4.1.7 The distribution of income and wealth: poverty and inequality

Question 1

Define Wealth

Answer 1

Wealth is defined as a stock of assets, such as a house, shares, land, cars and savings. Wealth inequality is the unequal distribution of these assets.

Question 2

Define Income

Answer 2

Income is money received on a regular basis. For example, it could be from a job, welfare payments, interest or dividends. When income is unevenly distributed across a nation, income inequality is said to exist.

Question 3

Outline Lorenz curve and Gini coefficient as a measurement of income inequality

Answer 3

The Lorenz curve measures the distribution of income and wealth in a country. The line of perfect equality shows the distribution of income when the richest x% of the population owns x% of the cumulative income.

The Lorenz curve shows the actual distribution of income and wealth. The one in the diagram shows a significant level of inequality. The richest 20% own a higher
proportion of income than the poorest

Question 4

What is the equation of the GINI co-efficient

Answer 4

The Gini coefficient gives a numerical value for inequality and is derived from the Lorenz curve. It is calculated by the areas: GINI = A/ A+B

A value of 0 indicates perfect equality, so everyone has the same income and wealth. A value of 1 is perfect inequality i.e. all of the wealth in the country is concentrated in the hands of one individual or household.

Question 5

Define equality

Answer 5

Equality refers to the equal distribution of wealth and income in society, so that everyone has the same income.

Question 6

Define equity

Answer 6

Equity refers to fairness, or what is considered to be an acceptable distribution of income and wealth in society. This could be subjective.

Question 7

Outline inequality in wages

Answer 7

Recently, more part-time and temporary jobs have been available rather than full time jobs. This leaves people underemployed, and it limits how much they can earn.
It became a problem during the Great Recession.

On average, those with a degree earn more over their lifetime than those who gain just A Levels. The wage gap between skilled and unskilled workers has increased in
the UK recently. Jobs in the low-skilled service industries, especially in the public sector, tend to pay less than jobs in the private sector. Even with equal pay laws, women still earn less than men on average. This could be due to career breaks and fewer hours worked on average than men, or because women are crowded into low-paid or part-time jobs, which may only require low skill levels. Women could also be discriminated against when it comes to promotions, which effectively locks out higher paying jobs. Although a gap still exists, it is narrowing. Workers might be discriminated against due to age, disabilities, gender and race.

Question 8

Outline Welfare payments and taxes in the distribution of income and wages

Answer 8

State pensions and welfare payments tend to increase less than wages, even though they are index-linked to inflation. This means that those on benefits see a smaller
real increase in their income compared to those in jobs. This increases inequality.

Moreover, recently welfare payments have been cut. Although this might encourage some people to find jobs, many people might be unable to work, so it lowers their
income more. In the UK, some taxes are regressive, which means that those on lower incomes bear
a larger burden of the tax. This can increase inequality.

Question 9

Outline Unemployment in the distribution of income and wages

Answer 9

This can cause relative poverty (and therefore increase income inequality), and it is particularly detrimental where no one in a household is working, since they are left to rely on state benefits.

Question 10

Outline Inequality between countries in the distribution of income and wages

Answer 10

Globally, there is inequality between countries. Some of this is caused by certain social groups being excluded and marginalised based on ethnicity, gender, sexual
orientation and disabilities.

Some countries have been held back by wars, droughts, famines and earthquakes, which has kept their populations in poverty. Across Africa, population issues are complicating efforts to reduce poverty and eliminate hunger. Their population of 1.1 billion is expected to double by 2050.

Two people born in two countries can have very different opportunities open to them, depending on where they were born. This inequality of opportunity can be seen between countries such as Japan and Sierra Leone, where the difference between life expectancies is significant. In Japan, women can expect to live to the age of 87, whilst in Sierra Leone, women can expect to live to 46.

Recently, developing countries have been growing faster and are catching up with the developed world. This is helping to narrow the gap between the rich and poor
countries. The bulk of economic development happened in the Western world, even though China was the technological leader until the 1500s. This could be because British society was more open to social mobility and political liberty, and had free speech supported by Parliament which led to the growth of new ideas. Britain then became the centre of scientific revolution and experienced the Industrial Revolution. This increased output per farmer, reduced food prices and led to higher wages.

Question 11

Impact of economic change and development on inequality

Answer 11

Kuznets hypothesis states that as society moves from agriculture to industry, so it develops, inequality within society increases, since the wages of industrial workers
rises faster than farmers. Kuznets curve is shown below. Then, wealth is redistributed through government transfers and education. He essentially argued that inequality in poor countries is just a transitional phase, and once nations become economically developed, inequality reduces.

Question 12

The likely benefits and costs of more equal and more unequal
distributions

Answer 12

Inequality motivates workers, which encourages them to learn new skills and work hard. A higher wage reflects higher productivity in a capitalist society, which results
in wage inequality.

Monopolies can exploit consumers with higher prices, and exploit their consumers with lower wages. This allows them to earn even higher profits.

