4.2 Flashcards
Explain the distinction between absolute poverty and relative poverty
A measure of the number of people below an absolute threshold
It should reflect minimum requirements of food, shelter, clothing, etc – i.e. an income insufficient to allow a basic standard of living
How is it measured?
World Bank use $2.15 per day (PPP)
Relative - A measure of the income (or wealth) inequality within a country
How is it measured?
OECD and EU measure it as below 60% of median earnings
As income inequality rises, so does relative poverty
Absolute Poverty – Causes
Homelessness
Inability or unwillingness to claim welfare benefits
Wars
Famines
Natural disasters
Lack of economic development
Low level of economic welfare from government
Relative Poverty – Causes
Unemployment
Part time work instead of full time (possibility of underemployment – lack of labour demand in recessions)
Discrimination – e.g. Gender pay differences
Disparities in skills – natural or through education
Lack of wealth – vicious cycle
Low level of welfare benefits – linked to prices rather than incomes
Regressive taxation
Inflexibility in labour market (e.g. poor mobility)
Regional disparities – e.g. Structural unemployment
Poverty trap
The Poverty Trap
Low pay reduces incentives to take up or paid work - creating a “dependency culture”
What is the poverty trap?
Where low income households have disincentives to earn extra income because of the tax and benefit system
Means tested benefits are taken away as extra income is earned
Employees become liable to pay income tax, national insurance contributions etc
Income vs. Wealth Inequality
Inequality can be measured in many different ways
The main two ways are income inequality (how income is distributed) and wealth inequality (how wealth/assets are distributed)
Wealth inequality tends to be greater than income inequality - individuals need some kind of income to survive but many have zero wealth
Existing wealth inequality can create income inequality as wealth creates income (savings → interest; property → rent; shares → dividends)
How is income inequality measured
Lorenz curves – shows the
distribution of income in an economy
the closer to the straight line, the more equal the distribution of income
GINI coefficient – a numerical measure of income inequality based on the Lorenz curve
Values range from 0 (perfect equality) to 1 (maximum inequality)
GINI = A/ (A+B)
The role of inequality in capitalism
Capitalism relies on the market to allocate resources via incentives
Inequality creates incentives → if higher income results from harder work and greater skills, then inequality creates an incentive to work hard and to acquire new skills
Without some level of inequality, there would be a lack of incentives to make capitalism work
BUT → If inequalities are passed down through generations (wealth being passed down in families) then a lack of social mobility may reduce these incentives
Too little or too much inequality could be a problem for capitalism to work effectively
Causes of Inequality - education + evaluation
Disparities in education
A poorer quality education leads to worsened career opportunities
Lower value skills
Lower value to employers, so lower paid work
More likely to be out of work during times of recession
Private schools vs. state schools may compound the issue
Affordability of higher education
Evaluation
Depends on the types of industry that are in a particular economy – the more high value industry there is, the more the types of job that will be shut off from the poorest
Depends on the structure of the education system – more inclusive systems may have fewer disparities
If greater education levels achieved, depends on there being suitable employment for a reduction in inequality
Causes of Inequality - Differences in assets/wealth
+ evaluation
Those with existing wealth (e.g. inherited) have opportunities to raise their incomes (e.g. interest, dividends)
Home ownership is a key area of wealth in UK
Allows access to cheaper borrowing alternatives (mortgages)
Passed down through families via inheritance
Difficult to get on housing ladder if poor
Evaluation
Depends on tax system – high levels of inheritance tax can redistribute wealth and make more equal
Depends on type of assets – some more ‘liquid’ – i.e. more easy to turn into funds/income
Causes of Inequality - levels of benefits
+ evaluation
Lower level of unemployment benefits means those out of work have lower disposable incomes
Benefits tracked to price rises instead of wage rises means they fall behind earners
Low state pensions means elderly may be trapped on a low income with little prospect of raising it
Evaluation
Low unemployment benefits may provide an incentive to take work, reducing inequality in the long run
Raising benefits would have to be paid for – low benefits may allow funds to be used to reduce inequality in other ways
Causes of Inequality- Level of government intervention + evaluation
More capitalist economies may tax and spend less, leading to less redistribution of income and wealth and more inequality
Prioritisation of other macroeconomic objectives may mean that reducing inequality is not central to policy
E.g. Labour 1997-2010 reducing child poverty objective; Tory 2010-2016 focussed more on reducing budget deficit
Evaluation
Less intervention may create more incentives for businesses and individuals – could be good in the long run
Greater intervention may lead to government wastage, worsening outcomes for all, even if inequality reduced
Evaluate how Education and training could be used by a Government that wished to reduce inequality
Improved training and education for unemployed, especially helpful if there is structural unemployment
However, Difficulty of knowing what type of training to provide, time lag, cost (opportunity cost)
Evaluate employment legislation how could be used by a Government that wished to reduce inequality
Rules of hiring and firing workers, anti-discrimination laws
However, could create constraints on businesses + its hard to enforce
Evaluate increasing the national minimum wage how could be used by a Government that wished to reduce inequality
Raise the threshold of pay for millions in the lowest paying jobs
Improves incentives for those unemployed as the reward for taking paid work is greater
Aim is to get NLW up to 66% of median earnings
Evaluation
Could cause greater unemployment if employers can no longer afford to pay staff
May not target poorest households – someone on NMW may not be only earner – partner may be on high salary
Evaluate how increasing benefits could be used by a Government that wished to reduce inequality
Should increase disposable incomes for the poorest in society (e.g. unemployed, disabled)
Linking benefits to average wage rises (e.g. median wage) rather than average price rises (e.g. CPI) would prevent those on benefits from falling behind earners
Evaluation
Disincentive effect for the unemployed to find work
Could lead to perpetuation of the unemployment trap
Opportunity cost – could alternative uses of government spending be more effective in reducing inequality?
