7 Income inequality and poverty Flashcards
1
Q
What is the main reason for income inequality?
A
The ways the labour market operates.
2
Q
How are poverty and income/wealth inequality linked?
A
High degrees of income and wealth inequality can exacerbate the spread of poverty.
3
Q
Why is regulation of the markets generally seen as vital?
A
Because, even when operating at a price equilibrium, the free market can create large inequalities of income and wealth, which many economists argue is a market failure.
4
Q
What do some economists believe about free market and inequality?
A
The incentives created by a more unequal world supersede the welfare loss caused by inequality, and that the increased motivation to work this inequality provides will boost the economy.
5
Q
What is the mainstream debate about income and wealth inequality policy?
A
Most disagree with the extreme view that no intervention at all should be pursued. The debate exists about what kind and what extent of intervention to pursue.
6
Q
What is income?
A
The flow of money received by a person or household in a given time period.
7
Q
What is wealth?
A
The stock of everything that a person or household owns which has value.
8
Q
Income is a ___ whereas wealth is a ___
A
Flow
Stock
9
Q
Why does wealth inequality favour those from wealthy backgrounds?
A
Wealth is essentially an accumulation of assets over time, so those who have historically accumulated many assets tend to do well.
10
Q
What does debt do to wealth?
A
Decreases NET wealth but leaves total wealth unharmed.
Net wealth = total assets - total liabilities (e.g. debt)
11
Q
Why is having a low net wealth sometimes a path to having a higher total wealth in the end?
A
If debt is used to finance an appreciating asset.
12
Q
What is a mortgage?
A
A long-term private loan, usually used to buy a house, which is secured using the property as collateral.
13
Q
What is the link between income and wealth?
A
Income which is saved becomes wealth.
14
Q
What is a virtuous circle?
A
The process by which the wealthy increase their income by gaining passive income from assets which they own which bear interest.
15
Q
What is a vicious cycle?
A
The process by which the least wealthy are forced to pursue further borrowing to finance their debt repayments and basic wants and needs.
16
Q
When did the vicious cycle become consequential?
A
One of the main causes of the housing crisis in 2008 was the overdependence of homeowners on private debt to pay their mortgages.
17
Q
What happens to consumption in the vicious cycle?
A
Falls.
18
Q
What happens to consumption in the virtuous cycle?
A
Rises, but not by as much.
19
Q
What is the distribution of income?
A
How personal or household income is distributed among different income groups in society.
20
Q
Where is the distribution of income most strikingly ordered?
A
When we look for distribution among different wealths.
21
Q
What is the main distribution of income we measure?
A
Between rich and poor i.e. income inequality measure.
22
Q
What are two ways we can use distribution of income to compare internationally?
A
- Compare total income between countries.
- Compare income inequality between countries.
23
Q
What is the distribution of wealth?
A
How personal or household wealth is distributed among different groups in society.
24
Q
Give an example of how income can become wealth.
A
Inheritance may be earned as income, but if it is then saved or used to purchase assets then it becomes wealth.
25
What is a quantile?
Distribution of a larger data set into sub-groups.
26
What are the 5 types of quantile to know?
1. Quartiles - divided into four groups.
2. Quintiles - divided into five groups.
3. Vigintiles - divided into twenty groups.
4. Percentiles - divided into one hundred groups.
5. Deciles - divided into ten groups.
27
What are the 4 World Bank classifications of income per capita?
1. High Income >$12,695 GNI per capita.
2. Upper Middle Income $4096-12695 GNI per capita.
3. Lower Middle Income $1046-4096 GNI per capita.
4. Low Income <$1046 GNI per capita.
28
What is GNI?
Total value of goods and services produced in a country in a year together with the net incomes earned by factors overseas.
29
Why is economic growth problematically linked to inequality?
Since the 1970s, a clear wage-productivity gap has opened.
30
Why should economic growth not be seen as a bad thing for those on low incomes?
They still end up ABSOLUTELY better off, just not RELATIVELY.
31
What is a statistic about income inequality in the UK?
