4.2.2 Inequality Flashcards
What is income?
Income is a ‘flow’ concept and consists of the returns that households receive as a result of providing their factors of
production e.g. wages, rent, interest payments etc.
What is wealth?
Wealth is a ‘stock’ concept and is a measure of household assets.
What does distribution of income refer to?
- The distribution of income refers to how income is shared out amongst the population; clearly wealth inequality refers to how wealth is shared out amongst the population. Inequality of income and wealth are often quite closely correlated, because earning higher income allows households to buy more assets.
- However, there are some exceptions e.g. some households may have low income but may have inherited wealth, and pensioners often have very low income but might be regarded as wealthy if they own their own homes or have large amounts of savings.
What are measures of income inequality?
- Quintile ratio
o This is the ratio of the average income of the richest 20% of the population to the average income
of the poorest 20% of the population - Palma ratio
o This is the ratio of the richest 10% of the population’s share of gross national income divided by the
poorest 40%’s share - Gini coefficient
o A Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality.
What is the Lorenz curve?
The Lorenz Curve gives a visual interpretation of income or wealth inequality. It is used to plot cumulative share of income (or wealth) against cumulative share of population. The diagonal line in the graphic below shows a situation of perfect equality of income i.e. 50% of population has 50% of income. The further away from the diagonal line that the Lorenz curve lies, the greater the degree of inequality.
What is the Gini coefficient values?
- The Gini coefficient is between 0 and 1
- A value of 0 is zero inequality and 1 is total inequality
How do you calculate the Gini coefficient from areas A and B?
The Gini coefficient here = area A / areas A + B
What are the main causes of inequality?
- Big differences in wages and earnings in different jobs/occupations
- Wage differentials are themselves caused by demand and supply-side factors in the labour market:
a. Minimum educational qualifications required (a barrier to entry to certain jobs)
b. Varying scale of trade union representation and collective bargaining power with employers
c. Changing skill requirements of different jobs e.g. prompted by technological advances - The effects of unemployment especially among the long-term unemployed and younger workers
- Damaging effects of poor health and nutrition on employment opportunities and productivity
- Changes in the taxation of income and wealth including the extent to which a tax system is progressive on
higher incomes and the wealth of the richest in a society.
What are the main causes of inequality between countries?
- Low life expectancy and fewer years of healthy life expectancy
- Low school enrolment rates as families cannot afford education - this widens the gender opportunity gap
- Low access to basic health care and poor nutrition which impairs brain development among the young
- Vulnerability to loan sharks for families mired in debt – having to pay very high interest rates
- Limited access to affordable technologies – creating a digital divide
- Much lower productivity which then leads to lower wages
- Low real spending power limits the size of domestic markets for goods and services
- Low prices for primary commodities – smallholder farmers have no bargaining power with transnational
corporations
Explain the impact of economic change and development on inequality
Economic changes always have an impact on the pattern of employment and the earnings available in different jobs and industries. For example, globalisation has in a number of advanced countries led to a “hollowing-out” effect meaning that there are more jobs in relatively unskilled work offering low rates of pay, fewer jobs in traditional fulltime jobs in heavy industry and more jobs in high-knowledge occupations that require extensive qualifications which
offer premium rates of pay.
What does the Kuznets curve suggest?
The Kuznets Curve suggests that inequality often rises during a phase of rapid industrialisation and urbanization but there may come a point when increased welfare provision, progressive taxes and more balanced income growth across industries might lead to a fall in overall inequality at higher per capita incomes
What does the Kuznets curve look like?
What are the main pillars of a free market capitalist economic system?
- Private property – people can own tangible assets such as land and financial assets such as shares
- Self-interest – people widely assumed to act in their own rational self-interest
- Competition in markets – assisted by the entry / exit of firms from industries
- The price mechanism – where prices in markets act as rationing, signalling and allocation devices
- Freedom of choice – from what to buy, which job to have, where to live
- Limited role for government – e.g. to protect private property rights, maintain currency stability
To what extent is a high income and consumption inequality an inevitable consequence of operating a capitalist
system, referring to the profit motive.
The profit motive: Commercial businesses are assumed to be driven by the profit motive when making
investment, output and employment decisions. Profits flow as dividends to shareholders and inequalities of
wealth can be widened as businesses list their shares on stock markets and investors can earn capital gains as
well as dividend income.
a. However – even within a capitalist system, there are many people motivated to run their businesses
as social enterprises, where profits made are reinvested for social / environmental purposes
b. Co-operative businesses are owned by their members with profits shared out – the co-operative
model has become more popular in recent years especially after the global financial crisis
c. The government can tax high profits and incomes through a progressive tax system so that the final
distribution of income in less unequal than original income
d. Competition policy and intervention by industry regulators can help to control monopoly profits and
keep real prices down for consumers
To what extent is a high income and consumption inequality an inevitable consequence of operating a capitalist
system, referring to a capitalist labour market.
In competitive labour markets, wages and earnings are influenced by the forces of
labour demand and supply. In theory there are few limits to the pay that can be achieved by the top earners
including those with very scarce skills that the market values and executives who have the power to set their
own remuneration (including bonuses and share options). At the lower end of the pay scale, the majority of
people earning low wages are not represented by a trade union and have little or no bargaining power with
an employer.
a. However – there are many possible interventions in labour markets that can alter the final distribution
of income and help to control inequality:
i. Minimum wage legislation setting pay floors that cannot be undercut
ii. Legal caps on executive pay
iii. Legal protections for employees especially in flexible jobs associated with the Gig Economy
b. Government investment in human capital promoting skills and employability of vulnerable groups in
society can increase earnings potential
