the distribution of income Flashcards
what is wealth
a stock of assets owned by an individual, firm or country
examples of wealth
- houses
- shares
- buildings
- land
what is income
income is a flow of money going to factors of production (wages/ salary is going to labour, rent is income going to land)
income may be earned through (through employment) or unearned
what is meant by the distributon of income
means how income is divided between different groups in society
what is the distribution of wealth
how wealth is divided between different groups in society
what is the link between income and wealth for the rich
virtuous circle
what is the link between income and wealth for the poor
vicious circle
explain the virtuous circle for the rich
if you have a high income you are more likely to have money left over after living costs
you can invest this and thereby gain interest
explain the vicious cycle for the poor
if you are poor, have no saving and a low income, you are likely to end up borrowing money
repaying a loan with interest, makes it even harder to save or cover living costs
what are the factors influencing distribution of wealth and income
when an economy grows rapidly the gap can become wider
although everyone is becoming richer in absolute terms, the rich gets richer more quickly than the poor gets richer
recall the factors influencing distribution of income
wage/ salary differentials
market structures
govt policy
age
household consumption
globalisation and migrations of workers
inequality in levels of wealth
high levels of education
factors of production
skills and qualifications
how does factors of production affect the distribution of income
earning from labour have not risen as fast as earning from land and entrepreneurship widening the gap wages haven’t risen as much as land owners earning from rent
how does earned vs unearned income affect the distribution of income
income is not one homogeneous item and the factors determining wage inequality are different from the factors determining differences in unearned income
unearned income tends to go hand in hand with wealth
how does wage differentials affect the distribution of income
differential here means the difference between top-earners and bottom earners
how does globalisation and migration of workers affect the distribution of income
the freer movement of goods and labour have arguably widened the gap between rich and poor
lower paid workers in industries such as manufacturing or call centres are aware that they are in competition now with cheap labour in other exerting a downward pressure on their wages
by contract executive justifying their high salaries through international comparison, suggesting that they will move abroad if they are not paid a competitive rate for their skills
what are the four components to an individuals total net worth, stated by the office for national statistcs
net property wealth (your house)
net financial wealth (your cash)
physical wealth (your car)
private pension wealth (your pension)
the relative size of each of these elements varies greater when you compare rich and poor
what are the factors influencing the distribution of wealth
propensity to save
government policy
private pensions
capital gains
inheritance traditions
inequality of wealth
inequality of income
gifts and luck
skills and qualifications
what is the private pension assets and how does it affect the distribution of wealth
pension pension assets accounted for 37% of total household wealth equalling the proportion of wealth from property in 2010-2012
the poor have not traditionally had private pensions, either through lack of access to workplace schemes or lack of spare cash to invest
state pensions arent included as you dont have a lump sum rather count as a flow concept giving a monthly income
the automatic enrolment of workers into employers pension schemes is a policy introduced to address this
how does inheritance, gifts and luck affect distribution of income
wealth distribution is in part accounted for by ‘accidents of birth’ and luck
old money is a label that refers to money that has been inherited/passed down rather than earned
new money refers to wealth generated by entrepreneurs and others who got lucky, take risks that pay off or win the lottery
so having old wealth can improve your chances of generating new wealth
how does taxation affect the distribution of income
both income and wealth can be and are taxed
in the UK the greater part of tax revenue comes from taxation on income than on wealth
even where is taxed the wealthiest are often able to avoid losing too much of their wealth because they have the means to employ clever accountants who know the loopholes
what are the consequences of wealth inequality
some may have to live in low quality homes or move house frequently
asset bubbles and property speculation
the hinderance of social mobility via the wealthy affording better education, health, cultural goods
child poverty and pensioner poverty
wealth creates incomes via interest, rent and dividends , causing more income inequality
can be argued that only the wealthy can afford to take big risks as entrepreneurs so have access to high risk/ reward opportunities
envy and jealousy leading to social problems
intergenerational inequality arising from property inequality
what are the consequences of income inequality
a sense of unfairness
impact on aggregate demand, economic growth and performance
impact on social indicators such as crime, education, physical health, mental health
recall the policies being used by UK govt to combat the uneven distribution of income
inheritance tax
income tax
capital gains tax
national insurance
restrictions on second homes
mansion tax
forcing independent schools to charge VAT
why might wealth and income inequality be desirable
theres an argument that some degree of income and wealth inequality is inevitable in a market economy and perhaps desirable as it may provide incentives and allocate resources effectively
what is the trickle down effect
wealth and income inequality can be seen as a not so serious issues because of the trickle down effect
the belief that if high income earners gain an increase in salary, then everyone in the economy will benefit as their increased income and wealth filter through to all sections in society
what happens if the richest gain an increase in wealth
extra wealth will cause an increased demand for goods and services causing higher employment and rise in wages
higher wages - multiplier effect
or they may invest their increased wealth in new businesses which will create new jobs and increase incomes of those employed
higher spending and investment will stimulate economic activity leading to a rise in tax revenues which can fund healthcare, education and welfare payments to the poor
