Income Inequality

Question 1

State + explain the micro causes of income inequality.

Answer 1

• Education: those who are more educated earn higher incomes generally.
• Age: older workers, with more experience + skills will be earning more than younger workers without such skill set.
• Capital Intensive Production: if there’s highly capital intensive production, capital owners see high incomes - no transfer to workers.
• Technology: tech advancement can highly complement skills of high income earners - makes incomes even greater. Tech advancements can also replace jobs of lower income workers.
• Flexible Labour Contracts: gig economy, zero hour, part-time - often earning significantly lower incomes.
• Inheritance

Question 2

State + explain the macro causes of income inequality.

Answer 2

• One Sector Dominance: often one sector that is highly dominant for economic growth in economy - those working in that sector see higher incomes, but we don’t see transfer of incomes to others in economy.
• Recession: those on lower incomes / young workers lose jobs the fastest, due to being the easiest to re-employ + they’re not a major loss - not as valuable as highly skilled workers.
• Globalisation: greater trade, inward FDI, immigration - rising inequality on trade side. Country may lose comparative advantage to country abroad - deindustrialization - increases unemployment - link to inequality. With greater international competition - firms may look to cut costs dramatically - lowering W / reducing size of workforce.
• Government Policies: if there’s a lack of government policies due to corrupt gov - don’t see equity - cause of income inequality.

Question 3

State + explain the micro consequences of income inequality.

Answer 3

• Social Costs: when there’s significant income inequality - rises in homelessness, protests, riots, greater reliance on healthcare, crime rates, etc. Burdens tax payer - NE.
• Incentive To Be Educated: if you’re educated - earn more than those who aren’t educated - good for individual, but also good for employer - see higher productivity + lower CoPs.
• Incentive For Entrepreneurship: can see incomes rise, brand new innovation - consumers + other firms benefit.
• Incentive To Work: with some inequality, always going to be some well paying work out there.

Question 4

State + explain the macro consequences of income inequality.

Answer 4

• Government Finances: high income inequality - greater G on benefits, on social costs, along with lower tax revenues. Budget deficits rise - national debts rise.
• Living Standards: low for those on lower incomes.
• Asset Bubbles + Indebtedness: with high income inequality, those on high incomes will look to I their money, seeking high yields (e.g. property, stock market) - if not sustainable - see bubbles forming - if there’s a crash in markets - can lead to financial sector instability. For those on lower incomes, to supplement living standards - temptation to borrow money - could lead to instability.
• Growth: high income inequality could be a growth constraint. Those with high incomes tend to have a high MPS, those with higher MPC are those on lower incomes - restricting purchasing power, consumption increases + AD. For those on low incomes with restricted access to

Question 5

State the micro policies to reduce income inequality.

Answer 5

• Minimum wage
• Maximum wage

Question 6

State + explain the macro policies to reduce income inequality.

Answer 6

• Progressive Income Tax
• G On Welfare (Transfer Payments)
• G on Education / Health
• Universal Basic Income (UBI)