4.1.7 Income Inequality, Wealth Inequality and Poverty Flashcards
What is income/wealth inequality?
When the distribution of income/wealth is not equal i.e. when a large share of income/wealth is held by a small portion of the population
What is poverty?
When incomes are not high enough to meet basic human needs.
What are the two types of poverty?
Absolute poverty / relative poverty
What is the difference between absolute poverty and relative poverty?
Absolute = Where incomes are below a certain threshold that the most basic life sustaining goods/services cannot be accessed. Set by world bank, $1.90 a day
Relative = Where income is below a given average in a society.
What are the causes of income/wealth inequality? (7)
1) Age
Person gets older their experience increases, raising earning potential. Over-time a person can save more, increasing wealth.
2) Education
More educated = higher MRP = higher income
3) One sector dominant industry
If a country has a particular sector that is dominant in the economy then workers in that sector will recieve higher incomes
4) Globalisation and free movements of labour and trade
Led to inequality in developed countries as immigratino of labour increases supply of low skilled labour and increases pay of those on higher wages
5) Technology
Replaced jobs or made skills redundant, reducing wages in those industries.
Has also created a niche sector of jobs for those skilled with technology, increasing their wages.
Increased scope for profits for many businesses, increasing incomes drastically in those profesions such as banking.
6) Ownership of financial assets and property
Those that own have greater wealth than those that dont
7) Corrupt governance
By not redistributing tax revenue and instead pocketing it, income inequality is worsened.
What are the NEGATIVE consequences of income inequality and wage differentials? (6)
1) Low incomes
High income inequality = many households living with low incomes compared to richest in society -> poor living standards -> limited access to basic life sustaining goods -> forcing households to borrow -> increasing risk of bankrupcy -> which would further reduce living standards
Low incomes can be cyclical -> low incomes deprive access to education / healthcare -> keeps skills low -> keeps incomes low
2) Costs to Gov
Policies to deal with income inequality are costly + so are social costs of failures that income inequality causes.
Spending carrie opportunity cost -> IF borrowed then future taxes rise, if these taxes are VAT or duty, as regressive taxes they hurt the poor further, worsening incomes inequality.
If policies are funded through cutting costs in other areas such as healthcare, education and infrastrucute then this will affect the poor more as they rely on these services and cannot afford private alternatives.
3) Social costs
Higher crime rates, vandalism, rioting, marital and family breakdown, mental health problems. -> greater pressure on Gov finances
4) Higher personal debt
More income inequality -> Individuals on lower end of spectrum need to borrow to finance expenditures such as cars, house, mobile phone ->becuase poor cant afford market price -> excessive debt and risk taking by banks creates instbaility in financial system -> increases chance of financial crisis and recession
5) Lower economic growth
lower incomes -> lower levels of education and health -> reducing their productivity -> reducing potential economic growth rates
6) Gov is monopsonist employer then actions against income inequality are LIMITED
- Gov are unlikely to increase wages in these profesions (teachers, doctors, nurses) to reduce wage differentials as it would lead to the deterioration of gov.finances and potentiall increase inflation beyond the Gov target, losing macro objective
What are the POSITIVE consequences of income inequality and wage differntials? (5)
1) Inscentives to gain qualifications and skills through education
Workers know only way to access higher paying jobs is to improve productivity to justify higher wage.
This improves living standards for individual and productive potential of economy will benefit through increases in labour productivity and international competitiveness
2) Encourages enterprise and entrepreneurial spirit
Inscentive to innovate and take risks to increase income -> higher living standards -> RnD benefits economy -> creates employment -> improves competitveness of industries -> reducing prices
3) Promotes work not welfare
Less strain on gov finanances
4) Promotes efficient allocation of resources in labour market
Because wages signal and incentivise labour movement to settle in profesions where they are most productive
5) Trickle down effect
Higher income individuals spend more money in economy -> creates job opportunities for lower wage individuals -> increasing incomes for all society
HOWEVER can be just theoretical as higher income earners may not spend income domestically and instead import goods or move their money abroad where there are more lucrative returns
What are the consequences of wealth inequality? (5)
1) Unequal distribution of property risking asset price bubbles
Low wealth unlikely to own property, plentiful wealth likely to own multiple properties with returns from wealth to own future property.
As a consequence those with low wealth forced to rent while the wealthy overconsume housing and become landlords, a market failure.
If the wealthy pursue more property ownership then housing prices will increase due to the laws of demand, worsening problem further and threataning bank crisis as the less wealthy have to borrow greater amounts.