what are the criticisms of the trickle down effect
the wealthy have a high marginal propensity to save
wealth has been saved in off shore accounts to avoid paying tax
why has the distribution of income become more unequal in the uk
cutting top rates of tax (supply-side policy - the economy will grow faster)
conservatives more likely to accept higher inequality
privatisation and rise of executive pay
fall in real value of benefits
increase in % of single parent families
increase in part time jobs
what causes inequality of income between households
wealth inequality
household composition
level of skills and qualifications
differences in earnings
why are there differences between income of regions
industrial structure
unemployment rates
% of population on benefits
educational standards
resource endowment
why may unequal distribution of income be good
wealthier people are likely to stay in the country and contribute
higher GDP
motivation for promotions - increasing MRP
more entrepreneurs- new products
take on extra work more regularly
govt gets more tax revenue
why may unequal distribution of income be bad
can lead to social problems such as:
resentment
robbery
riots
what are the causes of poverty
low levels of income
unemployment
dependency of others
age
govt policy - wealth creation and trickle down effect
low levels of education and training
country and/or region of residence
family backgrund
ill-health
what are the effects of poverty
ill-health (including stress and mental health illness)
limited education and training an thus poor job prospects
lower productivity (for individual/economy) - lower MRP
poorer lifestyle
what policies can you think to reduce income/ wealth inequality and poverty
welfare benefits
subsidised government services (benefits in kind)
progressive taxation
national minimum wage/ national living wage
reduce unemployment
encourage equality of opportunities in education and jobs
legislation to protect the lowest paid workers
switch to mean tested benefits
decrease or increase in real value welfare benefits
what are the pros of national minimum wage
boost low wages
empowers the economically weak (especially against monopsonist)
upward multiplier (AD)
increase the labour supply
increase the demand for labour
what are the negative effects of the national minimum wage to reduce income inequality
increase in the costs of production (anti supply side policy)
more unemployment
downward multiplier
therefore reduce the demand for labour
disequilibrium and so increased unemployment
how can you evaluate the use of the national minimum wage to reduce income inequality
effect of unemployment is dependent on elasticity of demand and supply of labour
what is the pros of cutting the bottom rate of tax to reduce income inequality
reduce the poverty trap
reduce benefit dependency
increase the supply of labour
upward multiplier
increase income for ow paid
cheap to administer
what are the cons of cutting the bottom rate of tax to reduce income inequality
disincentivising productivity (greater returns for less MRP)
progressive tax system is fair but does it lead to as much efficiency as flat rate or regressiv taxes
may have to increase tax elsewhere to fund
what are the pros of funding education and training to reduce income inequality
reduction in structural unemployment
increases MRP
reduces exploitation and discrimination
increase social mobility
increase labour occupational mobility
supply side policy
reduces costs of production
what are the cons of funding training and education to reduce income inequality
uncertain outcomes
expensive
opportunities cost
time lags
what are the pros of the trickle down effect to reduce income inequality
wealthy economies have less absolute poverty
entrepreneurs will invest and increase GDP
entrepreneurs demand labour and so create jobs
more emlpoyment will increase the scarcity of labour and so wages will rise
what are the cons of the trickle down effect to reduce income inequality
increases in real GDP are disproportionately taken by the wealthy
increasing disparity between high and low incomes
what are the pros of increasing benefits to reduce income inequality
increase income for those on low incomes
means tested gets to the most needy
stops absolute poverty
reduces relative poverty
what are the cons of increasing benefits to reduce income inequality
incentive to not work
reduce labour supply
people may get into poverty trap
expensive
people cheat the system
means tested so its beureacratic
what are the benefits of using tax credits to reduce poverty
increases income of low income earners
people are still encouraged to work
what are the cons of using tax credits to reduce poverty
disincentivises higher wages as you may lose tax credit
earning and losing tax credit seems like a huge increase in tax
could reduce MRP
how may free market economists view interventions by the govt to reduce poverty
they believe intervention is pointless in the long as its all about scarcity
so to increase low wages you need to make labour scarce
to do this - need a high demand for labour and for this you need to have free markets that exploit low wages
as labour gets more expensive businesses will switch to capital and create unemployment
what other measures could be used to reduce income inequality
reduce unemployment
expenditure to encourage equality of opportunities in education and jobs
subsidised govt services
spending on social funds
what are cash benefits
universal child benefits
state pensions
conditional benefits
means tested welfare payments
what are in kind benefits
education
healthcare
social housing
employment training
what are the problems with taxation systems
fiscal drag - when raises in tax thresholds in progressive tax systems dont keep pace with inflation
what is the effect of fiscal drag
if wages prices and tax thresholds all rise at the same rate then your income in real terms remains the same
however tax threshold arent linked to inflation rates so if the tax threshold doesnt increase you end up paying a higher proportion in tax and so becoming relatively poorer
what is a poverty trap
where more working results in little increase in net income
as earnings trap occurs where a persons income level is such that they become eligible to pay income tax but lose means tested benefits
this can result in a marginal tax rate of 70%
what is an unemployment trap
where working results in little increase in net income
applies to those not in work who believe that they will lose more if they work
both earning and unemployment trap are complicated by the black economy, where people dont declare income so that they can continue to claim benefits
