Distribution of Wealth + Income Flashcards
Income
The flow of money an individual receives in return for their factors of production (labour + entrepreneurship), usually in the form of salary, dividends + wages.
Wealth
The store of money an individual has at a specific moment in time eg. assets, capital and factors of production.
Inequality
Some individuals, households or communities have a disproportionate amount of the total income or wealth, likely leading to greater or fewer opportunities.
Inquity
A system which can be described as being ‘unfair’ or ‘unjust’ in some way, in relation to the needs of citizens.
Causes of wealth + income inequality (13 +)
Population size
The quality/ quantity of education systems
Corruption
Weak Tax systems
Lack of Welfare provision
Weak redistribution of wealth
Occupational immobility
Workers’ rights
Trade Unions
Minimum Wages
Quality of financial sector
Regulation / Regulatory Capture
Crime Rates
Relationship between wealth + income
Those with greater levels of wealth, eg. inheritance, are able to access higher levels of income (top-paying jobs) and as people earn greater incomes, their wealth increases.
For example, wealthy individuals can afford to use private systems of education, allowing them to become highly skilled.
Consequently, higher skilled labourers are traditionally rewarded with greater wages / income. Subsequently, those with high incomes can access financial assets with greater yields, leading to a further accumulation of wealth.
How do wage differentials affect inequality ?
Within labour markets, wage differentials exist in order to reward highly skilled labourers with greater wages.
This higher wage acts as an incentive for individuals to spend time obtaining these skills rather than getting a lower skilled job.
In other words, wage differentials allow for opportunity costs of education to be compensated for.
Wage differentials can lead to inequality as some individuals are unable to access the skills required to access high income jobs. Consequently income inequality can worsen.
How does age affect inequality ?
Older employees may receive higher wages than younger employees as they have greater experience, leading them to be promoted and advance along pay scales.
On the other hand, older workers may become less mobile and productive, leading them to be discriminated against with lower wages.
Once retired, an individual’s income is derived from their state pension and any other assets (wealth) they possess.
It is likely that older individuals will hold greater wealth as they have been able to accumulate this over time and grow their wealth, eg. returns on investments.
How does market failure (4) affect inequality ?
- Missing markets in education or training
- Geographical Factor Immobility
- Information Failure
- Underconsumption of merit goods
Inequality vs Market Forces
Inequality undermines the market mechanisms as it assumes that all consumers demand in a way which will maximise their personal utility.
Demand is assumed to be MPB, requiring a willingness and ability to consume at a personal utility maximising level.
Wealth and Income inequality distorts market equilibrium as wealthier individuals have a greater ability to consume at a high quantity, despite a lesser need to do so.
Therefore, resources are misallocated towards the rich individuals who gain less utility than poorer individuals would gain.
Social Cost of Inequality
Data has shown that inequality leads to greater levels of social dissent and anger. For example, an economy with a gini coefficient above 0.4 will likely experience greater crime rates, social unrest and political dissent.
Benefits of Inequality
Inequality can be equitable if resources are distributed in a way that is ‘fair’ in regards to effort and contributions to society.
Inequality also provides incentives for labourers to obtain skills. Higher wages signal where resources are required in order to maximise welfare. These wages incentives labour to train and compensate for time spent training rather than earning.
Inequality also promotes investment and entrepreneurship in the macroeconomy. This is crucial as it leads to long-run growth and more desirable consumer outcomes. Inequality allows those will higher incomes to invest in firms in the pursuit of potential profits and returns, eg. wealth accumulation.
Trickle-down arguments
Absolute Poverty
Where household income is insufficient to purchase the minimum basket of goods and services needed for survival. The UN defines this as those living at <$1 per day at 1985 PPP rates.
Relative Poverty
Where household income is insufficient to access the average standard of living in the economy. In the UK, this is falling below 60% of median household income for three of the past four years.
Causes of Poverty (5)
Weak financial institutions
Poor infrastructure
Missing Markets
Political instability
Lack of property rights