2018 - Top 20% of households receive 40% of the income; Bottom 20% only earn 8% of the income.
32
What are 4 causes of UK income inequality?
1. Who owns the factors of production.
2. Who receives income from passive sources and wealth.
3. Globalisation.
4. Wage differentials.
33
What does it mean to say factors of production are a cause of income inequality?
Ownership of the factors of production is not equally distributed throughout the population.
34
What are 3 pieces of evidence that show income inequality due to factors of production are worsening?
1. Labour's share of worldwide incomes has fallen from 66% in the early 1990s to 62% in the early 2000s.
2. A gap between productivity and wages opened up in the 1970s.
3. Between 1978 and 2014, CEO remuneration has risen 1000% in the US.
35
What are 2 reasons labour's share of the factors of production input is falling?
1. Capital substitution and increased capital specialisation.
2. Globalisation.
36
What is earned income?
Incomes such as salaries, wages and employee compensation which are earned due to work.
37
What is passive/unearned income?
Incomes such as dividends and interest which are not earned from employment.
38
What is the main determinant of how much someone is able to benefit from unearned income rather than earned income?
Distribution of wealth.
39
When drawing diagrams to illustrate how wage differentials naturally occur, what must you be careful to do?
Include and discuss PED and PES, and the quantity i.e. position of the curve.
40
What can make supply even more elastic in a wage differential diagram?
Globalisation.
41
Why has globalisation worsened income inequality?
Because international competition at the lower end makes low waged markets more price elastic in supply.
42
When did labour income shares reach their lowest point?
2008.
43
What evidence shows that income inequality can reduce long run economic efficiency?
Isolationism is more likely when people see that globalisation does not benefit them.
44
When did wealth inequality in the UK reduce in severity?
1990s-2000s - increasing home ownership.
45
What are 3 wealth inequality facts?
1. The top 10% own 50% of the wealth.
2. Top 1% own 14% of the wealth.
3. Bottom 15% have no or negative wealth.
46
What is total net wealth by ONS?
1. Physical assets.
2. Net property wealth.
3. Net financial wealth.
4. Private pension wealth.
47
Is the state pension wealth?
No.
48
What are the largest sources of wealth in the UK?
Almost jointly private pension and property, but private pension slightly larger.
49
What is another example of how wealth can generate passive income?
Top source of UK wealth is private pension assets - this becomes income later.
50
What is UK wealth by origin?
1. 42% is private pension wealth.
2. 36% is net property wealth.
3. 13% is net financial wealth.
4. 9% is physical wealth.
51
What is the main determinant of wealth and vice versa?
Income is the main determinant of wealth.
52
Give an example of how income leads to wealth.
Increasing wealth inequality occurring because the high income earners are more able to afford assets.
53
What are the 4 determinants of wealth?
1. Ability to benefit from capital gains.
2. Private pension assets and the decrease in quality of the state pension.
3. Inheritance, gifts and luck.
4. Wealth taxation policy.
54
How is inheritance, gifts and luck a key determinant of wealth?
For 'old wealth', it is more of a determinant.
55
What is equality?
When each person is treated exactly the same.
56
What is equality considered?
A positive concept.
57
What is equity considered?
A normative concept.
58
What is equity?
When everyone is treated fairly.
59
Give an example of how equity and equality are not the same thing.
Very few people would argue that total equality in income would be equitable.
60
Why is equity important to the income and wealth inequality debate?
The degree to which we should intervene is determined by our own normative concepts of what a fair distribution is.
61
What is horizontal equity?
When people in the same circumstances are treated the same.
62
What is vertical equity?
When income is redistributed to create a more equitable outcome.
63
What does vertical equity have that horizontal equity does not?
Transfer payments.
64
What is the problem with vertical equity?
Conflicts with benefit principle.
65
What is the benefit principle?
The principle that those who gain the most utility from something should also pay the most for it.
66
What does a Lorenz Curve show?
The extent of inequality, either in the distribution of income or wealth.
67
What does a Gini coefficient show?
The degree of inequality, either in the distribution of income or wealth.
68
What is a Lorenz Curve?
