Inequality

Question 1

How to Measure Inequality

Answer 1

• Inequality at the top of the income distribution
• Ratios
• Broader measure (Gini coefficient)

Question 2

Ratios

Answer 2

1. 90/10 ratio of 7 means that the richest 10% earn 7 times more than the lowest 10%
2. 90/50 ratio of income received by those at the 90th percentile and the 50th percentile of income distribution
3. 50-10 ratio of incomes received by those at the 50th percentile of income distribution vs. the poorest 10%

Question 3

Gini Coefficient

Answer 3

No. between 0 (perfect equality) and 1 (perfect inequality). The more inequality the higher the number
- Based on diff incomes, wealth etc btw people
- Includes everyone in society not just the richest vs. poorest (like 90/10)

Question 4

Calculate Gini Coefficient

Answer 4

• The average of differences between the people
• The average income of the people
  1/2 x (first number/ second number)

Question 5

The Lorenz Curve

Answer 5

Shows entire population on the horizontal from poorest to richest.
- Shows extent on inequality as deviation from ‘perfect equality line’ allowing comparison

Question 6

Trend in Inequality

Answer 6

• Wealth is more concentrated than incomes (wealthiest 1% in US hold 35% of the country’s wealth)
  Same across the globe: UK = 2nd highest inequality of that in western europe and north america

Question 7

Inequality in the World

Answer 7

• Scandinavian countries overall income inequality is the lowest with social mobility being highest.
• UK, US overall income inequality high and social mobility lowest

Question 8

Explanations of Inequality

Answer 8

Neoclassical Theory
Rent seeking and Institutional explanation (Stiglitz)
Role of Capital in inequality (Piketty)

Question 9

Neoclassical Theory

Answer 9

Economic growth would increase wealth and higher living standards to all sections. Resources given to the rich ‘trickle down’ to the rest
- ‘Trickle down’ due to Marginal productivity theory
- Due to competition, everyone participating in production process earns pay equal to their marginal productivity
- Market exploitation (monopolies) cannot persist

Question 10

Institutional Explanation (Stiglitz)

Answer 10

Marginal productivity theory cannot explain extreme inequality in rich countries
- Institutions matter
- Explanation: rent-seeking, monopoly power, exploitation, political and institutions factors etc

Question 11

Rent-Seeking

Answer 11

Getting an income not as a reward for creating wealth but by grabbing a larger share of the wealth that would’ve been produced regardless
- This typically destroys wealth

Question 12

Alternate Explanations to Inequality

Answer 12

• Assets which drive the increase in wealth are not produced capital goods –> with more wealth put into assets, there may be less invested in real productive capital.
• Institutional and political factors influence the relative shares of capital and labour:- 3 decade wages increase less than productivity
• Therefore, weakening of workers’ bargaining power = weakening unions, asymmetrical globalisation where capital is free to move while labour not so much, central bank policies focus on inflation

Question 13

Market Forces

Answer 13

Demand and supply for skilled workers is affected by changes in technology, education and globalisation.

Question 14

Growth in Wealth (Piketty)

Answer 14

Growth in wealth vs. income increases inequality characteristics in societies = rich get richer
- Centred around capital income ratio(β)
If β increases (r>g), inequality increases. Initial wealth inequalities will be amplified.
- inequality curve is shaped as a U
- Wealth inequality > income inequality

Question 15

Price of Inequality

Answer 15

• Growth spells usually shorter when income inequality is high
• Inequality leads to weak aggregate demand
• Public investment is lower in countries with high inequality
• Countries with more inequality have more problems: obesity, mental illness etc