Inequality Flashcards
define wealth
stock of assets like houses, cars etc at a certain time
define income
flow of money received on a regular basis over a period of time
reasons for differentials in income and wealth
- differences in quality or access to education= high education= high qualifications= higher earning potential
- inheritance of financial assets or property= may be a generational asset passed down
- age= older= more experience= higher income
- wage differentials of diff job professions
define Lorenz curve
measures distribution of income and wealth in a country
- the closer the line of perf equality is to the curve, the more equal distribution of income
gini coefficient formula
Area A/ Area A+B
- 0 is perf equality
- 1 is perf inequality= one person owns all income in society
use of Lorenz curve and mini coefficient
shows effective of gov policies and whether they have changed inequality figures
adv of inequality
- motivates workers to learn new skills= want a higher productivity to reflect high wage= incentivised by financial rewards= more likely to take risks and learn etc
- wealthier firms of ppl have more resources like capital to invest in order to drive long term returns= encourages investment in new projects= LR growth
- incentivise efficient allocation of talent= ppl more likely to pursue high skills to get higher rewards from jobs like finance= increase skills across population= drive competitive salaries to attract most productive employees= increase R and D= more LR growth
disadv of inequality
- inheritance of assets like land passed down through generational wealth= generates constant income flow= access to private, high quality education for the rich= access to best jobs and high incomes
= create unequal opportunity and income= widen inequality - stark disparities in income= create alienation and resentment between social classes= low social trust to foster tensions= low social stability and well-being= increase crime and protests= de-motivate poor ppl to participate in society
- income inequality decrease AD and consumer spending
- social and health inequalities= poor ppl have less access to healthcare due to NHS wait times, less doctors etc= worse off health care= low SOL and well-being= lower life expectancy and ability to work= depression etc
policies to decrease inequality (redistribute wealth and income)
- increase tax free allowance for the poor= can keep higher proportion of income earned= more money to spend on necessities= higher SOL
- higher progressive taxes on rich= decrease income gap= higher proportion of income taken= higher tax rev for gov to spend on benefits etc
- redistribute incomes through benefits schemes like universal credit= providing a guaranteed minimum income floor
- gov spending on public sector like education and healthcare= tackle root causes of inequality by fixing lack of productivity= more skills= increase MRP and incomes= decrease gap in LR
disadv of policies to decrease inequality
- high tax rates on rich will distort incentives to earn high incomes and decrease incentives to take risk and be entrepreneurial= less tax rev in LR= may move abroad where there’s lower taxes
- risk of poverty trap= more incentive to stay on benefits and not find a job= depends on amount of benefits and impact on gov £
- no guarantee ppl will take education efficiently= high OC to gov finances and has big time lag to actually come into effect
- enforcement must be strong to acc have an impact= expensive to fund projects like education etc= high risk of gov failure= firms may move where there are no restrictions= unintended consequences of gov intervention= costs outweigh benefits?
Evaluation on policies to decrease inequality
- depends on state and strength of gov finances
- is level of inequality level acceptable or detrimental?
- intervention is based on normative judgments= high risk of gov failure in decisions to make policy action
- equity vs efficiency= all policies are fair but not necessarily efficient for gov finances and incentive distortions etc
- policies are based on normative judgements= subjective decision to make= may help rich or ruin the poor etc= who deserves the help?= based on personal opinion
define absolute poverty
state where incomes are below a threshold to access the most basic, life sustaining goods and services= less than $2 a day in US
define relative poverty
incomes below a given average in society= below 60% of median income
define horizontal equity
equal treatment of equals, those with same incomes are taxed the same
define vertical equity
high income earner are taxed more= progressive and proportional taxes
causes of poverty
- cyclical unemployment= less AD in recession means workers lose jobs and incomes
- structural unemployment= hard for manufacturing sector labour to meet skill requirements of service sector jobs
- poor education and skills= low MRP= low access to high income jobs= high risk of hysteresis= long term poverty
- poor healthcare= limit access to work= poverty traps
- tax cuts for the rich= get automatic benefit= increase divide and relative poverty
define equity
fairness in the overall distribution of income and wealth
define equality
when everyone is given the same resources and opportunities, regardless of their circumstances
measurements of poverty
- HBAI measures “equivalent disposable income that falls below 60% of the national median”
- Persistent poverty. This is defined as a household which is below the poverty threshold line for 2 out of the past 3 years
- Absolute Low income. This sets a threshold as a proportion of the UK average income in a particular year (2010/11) and changes only in line with inflation. Thus rising wages could be expected to reduce absolute low income – even if inequality increases