Inheritance is passed down generations, which means wealth is often concentrated in the hands of a few families. Those who inherit lots have more wealth. They can also access the best education and therefore the best jobs, which is not accessible by those with less wealth. It results in an inequality of opportunity and income. Wealth can generate more income for the rich, which widens inequality. There can be income redistribution and wage equality through government intervention. For example, inheritance tax means rich families cannot keep their entire wealth. Moreover, state education means everyone can access education, and there is regulation for firms with monopoly power.

Inequality could discourage and demotivate those on lower incomes from participating in society. An unequal distribution can lead to negative externalities,

Question 13

Define Absolute poverty

Answer 13

Absolute poverty is defined as living below subsistence. This means that the person is
unable to meet their basic needs of food, clean water, sanitation, health, shelter and
education. The World Bank uses a measurement based on the number of people living on
less than $1.25 per day.

Question 14

Define Relative poverty

Answer 14

Relative poverty is measured by comparison to the average in the country. In the UK, those
with below 60% of the median income are considered to be in relative poverty. In the US, a
basket of goods which maintains the average standard of living of society is used. Relative poverty can be seen as one way of measuring income inequality.

Question 15

Outline Inequality in wages or unemployment as a cause of poverty and the effects

Answer 15

If workers can earn a higher level of education, they will be able to access jobs with higher wages. Those with lower levels of education might struggle to find a job, and if they do, it might only be low paid. This is especially harmful where countries do not have a National Minimum Wage or unemployment benefits, since it can leave people in relative poverty.

Recently, more part-time and temporary jobs have been available rather than full
time jobs. This leaves people underemployed, and it limits how much they can earn. It was especially a problem during the Great Recession. The changing structure of the UK economy to services as a result of deindustrialisation has meant some jobs have been lost. This could cause structural
unemployment and hysteresis. This is a type of structural unemployment, where someone is out of work for a long time, so their skills deteriorate. This makes it
harder to find a job, and it leads to long-term unemployment.

Question 16

Outline Welfare payments as a cause of poverty and the effects

Answer 16

State pensions and welfare payments tend to increase less than wages, even though they are index-linked to inflation. This means that those on benefits see a smaller real increase in their income compared to those in jobs. This increases inequality and the number of people in relative poverty.

Question 17

Outline Taxes as a cause of poverty and the effects

Answer 17

In the UK, some taxes are regressive, which means that those on lower incomes bear
a larger burden of the tax. This can increase inequality and relative poverty.

Question 18

Outline Disease, malnutrition and other health problem as a cause of poverty and the effects

Answer 18

Health issues can make it hard to get a job, especially in a country where jobs are
scarce and rarely available. People are likely to take a lot of time off work and it can
deter MNCs from investing in a country. This can leave people without an income and it can push people into absolute poverty. It is especially an issue in countries in Sub-Saharan Africa.

Question 18

Outline War and conflicts as a cause of poverty and the effects

Answer 18

This might push people to flee their homes, as well as destroying anything they
owned. It could leave people homeless and force them into extreme poverty.

Question 19

Outline the Impact of poverty

Answer 19

Health: high rates of poverty are associated with lower life expectancies, poorer standards of health and underdeveloped infants. Malnutrition is an important issue, which results in poor cognitive development in children, so they are not as productive as adults. Malnutrition also makes children more vulnerable to infections, which increases their risk of death.
Society: Poverty could result in poor housing, crime and mental health issues. Social unrest becomes more common and it can create problems within communities.
Poor sanitation: Many people living in poverty cannot afford basic levels of sanitation, and clean water is a rarity. This makes people more vulnerable to fatal diseases. Usually, the diseases contracted from poor sanitation are avoidable, but they simply cannot afford to improve their situation.
Education: Sometimes, families have to choose between eating and getting an education for their children. Children might have to be sent to work to support the family, which leaves them with poor literacy skills later on in life. This limits their ability to escape poverty as an adult.
Economy: Without a basic level of education, the higher paying jobs, with opportunities for career progression, are not accessible. This hinders the economy’s ability to improve its productive potential. For example, roughly 22% of India’s
population is still in poverty, which is limiting their rate of economic growth

Question 20

Governments could employ progressive taxes to alleviate poverty

Answer 20

such as higher rates of income tax for the richest earners. A progressive tax has an increase in the average rate of tax as income increases. As income increases, the proportion of income taxed increases.

Question 21

Governments could employ progressive taxes allow the government to

Answer 21

reduce regressive taxes and raise welfare payments. However, this could reduce incentives to work harder and earn more, and it could result in a fall in government revenue, as shown by the Laffer curve.

Question 22

Government policies such as national minimum wage

Answer 22

ensures all workers can access a minimum standard of living. This aims to prevent employees exploiting their workers by paying them low wages, and it prevents people falling into extreme poverty.

Question 23

In developing countries, governments might improve human capital by making education more widely available

Answer 23

Moreover, they might try and diversify the economy in order to stimulate economic growth and job creation. For example, countries such as Sri Lanka and tried to develop their tourism industry.

Question 24

Also, government spending on housing and the provision of public services,

Answer 24

such as education and healthcare, helps provide equal opportunities for people from all income backgrounds. This ensures that even those on low incomes can afford a good standard of healthcare and education. By providing these services, the government ensures that all members of society can achieve a minimum standard of living.