A graph on which the cumulative percentage of national income or wealth is plotted against the cumulative percentage of population.
69
What goes on the axes of a Lorenz Curve?
CUMULATIVE PERCENTAGE OF NATIONAL INCOME and CUMULATIVE PERCENTAGE OF POPULATION.
70
How can we measure the inequality from a Lorenz Curve?
The extent to which the curve deviates below a line of perfect equality y=x.
71
What is the Gini coefficient?
The size of the area subtended by the Lorenz Curve and the line of perfect equality.
72
What is the vertical axis of a Lorenz Curve?
Cumulative percentage of income.
73
What is the horizontal axis of a Lorenz Curve?
Cumulative percentage of population.
74
If incomes were distributed equally, the Lorenz Curve...
Would be a straight y=x.
75
The nearer the Lorenz Curve is to the straight line y=x...
The more equal the distribution of income/wealth.
76
What is the Gini Coefficient?
The area between the Lorenz Curve and the line of perfect equality as a proportion of the area under the line of perfect equality.
77
What is the Gini Coefficient formula?
(Area A)/(Area A + Area B).
78
What is the Gini Coefficient when perfect equality?
0.
79
How can the Gini coefficient be expressed as a percentage?
The proportion of the area under the line of perfect equality that is between the Lorenz and perfect equality.
80
What evidence shows neoliberalism creates inequality?
Since 1977 - UK Gini coefficient has risen from 0.25 to around 0.39.
81
What evidence shows economic recession reduces inequality?
Since recession, Gini coefficient fell from 0.39 to ~0.34 in UK.
82
What are 2 economic advantages of reducing income inequality?
1. Likely boost AD as higher MPC for the lowest earners.
2. The inequalities of opportunity associated with high levels of income inequality mean that the labour market will have problems.
83
What is the economic counter argument to reducing income inequality?
Incentives.
84
What is the consensus view in the UK?
Some degree of income redistribution is necessary and moral, but only to the extent it does not damage incentives.
85
What is a flat tax?
A tax which is a fixed proportion of income.
86
Where was the first country in Europe to implement a flat tax?
Estonia, in 1994, with a flat tax of 26%.
87
What are 4 problems that the UK tax system has that would be fixed with a flat tax?
1. Productively and allocatively inefficient.
2. Disincentivising for enterprise.
3. Creates disincentives for workers.
4. Social consequences.
88
What are 2 reasons against a flat tax?
1. Could not finance large amounts of the government's discretionary fiscal policy.
2. The savings to admin costs may not be as significant.
89
What is the inequality argument with flat taxes?
May increase inequality in the SHORT RUN but may increase equality in the LONG RUN.
90
What are 2 arguments against the incentivising effects of a flat tax?
1. More than 50% of those in poverty are currently employed anyway.
2. Structural barriers exist which may prevent incentives from working.
91
What evidence shows poverty is worsening in the UK?
According to the Rowntree Foundation, current levels of poverty are 50% higher than in 1979 due to income inequality.
92
What is poverty?
The state of being extremely poor.
93
What is the state of poverty in the UK?
According to the Rowntree Foundation, current levels of poverty are 50% higher than in 1979 due to income inequality.
94
What is poverty?
The state of being extremely poor and not having enough income to satisfy basic needs.
95
What are two causes of poverty and how do they express themselves differently?
1. Low national income per capita - ABSOLUTE poverty more prevalent. 2. High degrees of income inequality - RELATIVE poverty more likely.
96
What is an absolute poverty line?
A level of income which remains constant in real terms below which a person is in severe deprivation.
97
What particular kind of poverty is getting worse?
Child poverty.
## Footnote
In 2015, the Government repealed the 2010 Child Poverty Act, committing government to zero child poverty by 2020. Relative child poverty in the UK has risen from 27% to 29%.
98
What is Barnardo's definition of relative poverty?
Relative poverty is poor 'not by comparing them to a fixed cut-off point, but by comparing them to others in the population under study.'
99
What is the relative poverty line in the UK?
60% of average household income.
