a positive effect through the trickle-down effect?

Answer 17

Income inequality can be positive if the trickle-down effect takes place. This is when individuals who earn higher wages spend that money in the economy creating regional multiplier effects and job opportunities for others who then receive higher wages themselves. Consequently, incomes can rise for the majority in society rather than rising incomes being confined only to those earning the highest wages.

Question 18

What is one of the causes of poverty related to education and healthcare?

Answer 18

Individuals with poor access to health and education services will find it extremely difficult to gain human capital, skills and productivity to access jobs in the economy. This will trap them in poverty with very low incomes.

Question 19

How can a recession lead to poverty?

Answer 19

As labour is a derived demand, derived from the demand for goods and services when economic growth is low, there is less need for labour to produce goods and services increasing unemployment. Once more firms will be suffering from a decrease in revenues and less profitability. To compensate they may reduce the size of their workforces making staff redundant, increasing unemployment. As a consequence, the unemployed will suffer from lost income and lower living standards in either absolute or relative poverty.

Question 20

How does being born into poverty affect someone’s future?

Answer 20

Statistics show that those who are born into a poverty-stricken household are likely themselves to live in poverty as they get older. This is because access to healthcare and education is low, keeping productivity down for these individuals, but also because parents themselves may not understand or value the importance of education and thus deprive their children of education, where poverty will persist.

Question 21

What is a cause of poverty in developing countries?

Answer 21

In developing countries, children can still be raised to work on family farms (subsistence-based agriculture), working for improvements of family living standards before they complete education. Such work will prevent children gaining skills and productivity to earn higher income paying jobs, trapping them in absolute poverty.

Question 22

What are the consequences of poverty in terms of standards of living?

Answer 22

Those living in poverty suffer from low incomes meaning they will be experiencing very low standards of living in both material and non-material terms struggling to afford the most basic life-sustaining goods and services such as food, clean water, shelter, clothing, healthcare, and education.

Question 23

What is a poverty trap?

Answer 23

Poverty could well be cyclical with low incomes depriving individuals of access to healthcare and education, keeping levels of human capital and skills low. This prevents any increases in productivity trapping these individuals in a life of persistent low income. Furthermore, low incomes will reduce the amount of saving taking place in the economy. Financial intermediaries will then not have the funds to issue loans out to businesses for investment. Low investment in the economy will keep economic growth low thus ensuring incomes stay low in the long term with persistent poverty.