AQA A-Level Economics Micro - The Distribution of income and wealth: poverty and inequality Flashcards
Define: Income, Wealth, Distribution of Income, Distribution of Wealth.
Income - Personal or household income is the FLOW of money a person or household receives in a TIME PERIOD.
Wealth - Personal wealth is the STOCK of everything that a person or household owns at a PARTICULAR TIME PERIOD.
Distribution of Income - Measures how personal or household income is distributed among different income groups.
Distribution of Wealth - Measures how personal or household wealth is distributed among different groups in society.
What are the links between Income and Wealth
Income is flow of money in a time period, if you save that can add to your wealth.
The wealthier you are more investment income or unearned income you may receive which adds to total income.
Rich benefit from virtuous cycle: wealth increases income, allows to save more, saving adds to wealth etc. Poor suffer vicious cycle: low income, more borrowing, personal debt, income spent on debt repayment, consumption falls, wealth falls.
They are mutually reinforcing, easily link.
Sources of Income and Wealth:
Income: Salaries, dividends distributed to shareholders, Rental income to owners who lease property from tenants
Wealth: Savings in bank, property, ownership of shares by listed companies and equity stakes in private business
Factors affecting distribution of Income:
Factors of production: e.g labours share of income has declined when wage rates increase at slower rate than productivity, growing fraction of productivity gains go to capital, capital tends to concentrated in higher ends of income distribution, falling labour income shares likely to raise income inequality, also seen with technological advancements where amount of labour has fallen as machinery replaces furthering labour income share decline.
Globalisation and migration of workers: international migration caused supply of low paid labour to increase, e.g in UK workers compete with incoming migrants and overseas workers employed in NEE’s (outsourced jobs, relate to TNC’s). i.e call centre workers outsourced to India has lower wage than similar work in UK. Leads to increased competition, lower wages.
Similarly in high end sectors of labour market competition exists, however due to lowered supply of high end labour wage rates will be met for employees as companies risk employees moving to better paid work in other countries.
Factors affecting distribution of wealth:
Capital gains: Capital gain occurs when value of asset increases over period of time such as a house, consumer durable goods like cars depreciate over time (common for upper and lower sectors of wealth) while value of land generally increase (seen in UK). Therefore the wealthy are able to own multiple houses generating capital gains while the less wealthy likely do not own property paying rent, lowering overall wealth as well as commonly owning consumer goods that depreciate over time furthering wealth loss. wealthy individuals also face this however through capital gains this is limited and often becomes of little significance to the household or individual.
Define equality and equity and give differences.
Equality: when everyone is treated exactly the same, complete equality means everyone has same income, positive concept and positive statement where it can be tested against evidence of economy to see what degree occurs.
Equity: When everyone is treated fairly, normative concept (cannot be measured) as subjective
Degree of equality indicated by difference in peoples income (inequality) while equity is when people are treated fairly but differently taking into account circumstance. e.g few people would argue that it would be equitable if everyone received same income, irrespective of efforts and contribution to society, arguments occur when discussion begin about what level of inequality is fair.
Explain horizontal equity and vertical equity.
Horizontal equity: Occurs when households with same income and personal circumstances (e.g children) pay the same income tax and are eligible for same welfare benefits.
Vertical equity: (more controversial) as it justifies taking income from rich assuming they do not need it and redistributing it to the poor assuming they need it more. Proportional/progressive tax
Vertical equity conflicts with the benefit principle which argues that those who receive most benefit from gov spendings should pay the most (people who benefit from roads like motorists should pay the most in taxes)
Define poverty, absolute poverty and relative poverty.
Poverty: state of being extremely poor, not having enough money/income to meet basic needs including food, clothing and shelter.
Absolute poverty: condition characterised by severe deprivation of basic human needs, including food, safe drinking water, health, shelter, information and education. Depends not only on income but also access to services.
Relative poverty: occurs when income is below specified proportion of average income, e.g below 60% of median income.