100
What are the three main causes of UK poverty?
1. Old age. 2. Unemployment. 3. Low wages.
101
Why did the state pension struggle?
In the early 1980s, the Conservative government delinked the state pension from average earnings and linked it instead to RPI inflation.
102
What happened to the state pension in 2011?
Triple Lock introduced. Will rise in line with average earnings, CPI, or a 2.5% increase, whichever is greatest.
## Footnote
Average earnings and inflation were both low for the following decade, so state pension real purchasing power rose steadily.
103
What is the tradeoff with the state pension?
Increasingly unaffordable for government.
104
What measures is the government taking to reduce the burden of the state pension?
Keeps retirement age high, it will be 67 by 2028, currently at 66.
105
How has the government helped limit the risk of relative poverty and the state pension?
Private pensions e.g. automatic enrolment and default choice.
106
What evidence shows that UK unemployment is a key cause of poverty?
49% of those in relative poverty are unemployed.
107
What are two reasons unemployment as a cause of poverty can be solved by economic growth?
1. Cyclical budget surplus can be used to increase discretionary spending on further unemployment benefits. 2. Create employment.
108
What does low-waged mean?
Employed but on a low-wage.
109
What does unwaged mean?
Not employed.
110
Why specifically does education reduce the chances of poverty?
Skilled employment pays more.
111
What is the most important determinant of wages?
Work status - is it skilled or unskilled?
112
What measure can be taken to reduce the relative poverty of the low-waged?
National Minimum Wage (NMW).
113
What is a consequence of poverty on the government?
Direct cost to government - higher structural deficit from financing welfare programs.
114
What are three examples of the negative effects of poverty in the UK?
1. Educational deprivation. 2. Health deprivation. 3. Community effects.
115
What are three evidences that show educational inequality due to poverty?
1. By the age of 3, children from poorer backgrounds are on average 9 months behind children from wealthier backgrounds. 2. By the end of primary school, FSM recipients are 3 terms behind the richer students. 3. By 16, those on FSM achieve on average 1.7 grades lower at GCSE.
116
What are three evidences for poorer health outcomes for poverty?
1. Professionals live 8 years longer than unskilled. 2. Children born in the poorest areas weigh on average 200g less. 3. More likely to suffer chronic illness or disability.
117
What are three evidences for community outcomes of poverty?
1. Children have less enriching childhoods, not enjoying as much time away. 2. Almost twice as likely to live in bad housing. 3. Fuel poverty e.g. heating versus eating.
118
What is an example of a further example where government is negatively affected by poverty?
'Bed blockers' in NHS wards - cost taxpayers $2bn per year.
119
How can more of a country's inhabitants be in absolute than relative poverty?
If national income is so low that the absolute poverty line is more than 60% of average national income.
120
How can a tax and benefits system worsen inequality?
1. If it is regressive. 2. If it is progressive and we accept the free marketeers view.
121
What do free marketeers argue regarding the redistributive tax system?
Yes, may reduce inequality IN THE SHORT RUN but will worsen it IN THE LONG RUN by making labour markets less efficient.
122
How do free market economists argue that progressive tax systems make inequality/poverty worse in the long run?
1. There is a disincentive factor to work because people can subsist on benefits. 2. So unemployment is high, economic growth is low and the economy is uncompetitive. 3. We achieve inflation from cost push pressures and then we have real problems sustaining the structural deficit. 4. Then everyone is in poverty!
123
What is an example of a universal benefit made means-tested?
July 2024 Winter Fuel Payments to be means-tested.
124
The free market argument over redistributive taxation is an example of?
GOVERNMENT FAILURE.
125
What are the two types of benefit?
1. Means-tested. 2. Universal.
126
What are two flaws of universal benefits compared to means-tested benefits?
1. Universal benefits may well go to those who don't really need them. 2. Expensive.
127
What are four flaws of means-testing relative to universal benefits?
1. Problem of normative boundaries - what is an acceptable cut-off? 2. Potential information failure about availability or pride means some won't take it, even if they should. 3. Costs of administration. 4. Potential incentives crisis.