2) Greater risk of personal financial issues
Wealth acts as emergency source of finance during recessionary periods, thus those without wealth do not have this security -> they are more at risk of lower living standards during economic cycle troughs. This is worsened if low wealth/income individuals borrow to maintain living standards -> risk of bankrupcy
3) Unequal access to entrepreneurship
Lack of wealth and access to banks make it difficult for low wealth individuals to raise finance to start businesses. -> maintain individual lower living standards -> holds back investment, growth and employment
4) Unjust influence on policy, political decisions and job opportunities
Wealthy can use wealth to gain social influence and improve opportunities for themselves through bribes, donations, power or connections -> easier access to jobs -> missalocation of resources in labour market ->harms social mobility
5) Worsening income inequality creating social problems
Returns on wealth -> higher incomes -> greater inequity -> widening income gap -> market failure with poor underconsuming essential goods and wealthy overconsuming and ALL PROBLEMS WITH HIGH INCOME INEQUALITY
What evaluation points can we make when talking about income and wealth inequality? (4)
Eq.Opportunity + what needs to be considered when implementing policies
1) Equal opportunity is fundamental
This matters more than income equality when assesing consequences with opportunity including: education, healthcare, infrastucture, transportation and childcare.
With equal opportunity and inequality of income then choices are being made however if there is inequal opportunity then the lower income individuals have no choice.
2) Heavy intervention to promote equity could damage efficiency NORMATIVE JUDGEMENTS
-The rationale for intervention is NORMATIVE based upon equity that cannot be measured. It is possible for the costs to outweigh the benefits and for resulting Gov failure.
It is crucial to balance efficiency when striving for equity to ensure overall society welfare rises with government intervention.
3) The cause of the inequality
Imperative for root cause of inequality to be identified so effective, targeted policies can solve the issue without excessive damage to efficiency
4) Current state of Gov finances
Many policies to reduce inequality involve large Gov expenditure which can worse Gov finances with large budge deficits and national debt.
What are the causes of poverty? (4)
1) Poor education and healthcare
Difficult to gain human capital, skills and productivity to get better jobs.
2) Recession
Labour is derived demand fro demand for goods and services, when economic growth is low so is the demand for goods and services. -> low demand for labour -> lower wages -> lower employment -> unemployed have lower living standards and can experience poverty
3) Born into poverty
Statistics show those born into a poverty stricken household are more likely to live in poverty throughout their lives. Cuz poor access to education and healthcare -> imperfect imformation from parents regarding importance of education
4) Work before education
In developing countries children are raised to work to improce family living standards before they compelte education -> prevents gaining skills -> improving productivity
What are the consequences of poverty? (2)
1) Low standards of living
Low incomes -> struggling to afford essential items / life sustaining goods-> low living standards
2) Povery traps
Born into low income family -> deprived of access to healthcare and education -> inability to improve human capital, skills and productivity -> low income job -> inability to save -> inability to garner wealth -> need to borrow to purchase assets ->** paying bak debt interest -> risk of bankrupcy and inabilty to service debts** -> worsens credit score -> worsenes interest rates
What are 8 policies to redistribute income, reduce wage differentials and reduce poverty?
Transfer Payments
Gov. Spending on essential goods and services
Gov. implementing or adjusting progressive income taxation
Minimum wage
Maximum wage
Regulation in the form of gender / ethnic quotas
Policies that encourage greater TU membership
Market based approaches; providing opportunities and incentives for individuals to seek higher incomes
Discuss the policy of transfer payments to redistribute income, reduce wage differentials and reduce poverty
Payments made to individuals or groups in the economy to improve their living standards
I.E: child support, unemployment benefits, disbaility payments
These prevent those who cannot work from extreme poverty and allows their standard of living to be maintained, helping to close large income disparities.
Discuss the policy of ‘Gov. spending on essential goods and services’ to redistribute income, reduce wage differentials and reduce poverty
Spending on goods/services that are socially desirable and that generate postive externalities of consumption: healthcare, education, sanatation
This ensure access to essential goods/services and improves living standards
Reduces income inequality by allowing the poor a means to incerase skills, productivity and therefore incomes.
evaluation:
Cost to Gov -> opportunity cost -> if borrowed then future taxes rise -> if taxes are regressive then poor will suffer -> worsening income inequality
If funding comes from cost cuts in other areas -> negative imapcts on poor who rely on such services (public transport)
Discuss the policy of ‘Implementing/adjusting progressive income taxation’ to redistribute income, reduce wage differentials and reduce poverty
This means increasing taxes on workers with salaries in the highest income tax bracket and using the extra tax revenue to finance transfer payments OR gov spending on health/education. Reduce disposable incomes for rich and increase incomes for poor thus reducing income inequality
evaluation:
Raising tax on rich can distort labour market inscentives, preventing entrepreneurial risk taking activity to the detriment of economy. The LAFFER CURVE ilustrates this:
see flashcard for diagram
Laffer argued that by raising income taxes on the rich, eventually tax revenue will actually fall as tax rate increases:
-Workes lose inscentive to work for higher incomes
-Income effect becomes negative as workers work and earn less to reach a satisfactory target income, reducing income tax rev.
-Promote tax evasion and/or tax avoidance
-Incentivises highly skilled workers and entrepreneurs to emigrate, this can also dampen the productive potential of the economy
