Micro - The Distribution Of Income And Wealth: Poverty And Inequality Flashcards
The distribution of income and wealth
The difference between income and wealth
• Wealth is defined as a stock of assets, such as a house, shares, land, cars and savings. Wealth inequality is the unequal distribution of these assets
• Income is the flow of money or earnings over a certain period of time. E.g. wages, salaries welfare payments, interests or dividends. When income is unevenly distributed across a nation, income inequality is said to exist
• Wealth is the accumulation of prior earning and financial assets, whereas income is a measure of one’s ability to earn
Measurements of income inequality
The Lorenz curve and the GINI co efficient
• The Lorenz curve measures the distribution of income and wealth in a country.
• The line of perfect equality shows the distribution of income when the richest x% of the population owns x% of the cumulative income.
• The Lorenz curve shows the actual distribution of income and wealth. The one in the diagram shows a significant level of inequality. The richest 20% own a higher proportion of income than the poorest.
• The Gini coefficient gives a numerical value for inequality and is derived from the Lorenz curve. It is calculated by the areas:
GINI = A/A+B
A value of 0 indicates perfect equality, so everyone has the same income and wealth. A value of 1 is perfect inequality i.e. all of the wealth in the country is concentrated in the hands of one individual or household.
The difference between equality and equity in relation to the distribution of income and wealth
• Equality refers to the equal distribution of wealth and income in society, so that everyone has the same income.
• Equity refers to fairness, or, what is considered to be an acceptable distribution of income and wealth in society. This could be subjective= involves a value judgement.
Equity takes into account that some will need more resources or helps
Factors the influence the distribution of income and wealth
(Wages , welfare payments and unemployment)
• Recently, more part-time and temporary jobs have been available rather than full time jobs. This leaves people underemployed, and it limits how much they can earn. It became a problem during the Great Recession.
On average, those with a degree earn more over their lifetime than those who gain just A Levels. The wage gap between skilled and unskilled workers has increased in the UK recently. Jobs in the low-skilled service industries, especially in the public sector, tend to pay less than jobs in the private sector.
• Even with equal pay laws, women still earn less than men on average. This. could be due to career breaks and fewer hours worked on average than men, or because women are crowded into low-paid or part-time jobs, which may only require low skill levels. Women could also be discriminated against when it comes to promotions, which effectively locks out higher paying jobs. Although a gap still exists, it is narrowing.
• Workers might be discriminated against due to age, disabilities, gender and race
Welfare payments
State pensions and welfare payments tend to increase less than wages, even * though they are index-linked to inflation= means that those on benefits see a smaller real increase in their income compared to those in jobs. This increases inequality.
• Moreover, recently welfare payments have been cut. Although this might encourage some people to find jobs, many people might be unable to work= it lowers their income more. In the UK, some taxes are regressive
= means that those on lower incomes bear a larger burden of the tax= can increase inequality.
Unemployment
This can cause relative poverty (and therefore increase income inequality), and it is particularly damaging where no one in a household is working. since they are left to rely on state benefits.
Factors that influence the distribution of income and wealth 2
Changes to the UK tax system
• Over the last 2-3 decades, the UK has switched towards indirect taxes, which tend to be more regressive. The top income tax rate fell from 83% in 1979 to 40% in 1988, and it is still at this rate today.
• The basic income tax rate fell from 33% to 22%, which helps workers keep more income. However, the benefits of this disproportionately favour the richest households. This has led to an increase in income inequality.
Inequality between countries
Some countries have been held back by wars, droughts, famines and earthquakes, which has kept their populations in poverty. Across Africa, population issues are complicating efforts to reduce poverty and eliminate hunger. Their population of 1.4 billion is expected to double by 2050
Two people born in two countries can have very different opportunities open to them, depending on where they were born. This inequality of opportunity can be seen between countries such as Japan and Sierra Leone, where the difference between life expectancies is significant. In Japan, women can expect to live to the age of 87, whilst in Sierra Leone=46.