128
Who introduced Universal Credit and what does this show?
Since 2015, the Tories have been working it in.
## Footnote
Because it is better for incentives for universality, and for cutting admin costs.
129
What is a household?
A group of people cohabiting in a house or flat.
130
What evidence shows that redistributive taxation has been beneficial for income inequality in the UK?
Original income: the income of the top fifth is 12x greater than the income of the bottom fifth. Income after direct taxes and benefits was 6x greater. Income after indirect taxes and benefits-in-kind made it 4x greater.
131
What is the number one reason wealth inequality is worse than income inequality?
UK Government wealth taxation policy.
132
What are benefits-in-kind?
Non cash benefits which act as a 'social wage', helping to subsidise the living of the worst off in society.
133
What is the income flowchart?
1. Original income - income from work or dividend payments. 2. Gross income - original income + benefits. 3. Disposable income - gross income - direct taxes. 4. Post-tax income - disposable income - indirect taxes e.g. VAT and duties. 5. Final income - post-tax income + benefits-in-kind.
134
What are two direct taxes?
1. National insurance. 2. Council tax.
135
What is discretionary income?
Income left from disposable income after essential expenditure has been met.
136
What are two prerequisites for fiscal drag?
1. Unadjusted for inflation. 2. Progressive tax rates.
137
What is fiscal drag?
When inflation occurs, real wages do not rise in line with nominal wages. The increase in nominal wages may drag someone into a higher tax band, effectively making them worse off in real terms if their real wage does not rise to offset the increase in tax.
138
What evidence shows fiscal drag is not as popular as it used to be?
Tories raised basic tax threshold to £12,570 in 2022, an above inflation rise, to offset for years of fiscal drag and to prevent the poverty trap/incentivise people back into work.
139
What is the poverty trap?
Being stuck in poverty.
140
What is the poverty trap better called?
Earnings trap.
141
How does the poverty trap work?
Rising into the next tax band and erosion of benefits means one ends up worse off or stuck.
142
When one ends up worse off from an earnings increase, what are they said to be experiencing?
Experiencing a greater than 100% EFFECTIVE marginal tax rate.
143
What does a 100% effective marginal tax rate mean?
All of the new income is being taken as tax.
144
What is a key advantage of universal benefits to discuss in essays?
Avoids the poverty/earnings trap.
145
What kind of poverty are those in the poverty trap stuck in?
RELATIVE poverty for the most part.
146
What might hamper the poverty trap?
Disincentive factor of high effective marginal tax rates, as well as demotivation from low job satisfaction compounding this.
147
What are three ways we could eliminate the poverty trap?
1. Income tax thresholds could be raised - reduction in government revenue, structural deficit risk. 2. Raise national living wage above the level of the poverty trap - risk creating unemployment. 3. Replace with universal credit - super unlikely.
148
How would a flat tax avoid fiscal drag?
Marginal tax rate is constant.
149
What evidence shows Universal Credit might fix the problems with the poverty trap?
The system is more complex, but aims to avoid what it calls 'cliff edges' where benefits are entirely revoked.
150
How has government failure been created regarding the poverty trap?
The government introduced a 2018 'cliff edge' with FSM cutoffs at a £7400 earnings ceiling.
151
What evidence shows there is government failure in the provision of FSM?
It takes an extra £3543 to recoup the losses of the marginal tax rates when FSM is repealed.
152
What is the unemployment trap?
Those who are voluntarily unemployed because of their perception of the poverty trap.
153
What are two ways the unemployment trap works?
1. People feel the poverty trap is too significant, and that the effective marginal tax rates are too high, so they voluntarily unemploy. 2. Workers participate in the BLACK/UNDERGROUND ECONOMY to avoid taxes to bypass the poverty trap.
154
What do the unemployment and poverty trap represent?
Government failure.
155
What are three reasons people did not get a private pension?
1. Information failure - did not know, or could not predict, how much a poverty income the state pension was/would become. 2. Current moment bias - spent more on current wants and needs and presumed they'd either be dead or bailed out. 3. Default choice - just stuck with state pension because it was easier.
