4.2 Poverty and inequality Flashcards
What is absolute poverty
This measures the number of people living below $2.15, which is necessary to be able to afford basic goods and services.
What is relative poverty
when the income of a household is low compared to others
e.g. when a person has income below 60 of the median household income (
What is the Lorenz Curve
Agraph that measures the degree of income inequality. The further the Lorenz curve is from the 45 degree line of perfect equality, the more inequality there is in society.
What is the Gini Coefficient
This is a measure of inequality based on the Lorenz
curve:
- The Gini coefficient is area a / a+b.
- The bigger area a is, the more inequality exists.
- A Gini coefficient of 0 = perfect equality.
- A Gini coefficient of 1.00 = perfect inequality.
How does inequality in the UK changed since the 80s
- UK had fallen through the post-war period of 1945-80 but reversed in the 80s
By 1994 the top 1% of household’s share of total income is 8%
How can absolute poverty be reduced
- Absolute poverty can be reduced by economic growth, which benefits the
poorest in society. - Absolute poverty could also be solved by greater redistribution of income
in society, to provide minimal housing / food & water for the poorest. - Developed countries have very minimal levels of absolute poverty, due to the welfare state
What causes relative poverty/inequality in the UK
- Inequality in wages and earnings growth- UK deindustrilisation + globalisation
- SU Unemployment - have to rely on dole
- Falling relative value of state benefits
- Regressive Taxes -set to hit 30 year high
- Decline in TU membership - fallen to 22%
- growth in underemployment, zero-hour contracts,
part-time jobs and temporary jobs, all of which mean lower wages for
workers. - Discrimination - ‘Muslim Penalty’
- Single Income Family- 50% of live births to single mothers
- Poverty Cycle passes onto next generation
What is the poverty trap
when the tax and benefits system creates a disincentive to look for work or work for longer hours. By working longer hours, individuals may find they lose income due to income tax and national insurance contributions as well as losing some income-related state benefits.
but UK replacement rate is 0.22
How many times bigger are the wages of the riches compared to the average workers, and how has this statistic changed
The wages of the richest are now
170 times the average worker, compared to 60 times before.
What are the consequences of high relative poverty for growth
1) Causes a self-perpetuating poverty cycle
* Limited access to health care and education
* Volatile incones, high debts + low savings
2) Misallocation of scarce resources * Capital investment in society is skewed towards the preferences of the rich * Low collateral - limits growth of entrepreneurship
How can government spending reduce poverty
1) Welfare State/Transfer Payments:
* Universal Child Benefits
* Public Pensions
* Conditional + means tested welfare transfers e.g. Job Centre
2) State Provided Services:
* Education; social mobility
* Healthcare
* Social Housing provided by LA
* Training e.g. free A Levels for over 21
What is the difference between wealth and income
- Wealth is a stock concept; it is the value of assets, such as savings,
housing, and shares. - Income is the amount of money a person receives per time period e.g.
salary
Why is wealth inequality usually greater than income inequality
- Those with low income do not have any disposable income to save to
increase wealth. - Those who are wealthy (e.g. own a house) can gain rentable income,
which they can use to invest in the accumulation of more assets. - Wealth can be inherited, income cannot.
Is inequality necessary?
- Gives incentives to take risks and put the effort into setting up a business. Without the prospect of higher income, enterprise would be limited.
- Policies to reduce inequality may create disincentives to work e.g. higher
income tax may discourage working overtime.
Benefits to the unemployed / low paid can discourage taking work (unemployment trap / poverty trap).
Is inequality necessary?
- Gives incentives to take risks and put the effort into setting up a business. Without the prospect of higher income, enterprise would be limited.
- Policies to reduce inequality may create disincentives to work e.g. higher
income tax may discourage working overtime.
Benefits to the unemployed / low paid can discourage taking work (unemployment trap / poverty trap).
What are the issues associated with inequality
- Exploitation. e.g. landlords monopoly power in setting rents, especially in places like London.
-
Social friction. High levels of inequality can cause social friction and
resentment in society- Gini above 0.4 -
Diminishing marginal utility of money- more tax from highincome
earners has little impact on living standards. Taking tax from low
earners has a greater impact, because they have to cut back on essentials.
4.Difference between equality of opportunity and equality of outcome-
How can economic growth + development exacerbate inequality
-
Skilled labour. Growth could lead to increased demand for skilled labour
and a fall in demand for unskilled labour - Regional inequality - prosperous regions sucking in labour
-
Monopsony power of larger firms
* Living costs. Economic development can lead to increased costs of living
(transport / housing), which negates any rise in real wages.
How can economic growth + development reduce inequality
- Bigger Welfare State and opportunity to pursue policy - tax revenues rise and it can be used to fund a welfare state
-
Real wages. Economic growth tends to put upward pressure on real
wages, as firms compete to get workers, leading to a ‘trickle down effect’. -
More opportunities - diversification away from
producing primary products. - Organised Labour - growth of trade unions to enable rising real wages
What are causes of absolute poverty
· Drug/alcohol addiction
· Mental illness
· Homelessness/no fixed address
To Claim benefits –> you need a bank account –> you need an address. Therefore those in homelessness are de facto in absolute poverty
Living in a third world country/a country without established the benefit/welfare system.
What are Policies to tackle poverty
- Free Market Approach
- Training and Education
- Increase in Benefits
- Increase in Progressive Tax
What are the advantages of the free market approach to tackle poverty
- Trickle Down. The spending and investment of the rich trickles down to the low income earners, reducing relative poverty.
- Greater** incentive to achieve more in school**+ more tax revenue which can be spent on policies to reduce inequality such as training and education
- No UE trap
- The money spent on schemes such as transfer payments could be better spent on training and education which arguably tackle the root cause of poverty
What are the disadvantages of the free market approach to ackling poverty
- Does** little to resolve absolute poverty** as people who don’t have the skills to get a job will still not be able to find employment
- Doesn’t protect those in poverty so there’s no guarantee there will be any redistribution
- With less government intervention, there will be more discrimination
- Relative poverty may increase in a more free market approach
IMF - ‘rising income share of the top 20% results in lower growth’
LSE - ‘tax cuts for the risk have only increase inequality, with no gains’
What are the advantages of training and education in tackling poverty
· helps tackle root cause
* the qualifications gained from T+E helps increase employability + prevent structural Un
* More education –> higher bargaining power and earning
* Break out of poverty cycle
What are the disadvantages of training and education in tackling poverty
· time lag - doesn’t help those currently in poverty
* Even with a high level of T+E you can face discriminaiton
* Standards of T+E rely on local schools which are typically better in high-Y areas
e.g. Schools in the most affluent areas are more than twice as likely to be rated ‘outstanding’ by Ofsted
- Depends on success of the actual training e.g. 42% dropout rate for apprenticeships