Causes of Poverty:
High unemployment: Recession decrease in AD loss of workers (cyclical), UK moved away from industrial manufacturing towards service sector causes structural unemployment as peoples skills are no longer needed, if no training poverty is likely to be long term, hysteresis argument rises trapped in poverty.
Poor education: Links to unemployment, if someones MRP is too low to find employment likely to have very low incomes increasing poverty. Lack skills etc, likely lead to long term poverty
Poor Healthcare: limits productivity, limit earning potential due to people needing time off for health reasons, limits types of jobs people can do e.g certain conditions/illnesses impact peoples physical health.
Wage differentials: causes relative poverty, disparities between wages in high end and low end jobs
Consequences of high relative poverty for growth
Causes a self-perpetuating poverty cycle: Limited access to health care and education causes poorest to remain poor this coupled with volatile incomes, high debts + low savings further this. (by age 3 poor estimated to be 9 months behind wealthier backgrounds, children receiving free school meals achieve 1.7 grades lower at GCSE than not)
Misallocation of scarce resources: Capital investment in society is skewed towards the preferences of the rich through higher incomes leading to more property value (higher wealth), which causes most entrepreneurships to be carried out by rich as poor have low collateral increasing risk of debt further poverty (relative to absolute) limiting the amount this is undertaken in low ends society.
How does government intervention through reduced taxation lower income and wealth inequality?
Progressive: Make progressive income taxes more progressive either by:
- Raising tax on individuals earning in highest tax bracket - Government will be able to increase tax revenue from rich which can then be used to redistribute income and provide to poor, higher benefits, education or healthcare services.
- increasing tax free allowances - allowing poor to keep higher proportion of there income
Regressive ( take up greater proportion of income to low earners, burden poor more ): Reduce regressive tax, alcohol duty, cigarette duty, mos important VAT. by reducing tax lowering burden on poor allowing poorest to keep higher proportion of income which they can then spend to increase living standards.
Evaluation Points:
Progressive: Laffer would argue that governments would distort incentives specifically if tax on rich increased. Could cause overall tax gains to be lowered as wealthy individuals incentive to become more productive, increase earnings, take risks such as becoming entrepreneurial is lowered as they know increased income will be taxed at a higher rate, laffer argues if tax increase to high beyond a certain point this will become an impact (draw laffer curve to show). Further problem will be brain drain if applied to higher earners as the most skilled workers are in high tax brackets likely they will relocate to other countries where they will see lowered tax rates making them keep more of their income.
Some would argue that the policy is equitable (fair, vertical equity) but is inefficient in terms of end outcomes.
Chain of reasoning (basic):
- Increasing progressive taxation such as income tax, leads to a deduction in income and wealth inequality as more wealth is redistributed to those in relative and absolute poverty.
- Progressive tax causes the marginal rate of tax to increase as income rises.
- In the case of income tax, economists make the normative statement that it is more equitable for higher income earners to loose higher proportions of their income as they do not need it as much as those in poverty (vertical equity).
- As a result governments intervene by increasing progressive taxes to then greaten tax revenue which can then be redistributed to the poor by way of benefits, supply side policies like education reducing the rates of poverty that the economy faces.
- On the other hand laffer would argue that by increasing progressive taxes, the outcome would be inefficient (draw laffer curve).
- Explain laffer curve e.g beyond a certain point when tax rate increases lowered tax revenue made giving examples.
- This is due to the incentive to greaten income by way of increasing productivity or becoming entrepreneurial to fall as the consequence of taking more risk or becoming more productive leads to less in respect to income as these individuals will receive lowered proportions of the income.
- Furthermore this could lead to a brain drain in the economy as wealthy individuals look to relocate to other parts of the globe in which they would receive higher proportions of their income.
- In conclusion etc
Above could be used for macroeconomic objective conflicts between economic growth and redistribution of income by using contractionary fiscal policy, although use tax diagram