156
How is the state pension an example of moral hazard?
People often didn't contribute, banking on being essentially bailed out later.
157
What is the state pension keyword?
Poverty income.
158
How has the government used behavioural insights to boost private pension enrolments?
In 2012 made automatic enrolment a thing.
## Footnote
Nudge theory - default choice etc.
159
How else do private pension schemes draw on behavioural economics?
Provide a place for employer contributions, making private agents more aware of loss aversion - if they leave, they lose this.
160
What is an evaluation of private pension schemes?
Employee contributions fall in real terms each year, and has hastened the rise of informal employment and zero-hours contracts/non-employee status, creating a two-tier labour market.
161
What is a benefit of redistributive taxation?
1. Morally reduce inequality - EQUITY. 2. Increase AD.
162
What is a negative of redistributive taxation?
1. Incentives crisis -> subsequent slower economic growth and loss of international competitiveness.
163
What is an evaluation of redistributive policies?
If they can alleviate poverty, why is poverty still at record levels?
164
What is the fastest route out of poverty and why does this undermine the argument for redistributive taxation?
Economic growth.
## Footnote
Need incentives + retained profit.
165
What is a major counterargument to the idea that fiscal policy can address inequality effectively?
Fiscal drag and poverty/unemployment trap risk.
166
Income and wealth are said to be...
Mutually reinforcing
167
5 reasons for differentials in income and wealth
1. Age
2. Education
3. Ownership of financial assets
4. Ownership of property
5. Wage differentials
168
How can buy to let worsen inequality of wealth?
Virtuous circle - income used to buy houses, houses rented out, income used to buy more houses. Whilst the poorer are forced to pay for their rents
169
Norway Gini?
About 0.25
170
South Africa Gini?
About 0.65
171
Absolute poverty threshold
Usually about $2/day (World Bank)
172
Horizontal equity
Equal treatment of equals - those with the same incomes are taxed the same
173
Vertical equity
Higher income earners taxed more - progressive/proportionate tax systems
174
Which tax systems are not vertically equitable?
Only regressive tax systems
175
What kind of unemployment is most likely to lead to poverty?
Structural via hysteresis
176
How does subsistence agriculture lock in poverty?
Low MRPL from neglect of education, and lack of specialisation
177
5 arguments for an NMW
1. Fiscal benefit to government, from higher tax revenues
2. Poverty can be alleviated and inequality reduced
3. Productivity may rise to match the increase in supply such that MRP shifts right
4. MONOPSONY EMPLOYER
5. Incentivises firms with market power to invest to maintain productivity
178
4 arguments against an NMW?
1. Unemployment (BUT ELASTICITY/MONOPSONY?)
2. State is often a monopsony employer so may lead to worsened public finances
3. Cost to businesses reducing international competitiveness/shifted incidence
4. Youth lose out the most - and youth need to be employed to prevent hysteresis
179
Why do the youth lose out the most from the NMW?
MRPL lower
180
Why do free marketeers argue the NMW is particularly bad for the UK from a macro perspective?
UK trade deficit high - less price competitive makes this even worse
181
Efficient tax rate
The tax revenue max from the Laffer Curve
182
Laffer Curve axes
Tax Revenue on y-axis
Tax Rate on x-axis
183
3 reasons for the Laffer Curve
1. Disincentives to work harder or be entrepreneurial
2. Emigration
3. Tax evasion and tax avoidance
184
How could we maintain high taxes and reduce the problem of the Laffer Curve?
Use a proportional tax system
185
Why is emigration a particularly compelling argument for the Laffer Curve?
1. Highest MRP are most mobile due to globalisation
2. They are often also the biggest providers of tax revenue
186
Maximum wages and eval?
Price ceiling on wages
Evidence suggests loopholes are used e.g. bankers bonus repealed in 2023 by the PRA because base salaries were just rising
187
Transfer payments
Payments where no goods and services are exchanged
188
Example of a means tested benefit? Universal benefit?
Means-tested: JSA
Universal: Child benefit
189
