Income And Wealth Inequality Flashcards
(35 cards)
What is the difference between income and wealth
Income is a flow of money usually received in payments for factors of production and is recorded for an individual or household over a given period of time, whereas wealth is a store of money or value which is measured at a particular moment in time
What is the Lorenz curve
It plots the cumulative share of income received by any given percentage of the population when ordered from lowest to highest
Countries with greater levels of inequality deviate more from the line of complete equality
What is the gini coefficient
The Gini coefficient measures the level of income (or wealth) inequality in a country, on a scale from 0 to 1.
What are some alternatives to the gini coefficient
S80:S20 measure- refers to the income or wealth ratio between the top 20% and bottom 20%
Palma ratio-measure of income inequality specifically focusing on the income share of the top 10% relative to bottom 40%-higher the more unequal
Causes of income inequality
Wealth inequality-generates income
Wage differential
Differences in educational attainment
Technology replacing jobs
Recession
Flexible labour contracts
Causes of wealth inequality
Income increases ability to buy assets
Age-older people have earned more income over a longer period of time
Inheritance
Consequences of income inequality
Market failure and has a negative impact on society
Poverty leads to underconsumption of merit goods eg education and health and overconsumption of demerit goods eg alcohol
Social tensions-2011 riots
Resources skewed towards demand of rich due to the price mechanism
Benefits of income inequality
Provides an incentive to become qualified and increases MRP
Ability to attract workers into undesirable industries
Profit is a reward to entrepreneurs for investing and taking risks
What is absolute poverty
Absolute poverty-where household income is insufficient to purchase the min bundle of goods and services necessary for survival
What is relative poverty
Where household income is insufficient to access the average living standards of the economy
In the UK this is falling below 60% of median household income for 3 of last 4 years
What is the minimum income standard
Identifies what incomes different households requires to reach minimum socially acceptable standard of living
In the UK this is falling below 60% of median household income after housing costs
Causes of poverty
Wage inequality
Job insecurity and part time work/zero hour contracts
Unemployment trap-living off benefits will be in relative poverty
Economic inactivity
Old age-those with state pension as sole source of income will be in relative poverty
Regressive taxation/low social security
Poverty trap
What are the main causes of a poverty trap
Low incomes → can’t afford education or healthcare → low productivity → low incomes (cycle continues).
• High unemployment → no savings → no investment → no economic growth.
What is the unemployment trap
A situation where people are discouraged from working because the financial gain from getting a job is very small or even negative, due to the way benefits and taxes are structured.
What is the poverty trap
A situation where individuals, households, or even whole countries are stuck in poverty and cannot easily escape, because all the conditions around them keep reinforcing their low income.
People in jobs who have little incentive to earn extra income due to them paying higher tax or losing benefits
Costs of poverty
Treating health conditions associated with poverty
Policing and criminal justice
Benefit and welfare payments
What would happen if there was no inequality
Allocative inefficiency and missing markets as no incentive to work in certain industries
Reduced incentive to train/educate-reduced productivity
Low investment due to lack of profit incentive for entrepreneurs
Benefits of equality
Increased equal opportunities and reduces poverty and associated costs
Reduces crime and other costs associated with inequality
What is the trickle down effect
If governments lower taxes for the rich or encourage business investment, the wealthy will spend more, invest more, and create jobs.
This should increase living standards for everyone
What are the criticisms of the trickle down effect
Critics argue that wealth doesn’t always spread out — the rich may save the extra income rather than spending it.
• Inequality may widen, because the rich get richer faster than the poor.
• It can cause social tensions if the benefits take too long (or never) to reach lower-income groups.
Market based policies to reduce inequality/poverty
Policies that will promote economic growth and real gdp per capita using free market forces
Eg privatisation,cuts in corp tax,cut in income tax,cut in welfare payments
What are some interventionist policies to reduce inequality/poverty
Increase welfare payments-may exacerbate unemployment trap
Increase NLW-may increase involuntary unemployment
Invest in education and health-increase national debt
Provide free childcare
Increase income tax for top bands-laffer curve
Increase inheritance tax to tackle wealth inequality
Evaluation of policies to reduce inequality/poverty
Will the policy address in work or out of work poverty?
Will the policy exacerbate national debt and intergenerational inequality?
Laffer curve effect?
Inflation?
Will the policy impact incentives to work and increase the NRU?
Do the gov need to intervene?
Is inequality always bad?
Equity vs efficiency?