• Recently, developing countries have been growing faster and are catching up with the developed world. This is helping to narrow the gap between the rich and poor countries. (Advantages)
• Moreover, exploitation of the poor through colonial rule led to more inequality between countries. The fast spread of ideas meant the Industrial Revolution reached much of Europe. In many countries which are poor today, war and famine held back this development. The gap in wealth, which grew during the Industrial Revolution, led to an inequality in power, and consequently was a causal factor in the exploitation. of poorer countries
Income and wealth can be dramatically impacted by economic and social policies such as minimum wage regulation, progressive taxation, access to high quality education (private schools)
The likely benefits and cost of more equal and more unequal distribution
Unequal distribution
Inequality motivates workers, which encourages them to learn new skills and work hard. A higher wage reflects higher productivity in a capitalist society= results in wage inequality.(Advantages)
- Monopolies can exploit consumers with higher prices, and exploit their consumers with lower wages. This allows them to earn even higher profits.
(advantages)
Inheritance is passed down generations= means wealth is often concentrated in the hands of a few families. Those who inherit lots have more wealth. They can also access the best education and therefore the best jobs, which is not accessible by those with less wealth. It results in an inequality of opportunity and income. Wealth can generate more income for the rich, which widens inequality.
Inequality could discourage and demotivate those on lower incomes from participating in society. An unequal distribution can lead to negative externalities such as social unrest
More equal distribution
- There can be income redistribution and wage equality through government intervention. E.g., inheritance tax means rich families cannot keep their entire wealth. Moreover, state education means everyone can access education, and there is regulation for firms with monopoly power. (in UK)
Improve economic stability
- decrease poverty rate
Cost of greater equality
- productivity loses as harder working period get compensated less
Evaluation for distribution of income
Another evaluation point: less inequality can improve equity as it usually means that more people have greater access to opportunities and thrive within the county
HOWEVER, it’s important to realize that equality and equity are not the same as it really depends on person’s value or judgement.
e.g. one might believe it important to be able to earn more money if you work harder. earn more skills, achieve greater productivity and output compared to others
-is it fair to pay higher earners less purely to compensate others for earning less than
them= if this is forces excessively on higher earners through progressive taxes)
= likely consequence that higher earners will emigrate to other countries to avoid higher taxes
Income inequality as a cause of market failure
e-In a market economy, an individual’s ability to consume goods and services depends upon their income and wealth and an inequitable distribution of income and wealth is likely to lead to a misallocation of resources and hence market failure. Some consumers might not be able to buy goods and services at all.
-lack of equal access of opportunities e.g. quality education throughout the country not the same, healthcare disparities the cause)
-monopoly powers means that entrepreneurs can achieve higher earnings relative to workers- this widens the income gap (the cause)
Consequences of market failure- imperfect info, negative externalities such as pollution or social unrest, diminishes social cohesion: e.g. social tension between income groups or classes= higher crime rates= economic and social instability.
The difference between relative and absolute poverty
Absolute poverty is defined as living below subsistence. This means that the person is unable to meet their basic needs of food, clean water, sanitation, health, shelter and education. The World Bank uses a measurement based on the number of people living on less than $1.25 per day.
Relative poverty is measured by comparison to the average in the country. In the UK, those with below 60% of the median income are considered to be in relative poverty. In the US. a basket of goods which maintains the average standard of living of society is used. Relative poverty can be seen as one way of measuring income inequality.
The cause of poverty
Inequality in wages and unemployment–
If workers can earn a higher level of education, they will be able to access jobs with higher wages. Those with lower levels of education might struggle to find a job, and if they do, it might only be low paid. This is especially harmful where countries do not have a National Minimum Wage or unemployment benefits, since it can leave people in relative poverty.
- The changing structure of the UK economy to services as a result of deindustrialisation in 1970’S.
A movement away from manufacturing related industries to service sectors industry has meant some jobs have been lost as they don’t have the transferrable skills to do the service sector jobs
= could cause structural unemployment= their skills deteriorate (if there limited access to training).
This makes it harder to find a job, and it leads to long-term unemployment= go into poverty - Also cyclical unemployment- during recession, when there is a lack of AD in the economiy= lots of workers may lose their jobs=lose their income
Welfare payments– State pensions and welfare payments tend to increase less than wages, even though they are index-linked to inflation. This means that those on benefits see a smaller real increase in their income compared. to those in jobs = increases inequality and the number of people in relative poverty.
Taxes In the UK, some taxes are regressive, which means that those on lower incomes bear a larger burden of the tax. This can increase inequality and relative poverty. E.g. excise duty- those on high income may spend more on petrol, but is unlikely to be too significant, therefore as income rises, he percentage of your income going on petrol tax is likely to fall
Wars and conflicts This might push people to flee their homes, as well as destroying anything they owned. It could leave people homeless and force them into extreme poverty.
