Inequality Flashcards
Income
The flow of money
Absolute Poverty
Individuals do not have sufficient money to afford basic needs and necessities
Relative Poverty
When household income is lower than 60% of the median income in the country
Causes of Income Inequality
1. Differences in skills and qualifications
- low skilled workers are more likely to be replaced by capital and as they have no transferable skills they cannot find a new job
- this can lead to long term unemployment and instead receive benefits that do not rise in line with inflation
- this can lead to hysteresis
- high skilled workers are scarce and so are likely to bargain higher wages and so are more likely to earn higher incomes as they have more bargaining power
2. Unequal holding of wealth
- people who are struggling to get out of the poverty trap will not be able to pass anything on to their children and can lead to intergenerational poverty
3. Different compositions of households
- single parent households tend to be the poorest as they cannot go into work as they have to look after their children
- have to rely on benefits which may not increase in line with inflation
- some may be working part time but this may not be secure
4. Unemployment
- unemployed people have to rely on benefits which don’t increase in line with inflation
- don’t increase their skills and instead become outdated
- leads to long term unemployment as employers don’t want to hire workers with less skills which leads to suffering from hysteresis
- high skilled workers can still be unemployed and be financially stable and can just find another high skilled job
5. Age, Gender, Race etc
- younger people paid less
- men paid more than women
- ethnic minorities may be paid less
The Lorenz Curve
Shows the distribution of income
- In a perfect world, the curve is a straight line at a 45 degree angle called the Line of a Equality
- The bottom 10% of households get 10% of national income and the top 10% of households get 90% of national income
- In reality, it is more curved and the percentage of national income for both households is lower
- A country with higher income inequality will be more curved
- Can make it less curved by making tax more progressive and increase benefits
Gini Coefficient
A numerical measure of income inequality between 0 and 1
- A/(A+B)
- 0 = perfect equality
- If the gini coefficient = 0 then there is no Area A
- 1 = perfect inequality
Wealth
A stock of assests that have a monetary value
Causes of Wealth Inequality
1. Income inequality
- the higher the income the higher the marginal propensity to save which means more savings which is a form of wealth
- when income increases can buy a house so demand for houses increases which causes the prices to increase and so only high income households can buy them
2. Inheritance
- the poorest in the country cannot pass any assets onto their children and so can lead to intergenerational poverty
- the richest can pass on property to children
3. Marriage patterns
- high income households tend to marry high income housholds
- create power couples in relationships
4. Differences in entreprenuer skills
- those who have skills may open up businesses and can increase their wealth in the form of profits
Harms of income inequality
1. Poorest in society cannot afford the basic needs
- productivity would be low and health would be very low, leading to them spending time out of work
- further worsens income inequality
- for poor families children may need to be sent to work early instead of school
- causes a self erpetuating vicious cycle of inequality
- worsens GPI score as more people in poverty turn to crime which leads to negative externalities
- attract no or low quality FDI which may lead to low quality jobs and exploitation
2. Lower HDI score
- In developing countries there is a big gap between the rich and the poor as less people can afford school and healthcare which leads to a lower HDI score
- development countries there is no welfare state so may lead to the formation of shadow markets
3. PPF shifts inwards
- quality of factors of production would decrease if there’s more homelessness, less people enter the workforce meaning the government collect less tax revenue
- can lead to demand pull inflation as a reduction in the PPF means it is more likely to hit a supply constraint
Benefits of income inequality
1. Can be good as it provides motives
- more incentives to work and set up a business which leads to high incomes
- without inequality there would be no incentive to work hard
- as a result derived for labour increases, employment increases, leads to trickle down effect
2. Depends on whether or not the government provide welfare benefits
- stops people from entering absolute poverty
- State provision/Education = people can get higher skills that are transferable which allows them to get a job and break poverty chain
- state provided healthcare means less time spent outside of work
Policies to reduce income inequality
1. Increase in national minimum wage
- work replacement ratio goes does as earn more income in work than out of work
- people more incentivised to eneter workforce and find a job
- wages increase in line with inflation unlike benefits
- unlikely to suffer from hysteresis
2. Reformation of tax and benefits
- decrease tax or make more progressive and increase benefits so more income
- increasing personal allowance
- lorenz curve shifts inwards towards the line of equality
- benefits help low income households
3. Education and training
- gain transferrable skills so even if lose their job they can easily find another
- gain higher occupational mobility to prevent people from being structurally unemployed
- if high quality education, can enter a high value sector of work and earn hgiher income
- can break intergenerational poverty
- if higher skilled can demand for higher wages so work replacement ratio decreases
4. Childcare
- more affordable so women can go to work
- labour force participation for women increases
- can enter the work force quicker after giving birth so dont lose any skills
- dont need to say off work to look after children
5. Provision of social housing
- social housing is government provided housing
- it is important the government provides to those who can’t afford
- must be a good quality as if it is bad it could lead to develop respiratory problems and so take time out of labor force
- the government tend to subsidise rental prices for social housing as it allows people to attain more rdy
Evaluation of policies to reduce income inequality
1. Increase in national minimum wage
- leads to cost push inflation as SRAS shifts
- derived demand for labour decreases so unemployment increases and have to rely on benefits
2. Reformation of tax and benefits system
- if benefits increase, the wage replacement ration might increase and would rather stay at home than go work
- increases voluntary unemployment
- if tax increases by alot, can lead to human capital flight as workers will move to another country where there is a lower tax rate
- firms may set up in other countries
3. Education and training
- depends on quality of education and training
- depends on how it is financed
- how long the education and training lasts
- could increase national debt
4. Childcare
- lack of supply of childcare
- tight budget deficit
- depends on the flexibility of jobs
5. Social housing
- depends on how the gov rations out housing
- lots of waiting lists
- depends on quality of housing
