Wealth and Income

Question 1

Wealth and Income

Answer 1

• Income is a flow. It is the annual salary a person receives. National income is the annual GDP that a country produces.
• Wealth is a stock concept. At a certain point it is fixed. Wealth is comprised of assets such as stocks, shares and property.
• A high level of wealth generally enables a higher income. For example, people can earn dividends and rent from stocks and property they own. With a high income you can generally save more leading to higher wealth.

Question 2

Wealth Inequality

Answer 2

Wealth inequality is generally greater than income inequality:
• Wealth is inherited, income is not. Therefore, wealth is often passed on from generation to generation
• People with higher incomes, can accumulate more wealth. They have more disposable income to save and invest in property and other assets. People on low incomes have a much higher marginal propensity to consume. They don’t have the luxury of being able to save.

Question 3

Advantages of Increased Equality

Answer 3

• Greater income inequality helps to make society more cohesive. If there are obvious inequalities in income, it is likely to cause feelings of ill-will and could contribute to social problems and even civil unrest.
• Increasing the incomes of the poorest, will lead to higher levels of consumption. The rich have a higher marginal propensity to save. Increasing the incomes of the poorest will lead to greater demand in the economy.
• Increasing equality through better access to education and training is effective in increasing equality of opportunity. This is less contentious than increasing equality of outcome.
• Reducing inequality by tackling unemployment can save the government money in terms of lower spending on benefits and higher tax revenue.

Question 4

Problems of Increasing Equality

Answer 4

• Reducing inequality can reduce incentives in the economy. Without the reward of high incomes, people may not want to set up a new business.
• Means tested benefits can lead to a poverty trap, where people on low incomes lack incentives to get a better paid job.
• Benefits to reduce inequality take up a substantial part of the government’s budget, leading to higher tax, also less top rate tax

Question 5

Benefits of a Minimum Wage

Answer 5

1. Increase the wages of the lowest paid workers.
2. Higher wages can increase the incentive for people to work harder and therefore increase productivity.
3. Increase the incentives for the unemployed to accept a job. With a minimum wage, the gap between benefits and wages grows.
4. If firms have monopsony power they can drive wages down by employing less workers. In this case a minimum wage is likely to have a positive effect on wages and employment.

Question 6

Disadvantages of Minimum Wages

Answer 6

1. If labour markets are competitive a minimum wages could cause unemployment.
2. A minimum wages can cause cost-push inflation. This is because firms face an increase in costs which are likely to be passed on to consumers. This is more likely if wage differentials are maintained.
3. A minimum wage may increase the number of people working on the black market (avoiding legal minimum).
4. A limitation of the minimum wage is that it doesn’t increase the incomes of the lowest income groups. This is because the poorest have to rely on benefits and are therefore not affected by the minimum wages.
5. Also, many who benefit from the minimum wage are second income earners and, therefore, the household is unlikely to be below the poverty line.

Question 7

Evaluation of Minimum Wages

Answer 7

1. The effect of a min wage on unemployment is uncertain. It depends upon the structure of the labour market and whether the increased costs can be passed on to consumers.
2. Empirical evidence from the US and the UK suggests that a moderate increase in the min wage doesn’t cause a fall in employment. Would have to be high
3. The effect on wage differentials is important. For example skilled workers just above the min wage may feel they deserve more. However, there doesn’t appear to have been much of a knock on effect on other wages.
4. There may be a good case for a regional minimum wage because wages tend to be lower in the north than the south. In London, very few workers benefit from the minimum wage and in this region the Min wage could increase.