economics of inequality & poverty Flashcards
equality
everyone gets the same
equity
fairness through proportionable allocation based on individuals needs and circumstances
income
money you earn over a period of time (wages, interest, rent etc.)
wealth
value of everything you own (house, car, investments) minus what you owe (debt)
wealth inequality > income inequality
gap between rich and poor is wider when it comes to wealth as compared to income, wealth can generate income, so rising wealth inequality can lead to greater income inequality
Lorenz curve
population is divided into 2 quintiles, richest quintile is top 20% of households that have highest disposable income
poorest quintile lowest 20% of households that have lowest disposable income
gini coefficient
measures degree of income inequality in a population
gini coefficient (from Lorenz curve)
(area between line of perfect equality and Lorenz curve) / (area below Lorenz curve)
poverty
inability to cover minimal consumption needs or minimum standard of living
two main types of poverty
absolute poverty & relative poverty
absolute poverty
household does not have enough income to meet basic needs essential for survival like food, shelter and clothing
two ways of measuring country-wide (absolute) poverty
- determine % of people whose daily income falls below specific baseline amounts. these baselines remain the same for every country
- most widely used baseline amount is USD$1.90 per day 2011 PPP
relative poverty
when household’s income is below the median income for the society. so even if they can afford basic needs, they are still considered poor because they are much worse off than most people in the country (usually relative poverty line is 50% of country’s median income)
other dimensions of poverty
access to basic necessities, access to education and opportunities, security from violence, voice and agency
access to basic necessities
eg. clean water, healthcare & sanitation
access to education & opportunities
people who are poor may not have the same opportunities for education & employment as those who are not poor
security from violence
people who are poor are more likely to be victims of violence
voice and agency
people who are poor may not have the same voice or influence in their communities as compared to those who are not poor
limitations of income based measures of measuring poverty
poverty is multidimensional, encompassing more than just income
multidimensional poverty index (MPI)
captures deprivation in health, education and living standards. individuals deprived in at least 3 of 10 MPI indicators are considered MPI poor
challenges in accurately measuring poverty
defining poverty, data limitations, poverty lines
challenges due to defining poverty
disagreements about what constitutes poverty make it difficult to measure more consistently
challenges due to data limitations
survey frequency: irregular or infrequent household surveys lead to outdated data
incomplete data: surveys often miss vulnerable groups like the homeless or sex workers
data disaggregation: lack of data disaggregated by factors like gender, disability and age hinders understanding diverse impacts of poverty
challenges due to poverty lines
underestimation: lines fail to capture the real severity and intensity of poverty (for ignoring the other dimensions of poverty)
oversimplification: lines create an inaccurate picture of the unpredictable and sporadic nature of poor people’s income
consequences due to challenges in measuring poverty
misleading understanding of the extent & nature of poverty, ineffective policy interventions due to flawed poverty data, exclusion of vulnerable groups from poverty statistics and support
inequality of opportunity
people in the same society have unequal access to resources and opportunities based on factors like parental background, gender & birthplace
impact of inequality of opportunity on income inequality
strong correlation
circumstances at birth (wealth, location, etc.) influence education, job prospects and income & wealth
relationship between income inequality & inequality of opportunity
no countries with high opportunity inequality have low income inequality
few cases with low opportunity inequality and high income inequality suggest other factors at play
unequal ownership of resources fuels income inequality
income depends on what factors of production (land, labour and capital) households own
each factor receives a share of national income rent, wages, interest, profits
highly unequal ownership leads to highly unequal income distribution
recent trend of unequal ownership
share of income going to capital and entrepreneurship (interests, profits etc.) is rising
share of income going to labour (wages) is falling
impact of unequal ownership (& recent trends)
decline in labour’s shares fuels income inequality
causes of economic inequality & poverty
different levels of human capital, discrimination, unequal status and power, government tax & benefits policies
different levels of human capital (causes of economic inequality & poverty)
skilled and educated workers earn more, while low-skilled workers face low wages and poor work conditions
the decline of mid-level skills and rise of high and low-skilled jobs further widens the gap
discrimination (causes of economic inequality & poverty)
gender, race, religion, etc, can lead to job discrimination and lower wages of marginalised groups
(eg. women face higher poverty risks due to lower employment rates, lower pensions, and unequal pay for equal work)
unequal status and power (causes of economic inequality & poverty)
