Income, Wealth And Poverty Flashcards
(20 cards)
What is income
A flow concept measured over a period of time
• The flow of income is derived from the stock of assets that form wealth
What is wealth
• Assets with a marketable value that are capable of generating income
• Houses, pension rights, saving, shares and even human capital!
Causes of wealth inequality
Inheritance
Assets prices increase, on average, faster than incomes
• Usually as demand for assets is income elastic
Income inequality
• Higher earners are better able to save and/or invest
Wealth is less easy to redistribute than income
Chance
• The lottery!
Causes of income inequality
Unemployment & retirement
• Inequality currently widening
Differences in productivity (MRP) - linked to wage differentials
• Wage differentials due to skill & qualifications, males/female, full/part time ect and changing patterns of labour demand
Wealth inequality (wealth creates income)
Regional reasons (declining industries in North
Government policy
• The extent of intervention through taxes/benefits
Degree of competition in product markets
• Supernormal profit is also redistributed income from consumer to producer
What is absolute poverty
When a household does not have sufficient income to sustain even a basic acceptable standard of living/ meet basic needs
This will vary in different countries
World bank says people living on $1.90 a day
What is relative poverty
A level of household income that is considerable lower than the median level of income within a country
• The official U.K. relative poverty live is household disposable income (adjusted for household size) of lass than 60% of median income
Causes of absolute poverty
Population growing faster than GDP in low income countries
Severe saving gap - families unable to save and living on less than $1.90 per day
Absence of basic government/ public services
Effects of endemic corruption in government and business
High levels of debt and high interest rates
Damaging effects of civil wars and natural disasters
Low employment rates, vulnerable jobs and poverty wages
Absence of basic property rights
Causes of relative poverty
Unemployment
• Changing pattern of demand for labour
• Benefits may be well below the median level of income for society
• Mental and physical disabilities affect ability to work and earn money
Lack of human capital
• Unskilled workers can only sell their services in the market for low wages
Lack of financial capital
• Ageing population and fuel poverty
Changing nature of society
• Divorce rates/single parenthood and child poverty
Inheritance
Consequences of extreme poverty for development
Low life expectancy and fewer years of healthy life expectancy
Low school enrolment rates as families cannot afford education - widens the gender opportunity gap
Low access to basic health care
Vulnerability to loan sharks for families mired debt
Limited access to technology
Threats to democracy and stable institutions
Low real spending power limits the size of domestic markets for consumer goods and services
Causes of income inequality in UK:
Widening gap between high and low paid jobs
• Increasing scale and depth of working poverty
• Decline in full time employment in manufacturing
• Decline in trade union membership (union density)
• Bonus culture prevalent in financial and business services
• Sharp rise in executive pay relative to median incomes
Regressive impact of indirect taxes
Welfare benefits system has become less generous over time
Unaffordable housing to buy and rent + other cost of living issues
Wealth inequality contributes to income inequality
Which policies might be effective in reducing income inequality in the UK
Free market economists might argue that policies such as lower taxes to drive faster growth can help to reduce income inequality because of the trickle down effect where growth creates extra jobs and lifts per capita income.
Critics of this view argue that the evidence for trickle down effects is weak and that proactive pro poor government interventions are needed to make a significant difference to inequality
Which policies are designed to lower inequality
Higher marginal tax rates on income and wealth
Increases in the statutory (legal) minimum wage
Rise in the relative level of cash welfare benefits
Measures to increase employment rates
Subsidies on energy bills, tuition, childcare ect
Rent controls to tackle unaffordable housing
Laws to tackle discrimination in labour market
Universal Basic income
Arguments in favour of raising NMW:
Reduces unemployment trap
Living standards will rise
Improves work incentives can also increase labour productivity
Increase in consumer spending - rise in disposable income
What is introducing National minimum wage an attempt of
Introducing national minimum wage is an attempt to fix market failure and raise everyone’s wages
However
Less people are employed = government failure due to unintentional consequences
Arguments against raising national minimum wage:
Increase unemployment
Risk of cost push inflation as businesses pass on higher costs to consumers
Higher government spending
Reduces price competitiveness for some UK export businesses
Arguments in favour of introducing a system of rent controls in the UK
Makes renting affordable for lower income / younger people and families - improved mobility
Releases money for people to spend on other goods and services (better nutrition) and saving
Arguments against a system of rent controls in the UK
Reduced supply of and quality of rental housing
• Fall in new construction of rental properties
Unintended consequences - Difficulty in and costs of implementation, longer waiting times
Arguments in favour of raising the top marginal rate of income tax from 45% to 50%
Raises tax revenue to help pay for public services such as education and health
Reduces post tax income inequality which can increase aggregate demand
Social justice/ equality - those with the ability to pay should contribute more
Arguments against raising the top marginal rate of income tax from 45% to 50%
Potential brain drain
Tax revenue might fall - use Laffer curve analysis - rising avoidance and evasion
Competitiveness - might make UK economy less attractive to high earners
Growth- reducing incentives for top earners to work, invest, and innovate
Diagrams for questions on poverty and inequality:
Lorenz curve to show inequality
Kuznets curve - income per capita and inequality
Analysis diagrams for minimum wage
Analysis diagram for rent controls
Labour market diagram for monopsony employer