Corruption and political oppression Countries with corrupt leaders might have higher levels of poverty. There is likely to be relative poverty since the leaders might keep most of the wealth.
- Also natural disaster -
- poor health- link to low productivity, type of work they can be in. Health issues can make it hard to get a job, especially in a country where jobs are scarce and rarely available. People are likely to take a lot of time off work and it can deter MNCs from investing in a country. This can leave people without an income and it can push people into absolute poverty.
Effect of poverty
Health: high rates of poverty are associated with lower life expectancies, poorer standards of health and underdeveloped infants. Malnutrition is an important issue, which results in poor cognitive development in children, so they are not as productive as adults.
Manutrition also makes children more vulnerable to infections, which increases their risk of death. Therefore development of human capital is hampered by limited access to healthcare, basic resources, education
Society: Poverty could result in poor housing, crime and mental health issues. Social unrest becomes more common and it can create problems within communities. Safety and well-being of communities can be threatened
Poor sanitation: Many people living in poverty cannot afford basic levels of sanitation, and clean water is a rarity. This makes people more vulnerable to fatal diseases.
Usually, the diseases contracted from poor sanitation are avoidable, but they simply cannot afford to improve their situation.
Education: Sometimes, families have to choose between eating and getting an education for their children. Children might have to be sent to work to support the family, which leaves them with poor literacy skills later on in life. This limits their ability to escape poverty as an adult.
Economy: Without a basic level of education, the higher paying jobs, with opportunities for career progression, are not accessible. This hinders the economy’s ability to improve its productive potential/ inhibit economic growth
In conclusion include invention or policies that could be put in place
Gov policies to alleviate poverty and to influence distribution of income and wealth and income
- so gov intervention
For example, inheritance tax means rich families cannot keep their entire wealth. By levying taxes on the transfer of assets and properties between generations, inheritance tax aim to reduce wealth concentration among the riches in society=a more fair distribution of wealth
• Governments could employ progressive taxes, such as higher rates of income tax for the richest carners. A progressive tax has an increase in the average rate of tax as income increases.
-For example, in the UK income tax is progressive. For income between 12,571 to 50,270, people only pay the basic rate of 20%., for income between 50,271 and 125,140= people pay the higher rate of 40%. Above this, a rate of 45% is paid.
-This should help reduce inequality, because those on lower incomes pay less tax. The tax is based on the payer’s ability to pay. Higher income households are more able to pay higher rates of tax than lower income households
.
•Progressive taxes allow the government to reduce regressive taxes and raise welfare payments. However, this could reduce incentives to work harder and earn more, and it could result in a fall in government revenue, as shown by the Laffer curve( evaluation)
The UK has a National Minimum Wage which ensures all workers can access a minimum standard of living. This aims to prevent employees exploiting their
• workers by paying them low wages, and it prevents people falling into extreme poverty. Employees can therefore get paid enough to cover fundamental requirements.
Therefore gov. can alleviate income inequality, lessen the occurrence of working poverty by enacting and readjusting minimum wage standard
Improving human capital
In developing countries, governments might improve human capital by making education more widely available. Moreover, they might try and diversify the economy in order to stimulate economic growth and job creation. For example, countries such as Sri Lanka and tried to develop their tourism industry.
• Also, government spending on housing and the provision of public services,
such as education and healthcare, helps provide equal opportunities for people from all income backgrounds. = ensures that even those on low incomes can afford a good standard of healthcare and education. By providing these services=gov. ensures that all members of society can achieve a minimum standard of living.
-social welfare programmes like social housing, food aid= these programmes make sure they have access to the resources and basic needs they need to raise their living
The economic consequences of such policies
Fiscal considerations-
it cost a lot of money to put income and wealth redistribution programmes into practices. To prevent overtaxing the economy or spending too much on welfare= gov. must carefully balance their fiscal priorities.
Therefore the sustainability and effectiveness of these programmes depend on prudent financial management and resource allocation OR leads to an increase in national debt
= causes a burden on future taxpayers
• Welfare benefits are likely to be more successful if applicants have met certain minimum requirements in order to be able to claim benefit, HOWEVER, critics argue that the minimum eligibility criteria can be too strict= leaving many people who need help without it= not as beneficial to everyone in need
Recognizing moral and political perspective
- some don’t that eradicating poverty is morally required and that systematic disparities must be addressed through gov intervention
- other may support market driven strategies, focusing on individual liberty and minimal involvement
