Inequality

Question 1

define wealth

Answer 1

stock of assets like houses, cars etc at a certain time

Question 2

define income

Answer 2

flow of money received on a regular basis over a period of time

Question 3

reasons for differentials in income and wealth

Answer 3

• differences in quality or access to education= high education= high qualifications= higher earning potential
• inheritance of financial assets or property= may be a generational asset passed down
• age= older= more experience= higher income
• wage differentials of diff job professions

Question 4

define Lorenz curve

Answer 4

measures distribution of income and wealth in a country
- the closer the line of perf equality is to the curve, the more equal distribution of income

Question 5

gini coefficient formula

Answer 5

Area A/ Area A+B
- 0 is perf equality
- 1 is perf inequality= one person owns all income in society

Question 6

use of Lorenz curve and mini coefficient

Answer 6

shows effective of gov policies and whether they have changed inequality figures

Question 7

adv of inequality

Answer 7

• motivates workers to learn new skills= want a higher productivity to reflect high wage= incentivised by financial rewards= more likely to take risks and learn etc
• wealthier firms of ppl have more resources like capital to invest in order to drive long term returns= encourages investment in new projects= LR growth
• incentivise efficient allocation of talent= ppl more likely to pursue high skills to get higher rewards from jobs like finance= increase skills across population= drive competitive salaries to attract most productive employees= increase R and D= more LR growth

Question 8

disadv of inequality

Answer 8

• inheritance of assets like land passed down through generational wealth= generates constant income flow= access to private, high quality education for the rich= access to best jobs and high incomes
  = create unequal opportunity and income= widen inequality
• stark disparities in income= create alienation and resentment between social classes= low social trust to foster tensions= low social stability and well-being= increase crime and protests= de-motivate poor ppl to participate in society
• income inequality decrease AD and consumer spending
• social and health inequalities= poor ppl have less access to healthcare due to NHS wait times, less doctors etc= worse off health care= low SOL and well-being= lower life expectancy and ability to work= depression etc

Question 9

policies to decrease inequality (redistribute wealth and income)

Answer 9

• increase tax free allowance for the poor= can keep higher proportion of income earned= more money to spend on necessities= higher SOL
• higher progressive taxes on rich= decrease income gap= higher proportion of income taken= higher tax rev for gov to spend on benefits etc
• redistribute incomes through benefits schemes like universal credit= providing a guaranteed minimum income floor
• gov spending on public sector like education and healthcare= tackle root causes of inequality by fixing lack of productivity= more skills= increase MRP and incomes= decrease gap in LR
  = allow wider universal access to education and free NHS treatment
• subsidies for workplace training and internships
  = increase productivity and real wages
• higher minimum wage= higher incentive to work and more income take home

Question 10

disadv of policies to decrease inequality

Answer 10

• high tax rates on rich will distort incentives to earn high incomes and decrease incentives to take risk and be entrepreneurial= less tax rev in LR= may move abroad where there’s lower taxes= brain drain
• risk of poverty trap= more incentive to stay on benefits and not find a job= depends on amount of benefits and impact on gov £
• no guarantee ppl will take education efficiently= high OC to gov finances and has big time lag to actually come into effect
• enforcement must be strong to acc have an impact= expensive to fund projects like education etc= high risk of gov failure= firms may move where there are no restrictions= unintended consequences of gov intervention= costs outweigh benefits?
• higher min wage may lead to excess supply of labour as firms cut employees to reduce COP
  = must be real wage= in line with inflation
  = would increase incentive to educate and gain skills= higher wedge between in work payments vs welfare
  = would also decrease discriminatory wages e.g. for women= provides a floor in the legal labour market

Question 11

Evaluation on policies to decrease inequality

Answer 11

• depends on state and strength of gov finances
• depends on PED of goods that employers are selling
  = hotel like Travelodge may have elastic demand= cant increase price
• economic cycle= may be better to use during recession but would harm firms due to less growth
• depends on whether it actually increases productivity
• magnitude in change of min wage
• time scale it happens
• is level of inequality level acceptable or detrimental?
• intervention is based on normative judgments= high risk of gov failure in decisions to make policy action
• equity vs efficiency= all policies are fair but not necessarily efficient for gov finances and incentive distortions etc
• policies are based on normative judgements= subjective decision to make= may help rich or ruin the poor etc= who deserves the help?= based on personal opinion
• min wage adds to cost of employing= excess supply of labour= higher unemployment due to higher unit labour costs
  = harder to small firms to make profit
  = increase cost= risk of cost push inflation= decrease real incomes

Question 12

define absolute poverty

Answer 12

state where incomes are below a threshold to access the most basic, life sustaining goods and services= less than $2 a day in US

Question 13

define relative poverty

Answer 13

incomes below a given average in society= below 60% of median income

Question 14

define horizontal equity

Answer 14

equal treatment of equals, those with same incomes are taxed the same

Question 15

define vertical equity

Answer 15

high income earner are taxed more= progressive and proportional taxes

Question 16

causes of poverty

Answer 16

• cyclical unemployment= less AD in recession means workers lose jobs and incomes
• structural unemployment= hard for manufacturing sector labour to meet skill requirements of service sector jobs
• poor education and skills= low MRP= low access to high income jobs= high risk of hysteresis= long term poverty
• poor healthcare= limit access to work= poverty traps
• tax cuts for the rich= get automatic benefit= increase divide and relative poverty

Question 17

define equity

Answer 17

fairness in the overall distribution of income and wealth

Question 18

define equality

Answer 18

when everyone is given the same resources and opportunities, regardless of their circumstances

Question 19

measurements of poverty

Answer 19

• HBAI measures “equivalent disposable income that falls below 60% of the national median”
• Persistent poverty. This is defined as a household which is below the poverty threshold line for 2 out of the past 3 years
• Absolute Low income. This sets a threshold as a proportion of the UK average income in a particular year (2010/11) and changes only in line with inflation. Thus rising wages could be expected to reduce absolute low income – even if inequality increases

Question 20

causes of income inequality

Answer 20

• education
• age= older workers with more experience and skills
• capital intensive production= less demand for human capital in market
• tech advancement can replace jobs of lower income workers
• people who work on flexible labour contracts tend to earn lower income
• inheritance

Question 21

consequences of income inequality

Answer 21

• social costs= rise in homelessness and poverty= more riots and protests
  = more reliance on healthcare services and higher crime rates
• burden on taxpayer= NE of inequality
• create incentive for ppl to be educated in order to earn higher wages
  = increase SOL and higher productivity= lower COP for employers
• strong incentive for entrepreneurship= ppl will take risk by starting business
  = successful= increase income and increase innovation
• strong incentive to work= good paying work in society will beat low paid jobs

Question 22

impact of living wage on inequality

Answer 22

• sets a higher minimum threshold for earnings than a standard minimum wage
  = helps lift low-income workers closer to the median income, reducing the income gap between the richest and poorest
  = workers now earn enough to afford essentials like housing, food, and transport= reduces absolute poverty
• their earnings grow faster than higher-income groups (in relative terms), income inequality narrows, particularly as measured by indicators like the Gini coefficient
• due to higher earnings, workers may need less financial support from the state (e.g. housing benefits, food assistance)
  = allows for reallocation of public funds toward other inequality-reducing services like education and healthcare
• ensures that employers internalise the true cost of labor, rather than offloading it to taxpayers

Question 23

alternatives other than min wage

Answer 23

• living wage= optional alternative wage= increase SOL
• income tax decrease may be better
• training programmes etc