Theme 4.2 : Inequality, and poverty Flashcards
Definition of absolute poverty
Incomes below a threshold ($2 a day) to access the most basic, life sustaining goods/services
Definition of relative poverty
Incomes below a given average in society
Difference between equality and equity
Equity - Fair distribution of income
Equality - Equal distribution of income
7 causes of poverty
-Unemployment - cyclical and structural
-Poor education/skills
-Poor health
-Wage differentials
-Born into poverty/raised by single parent
-Tax cuts for well off
-Subsistence agriculture
Difference between income and wealth
Income - Flow measured over a given time
Wealth - Stock concept, assets with market value that can generate income
Reasons for wage differentials
Age - Wealth accumulated over time. Incomes increase so does wealth
Education (distribution of income)
Ownership of financial assets
Ownership of property
How to calculate the Gini coefficient
Section A / Section A+B
Section A is area between line of perfect equality and Lorenz curve
Section B is area below the Lorenz curve
0 = perfect equality
1 = Perfect inequality
Explain the Lorenz curve
The closer the curve is to the line of perfect equality, the more equal the distribution is
6 policies to redistribute income/wealth
- Taxation
- Benefits
- Min / max wage
- Legislation
- Gov spending on education training
- Gov spending on healthcare
MICRO causes of income inequality
-Age
-Education
-Technology
Inheritance
Flexible labour contracts
-Capital intensive production
MICRO consequences of income inequality
-Social costs
-Incentive to be educated
-Incentive for entrepreneurship
-Incentive to work
MACRO causes of income inequality
-One sector dominance
-Recession - Low skill and younger workers are first to be made redundant as they have low marginal revenue product (MRP)
-Lack of effective progressive tax
-Lack of infrastructure
-Government policies/corrupt government
MACRO consequences of income inequality
-Worsens government finances
-Living standards decrease
-Asset bubbles
-Less economic growth
MACRO Policies to reduce income inequality
-Progressive income tax
-Gov spending on welfare
-Gov spending on education
-Universal basic income/benefits
MICRO policies to reduce income inequality
-Minimum wage
-Maximum wage
Explain the Laffer curve
-Bell shape
-Optimal tax rate is T*
-Increasing taxes will increase tax revenue up to a certain point
-Increasing taxes beyond the efficient tax rate (T*) will see a reduction in tax revenue for 3 reasons;
-Disincentivises people to work harder - Less productivity as lots of income will be taxed away
-Emigration - People move to countries with lower tax rates - High earners may leave
-Tax evasion/Tax avoidance - Both reduce tax revenue, evasion is illegal but avoidance is legal, higher tax rate makes evasion more likely
Explain the poverty growth cycle
1) Low incomes
2) Low levels of savings
3) Low levels of investment
4)Low economic growth
Explain the development poverty cycle
1) Low incomes
2) Low levels of production
3) Low levels of human capital
4) Low productivity
Application point
How many times more was the average American CEO payed than the average worker
271 times more
Application point
How many men have the same amount of wealth as the worlds poorer half of the population
8
Effect of imposing minimum wage on income inequality
An increase in the minimum wage will increase wage costs for a business. This will decrease their profits , which may mean that the manager will receive a lower salary. This will then decrease income inequality .
APP
How much money did the UK give to Pakistan in 2015?
£374 million
This Aid was spent on the building of new schools and hospitals which improved education and health, these both improved the productivity of workers in Pakistan allowing them to demand higher wages from their employers, over the next year Pakistan’s GDP per capita rose by $100, decreasing poverty
APPLICATION
Poverty statistics for UK
-In 2021/22, 13% of people in the U.K. were in absolute poverty before housing costs are considered (rising to 17% after housing costs).
-The UK’s Gini coefficient for income inequality is 0.36 for 2021/22.
-The UK’s Gini coefficient rose during the 1980s from 0.24 to 0.34.
APPLICATION
Wealth inequality in UK
-in 2020, the richest 10% of households held 43% of wealth.
APPLICATION
Causes of poverty / income inequality
-Education: more than 70% of children from the top 10% richest households achieve 5 good GCSE grades compared with below 30% for poorest 10% of households.
-The tax system: tax rates for capital gains, dividends and self employment can be lower than effective tax rates for employment income in the UK. Also the unemployment trap occurs, as those on welfare may only be £3.29 per hour better off from working compared to claiming Universal Credit
-Discrimination: 16% of migrants to the U.K. perceive their group to be facing discrimination, according to the Migration Observatory.
APPLICATION
Solutions for Poverty / income inequality
Education and training: Rishi Sunak, the former Prime Minister of the UK, wants all students to learn maths until age 18 as a compulsory subject.
Tax and welfare changes: Increasing the Personal Allowance, the minimum amount of income before any income tax is paid, or lowering income tax thresholds for high earners so that more people pay the 45% pay tax.
Compulsory pay gap reporting: firms with more than 250 employees must report their gender pay gap in the UK.
Anti-discrimination law (Equality Act 2010 for the UK).
Definition of a progressive tax
The proportion of income tax increases as income increases
Income tax is the most common example of a progressive tax in the UK as higher earners pay a higher rate of income tax.
Definition of a regressive tax
The proportion of income you pay as tax decreases as your income increases
APPLICATION
Percentage of national insurance if you earn over £4189 a month vs if you earn £1048 to £4189 a month
EXAMPLE OF A REGRESSIVE TAX
Above £4189 a month = 2%
Between £1048 and £4189 a month = 8%