concentrated market power in few firms allows them to charge higher prices and pay lower wages, increasing inequality
powerful social groups with exclusive privileges also contribute to wealth and income disparities
government tax and benefits policies (causes of economic inequality & poverty)
taxes on high earners and benefits for low earners can narrow income gaps
however recent trends (contributing to rising income inequality)
1. lower top tax rates and reduced property/inheritance taxes for high earners
2. shrinking welfare state with reduced transfer payments
globalisation and technological change (causes of economic inequality & poverty)
technology creates both new jobs and skills while devaluing others. widens gap between those with “in-demand” skills and those without
increased trade through globalisation can benefit workers in export-oriented industries but put those in import-competing fields at risk, potentially increasing income disparity
market based supply-side policies
product & service deregulation, employment market flexibility, tax cuts
product & service deregulation (market-based SS policies)
reducing government control over businesses and industries
employment market flexibility (market-based SS policies)
weakening labor unions, lowering minimum wages & easing hiring and firing processes
tax cuts (market-based SS policies)
stimulating economic activity by reducing tax burden on businesses and individuals
pros of market based SS policies
potentially higher economic growth, job creation, lower prices
potentially higher economic growth (pros of market based SS policies)
freer markets lead to increased innovation, efficiency and productivity
job creation (pros of market based SS policies)
reduced regulations and lower taxes incentivise businesses to expand and hire more workers
lower prices (pros of market based SS policies)
increased competition can drive down prices for consumers
cons of market based SS policies
widening inequality, reduced worker protections, increased monopoly power
widening inequality (cons of market based SS policies)
deregulation and tax cuts can disproportionately benefit wealthy individuals and corporations, exacerbating income disparity
reduced worker protections (cons of market based SS policies)
weakening labour unions and employment laws make workers vulnerable to exploitation and lower wages
increased monopoly power (cons of market based SS policies)
deregulation can lead to the formation of monopolies and oligopolies, which can harm consumers through higher prices and reduced choice
potential approaches to balance stimulating economic growth and ensuring fairness & social well-being
progressive taxation, investing in education and training, strengthening anti-trust regulations, implementing safety nets
progressive taxation (to create balance)
taxing wealthier individuals and corporations at higher rates to generate revenue for social programs and infrastructure investment
investing in education & training (to create balance)
equipping workers with the skills needed to thrive in a changing economy
strengthening anti-trust regulations (to create balance)
preventing the formation of monopolies and ensuring fair competition
implementing safety nets (to create balance)
providing unemployment benefits, healthcare and other forms of assistance to those who fall behind
impact of wealth & income inequality on economic growth
lower investment in human capital, lower savings, rent-seeking behaviour, credit constraints, political and social instability
lower investment in human capital (impact of inequality on economic growth)
when lower-income households have less access to healthcare and education, they are less likely to invest in their children’s human capital, leading to a less skilled workforce and lower labour productivity
lower savings (impact of inequality on economic growth)
lower income households have a lower propensity to save than higher income households, leading to lower overall rate of savings in the economy, reducing investment and economic growth
rent-seeking behaviour (impact of inequality on economic growth)
when there is a high degree of inequality, wealthy individuals and businesses may be more likely to engage in rent-seeking behaviour, such as lobbying for government policies that benefit them at the expense of others, diverting resources from productive activities and reducing economic growth
credit constraints (impact of inequality on economic growth)
lower income households may have difficulty accessing credit, which can limit their ability to invest in education or start businesses. this can limit their economic opportunities and reduce their contribution to economic growth.
political and social instability (impact of inequality on economic growth)
high levels of inequality can lead to political and social instability, which can deter investment and reduce economic growth
policy measures to reduce inequality & promote economic growth
investing in education & training, progressive taxation, strengthening labour unions, expanding access to healthcare and affordable housing
investing in education & training (policy measures to reduce inequality & promote Econ growth)
helps to improve skills of workforce & make it more comeptitive
progressive taxation (policy measures to reduce inequality & promote Econ growth)
help to reduce gap between rich and poor & generate revenue for government programs that can benefit all members of society
strengthening labour unions (policy measures to reduce inequality & promote Econ growth)
