4.2 Poverty and Inequality Flashcards
What is absolute poverty?
- when people are unable to afford sufficient necessities to maintain life
- UN definition “severe deprivation of basic human needs, including food, safe drinking water, sanitation, health, shelter and education”
- anyone living on less than $1.90 a day
Relationship between economic development and absolute poverty?
Negative correlation, i.e. more developed a country, fewer people in absolute poverty since government tends to intervene to attempt to provide the necessities.
What is relative poverty?
- if income falls below an average income threshold for the economy
- in the UK, classed as those with an income of less than 60% of median household income after deducting household costs
OR - those who cannot afford to buy goods which they need to buy in order to not be considered poor according to social norms
What is the poverty trap?
- people on low incomes are disincentivised to work since they may lose income due to income tax and lose national insurance contributions and income-related state benefits.
Causes of poverty
Unemployment, lack of skills, health problems and income dependency
Absolute poverty x GDP?
Absolute poverty tends to fall as GDP increases, assuming that the state provides support to the disadvantaged
Causes of relative poverty growth
- if those on higher salaries see larger income growth than those on lower salaries
- changes in government spending and taxation
Why has relative poverty been growing in the UK?
- growing inequality in wages growth
- de-industrialisation has increased the number of service sector jobs which tend to be lower paid
- growth in underemployment, zero-hour contracts, part-time jobs and temporary jobs (all lower wages)
- decline of trade unions left many workers unable to bargain for higher wages
- state benefits have fallen in relative value
- taxes have become more regressive
- long term and structural unemployment have risen
What is income?
A flow of earnings
What is wealth?
A stock of asset
Why is wealth more likely to be unequally distributed than income?
- assets that make up wealth can be accumulated over time
- people who are wealthy now can generate an income from those assets
- if income from the assets exceeds the expenditure, they are able to build a stock of assets
- this accumulation of wealth can occur over successive generations s through inheritance
Measures of income inequality?
- the Lorenz curve
- the Gini coefficient
Characteristics of the Lorenz curve?
- cumulative % of the population (X) plotted against the cumulative % of income that those people have (Y)
- perfectly equal society would have y=x line
Characteristics of the Gini coefficient?
- measures between 1 and 0
- the bigger the coefficient, the more unequal the country
Causes of wealth and income inequality
- education levels
- labour market (wage differentials based on skills, experience and demand)
- wealth accumulation
- government policies
How do wages impact wealth and income inequality?
- people earn more than others due to higher educational achievements, because they work longer hours or because skills are more in demand
- the higher the level of income, the more someone can save and thus the more wealth they can build up
How do wealth levels cause wealth and income inequality?
- people with wealth can build up larger wealth through inheritance or savings
- people with high amounts of wealth can undertake riskier investment which could give a higher rate of return
- high levels of wealth can earn rent and interest on their assets = increased income
How does chance impact wealth and income inequality?
- bought houses in the right area or right assets will see a huge increase in the price in their assets and therefore in their wealth
- may have been lucky to inherit wealth
- right job may see income rise higher than other areas
How does age cause wealth and income inequality?
- working adults at the peak of their career will earn a higher income than those who have just started
- those who are older will have a chance to build up more assets (some stock may have been used to pay for retirement)
What causes wealth and income inequality between countries?
- some countries held back by wars, droughts, famines and earthquakes
- marginalisation and exclusion of certain groups
- developed countries tend to favour each other when trading, allowing them to develop more than countries not involved
What is Kuznets hypothesis?
As society develops and moves from agriculture to industry, inequality increases as wages of industrial workers rises faster than farmers. Then, wealth is redistributed through taxation and government spending and so inequality falls.
What theory discredits Kuznet’s hypothesis?
Piketty argued that inequality rises as the country develops since the rate of return on capital grows, so the rich get richer and inequality increases.
How does capitalism cause inequality?
- leads to income inequality due to wage differentials (wages vary based on demand and supply, which are different for each job)
- individuals own resources, wealth differs based on assets they own
- wealth passed on or gained through saving of incomes
Why is inequality essential for capitalism to work?
- capitalist society provides incentive to work harder to gain more
- makes people try harder and take risks, which grows the economy
