4.2.2 - inequality Flashcards
What is the difference between income and wealth?
Income is a flow of earnings, wealth is a stock of asset.
What is income inequality?
Refers to the extent to which income is distributed in an uneven manner. Differences in people’s income flows from wages, dividends, rents, etc.
What is wealth inequality?
Differences in people’s stock of assets. Likely to be more unequally distributed than income because assets can be accumulated over time.
What is the Lorenz curve?
Shows the cumulative percentage of the population plotted against the cumulative percentage of income these people have. A perfectly equal society would have a straight line from corner to corner. The degree of the bend away from the straight line indicates the degree of inequality.
What is the Gini coefficient?
Determines the degree of inequality. Is a value between 0 and 1 = the bigger the value, the worse the level of inequality within the country.
How is the Gini coefficient calculated?
G = A / (A+B)
A is the area between the diagonal line and the Lorenz curve, B is the area below the curve.
What are some causes of income and wealth inequality within and between countries?
- education, training and skills
- wage rate including minimum wage
- strength of trade unions
- degree of employment protection
- social benefits
- tax system = how progressive it is
- pension entitlements
- ownership of assets and inheritance
How does education, training and skills cause income inequality?
More education/training improves the quality of human capital, increasing occupational mobility to increase employment opportunities. Workers may earn higher incomes, however those with lower skills earn reduced incomes, creating income inequalities between groups eg. COVID 19 disruptions to education has meant that people entering the labour market in recent years have faced lower income opportunities.
How do wage rates (minimum wage) cause income inequality?
Higher minimum wage rates reduce income inequality by decreasing the gap between low and high paid workers in the economy, as businesses have to pay people wages/salaries over the minimum wage eg. National Living Wage for over 21s will rise to £12.21 in April 2025 in the UK.
How does the strength of trade unions cause income inequality?
Stronger trade unions reduce income inequality, as unions increase wages for the poorest 35% and decrease wages for the top 20%. Workers also have more bargaining power within trade unions, limiting low pay eg. Accord is a trade union for banking, finance and insurance industries in the UK.
How does the degree of employment protection cause income inequality?
Better employment protection can reduce income inequality as workers have more rights, are paid better wages reducing unfair low paid employment. Therefore, there is better equality within employment opportunities eg. Employment Rights Act 1996 - workers are protected from suffering any harm due to reasonable actions they take on health and safety grounds.
How do social benefits cause income inequality?
If social benefits aren’t increased to match an increase in wages, incomes of poorer individuals and families who rely on benefits will fall further and those within employment experience income rises, widening income inequalities within the UK eg. National Living Wage may be increased whilst Universal Credit and JSA may be lowered.
How does the tax system (how progressive it is) cause income inequality?
Progressive taxes can reduce income inequality as those with higher incomes are taxed higher amounts, and those on lower incomes are taxed lower amounts, reducing higher incomes and increasing lower incomes, reducing income inequality eg. personal income tax based on graduated scales = tax increases as income increases
How does the tax system impact wealth inequality?
Progressive taxes on assets/wealth means that the wealthier are taxed much higher amounts as they have higher asset value, this reduces their wealth levels leading to a fall in wealth inequality eg. ad valorem taxes on real estate and financial assets, people with higher asset values are taxed more
How do pension entitlements impact income inequality?
Higher pension entitlements for people who earned higher incomes cause income inequality, as low-income earners are entitled to a smaller pension payment when they retire, widening differences in income between elderly individuals eg. those on state pension receive lower payments than those with private pensions who paid into this fund throughout their lives
How do pension entitlements impact wealth inequality?
Lower income earners pay less into their pensions throughout their lifetimes, so they accumulate less wealth when they retire. Higher income earners earn lots of wealth when they retire, deepening wealth inequality for older generations eg. the top 10% of pension savers own the majority of total pension wealth
How does ownership of assets and inheritance impact income inequality?
Ownership of assets can generate more wealth, which can increase incomes of those who own assets eg. rent payments on properties, dividends from shares. Therefore there is further income inequality between the wealthier and less wealthy populations.
How does ownership of assets impact wealth inequality?
Those with more ownership of assets, such as houses and shares, have accumulated more wealth. Those who don’t own assets eg. if they rent a house/have a mortgage, are less wealthy widening wealth inequality for different groups in the UK.
What is the impact of economic change and development on inequality?
Kuznets hypothesis says that as society develops and moves from agriculture to industry, inequality can increase as the wages of industrial workers rises faster than farmers. However, wealth is then redistributed through taxation and government spending, reducing these inequalities.
What is the significance of capitalism in relation to inequality?
- A capitalist economy leads to inequality due to wage differences. Wages vary based on demand and supply for different jobs.
- Individuals own resources, wealth differs based on assets they own. This can be passed on or gained through saving income.
- Equality may never be achieved in a capitalist society where possibility of having more encourages hard work. Without incentive to gain more, people won’t work hard or take risks so the economy won’t grow. Inequality is needed for capitalism to work.
- A degree of inequality is necessary but excessive inequality causes inefficiency and social injustice.
