Inequality & Poverty Flashcards
(6 cards)
Causes of inequality
) Age. As a person gets older their experience and human capital increases raising productivity and incomes. The younger generations do not have the same experience and human capital and thus receive lower incomes.
2) Education. Those who are more educated with greater school, college and
university qualifications are much more likely to earn higher incomes in a capitalist economy compared to those
with little or no education given that individuals are paid according to their productivity and how much revenue they can bring in for their employer.
3) One sector dominant and capital intensive production. fI the economy is highly specialised with output coming from one dominant sector ni the economy, it si workers and capital owners ni that specific industry who benefit from higher incomes whereas the rest of the economy will only benefit indirectly widening income disparities.
5) Technology has in many cases replaced jobs or made various skills of workers redundant
reducing wages ni those industries. This has pushed many workers into low paid and low skilled work but has also created a niche sector of jobs requiring technical expertise and specific skill sets where wages are higher. Furthermore technology has substantially increased the profit potential of certain industries without the need for large numbers of employees, like banking, increasing incomes drastically in such professions widening income disparities.
Consequences of income inequality
1) Higher levels of debt. The more income inequality there is, the more individuals on the lower end of the income spectrum will need to borrow to finance expenditures such as their house, car, furnishings etc. This is because the free market does account for needs and would thus exclude the poor from
consumption, as they cannot afford the market price. Excessive debt and risk taking by banks can create instability ni the financial system and increase the chances of a financial crisis and deep recession in the economy fi there comes a point where loans cannot be paid back.
2) Costs to the Government. Policies to deal with income inequality are very costly for the government
as is having to deal with the social costs that income inequality can cause. Such spending carries a
severe opportunity cost. fI the money had to be borrowed, the chances are that taxes in the future would have to rise. fI indirect taxes such as VAT or fuel duty did go up to part fund this spending, as
regressive taxes, these especially hurt the poor worsening income inequality contradicting the
intentions of these policies. fI the government funds these policies through cutting spending ni other
areas of the economy such as education, healthcare and public transport, the negative impacts could once more be suffered by the poor who rely on such services.
Causes of poverty
1) Poor education and healthcare. Individuals with poor access to health and education services will find it extremely difficult to gain human capital, skills and productivity to access jobs in the economy.
This will trap them in poverty with very low incomes.
2) Recession. As labour is a derived demand, derived from the demand for goods and services when economic growth is low, there is less need for labour to produce goods and services increasing unemployment. Once more firms will be suffering from a decrease in revenues and less profitability. To compensate they may reduce the size of their workforces make staff redundant, increasing
unemployment. As a consequence the unemployed will suffer from lost income and lower living standards in either absolute or relative poverty.
4) Work before education. In developing countries, children
can still be raised
to work on family farms (subsistence based agriculture), working for improvements of family living standards before they complete education. Such work will prevent children gaining skills and
productivity to earn higher income paying jobs, trapping them ni absolute poverty.
Consequences of poverty
1) Low Standards of Living. Those living ni poverty suffer from low incomes meaning they wil be experiencing very olw standards of living ni both material and non-material terms struggling ot aford the most basic life sustaining goods and services such as food, clean water, shelter, clothing, healthcare and education.
2) Poverty Traps. Poverty could well be cyclical with low incomes depriving individuals of access to healthcare and education, keeping levels of human capital and skills low. This prevents any increases in productivity trapping these individuals in a life of persistent low income.
Furthermore, low incomes will reduce the amount of saving taking place in the economy. Financial intermediaries will then not have the funds to issue loans out to businesses for investment. Low investment in the economy will keep economic growth
low thus ensuring incomes stay low
in the long term with persistent
poverty
Policies to redistribute income
1) Transfer payments can be used to
redistribute income and
provide different types of
assistance to groups in the economy to improve their living standards. Examples of transfer payments include child support assistance, unemployment benefits and payments to the disabled. Transfer payments prevent those unfortunate enough not to have the skills needed to find work from living in extreme poverty and allows those who have children or who are disabled to
maintain a decent standard of living, increasing incomes for the poor and helping to close large income disparities.
2) Government spending on essential goods and services that are socially desirable and that generate positive externalities of consumption, such as health care, education, sanitation, and water supplies can ensure that the poorer members of the economy have access to essential goods and services increasing living standards. This policy would reduce income inequality by allowing the poor a means to increase their skills, productivity and therefore incomes.
severe opportunity cost. fI the money had to be borrowed, taxes in the future would have to rise. fI
regressive, indirect taxes such as VAT or fuel duty go up to part fund this spending, the poor will suffer,
worsening income inequality contradicting the intentions of these policies. fI the government funds
these policies through cutting spending in other areas of the economy such as public transport, once more the negative impacts could well be suffered by the poor who rely on such services.
3) Governments could implement or adjust progressive income taxation, increasing taxes on workers
with salaries in the highest income tax bands using the extra tax revenue to finance transfer payments and extra government spending on health and education. This will reduce disposable incomes for the rich and increase incomes at the lower end for the poor thus reducing the level of income inequality.
Evaluation - By increasing taxation levels specifically for those who earn higher incomes, incentives in
the labour market could be distorted preventing entrepreneurial risk taking activity to the detriment of the economy. The Laffer curve below illustrates this point:
Laffer argued that by raising income taxes on the rich, eventually tax revenue actually fall as tax rates increase. Workers will lose the incentive to work for higher incomes that will be heavily taxed. The income effect becomes negative whereby workers work and earn less to reach a satisfactory target income reducing income tax revenue. Higher taxes promote tax evasion and/or tax avoidance by individuals whilst also incentivising the highly skilled workers and entrepreneurs to emigrate to countries where tax rates are lower. Not only will this reduce expected tax revenue for governments to use in redistributing income but it could also dampen the productive potential of the economy as innovation and entrepreneurial spirit is limited and hours worked fall.
4) Aminimum wage can directly boost the incomes of the poorest in society. By governments imposing
minimum wages at equitable levels, producers are burdened without impacting the government’s fiscal
position. Aminimum wage would be set above the equilibrium wage rate in the labour market acting as a wage floor protecting workers with low skills against wages that would not promote a decent standard
of living ni sectors such as retail, supermarkets, leisure, recreation and manufacturing. With higher wages, those at the lower end of the income spectrum will be able to move out of relative poverty by improving both their material and non-material standards of living closing the income gap in a country.
Evaluation - Minimum wages can
distort efficient labour market outcomes and cause unemployment, harming those ti is supposed to protect. Those with low skills may ultimately find it very difficult to find work at a higher wage rate when their productivity is not enough for firms to justify employment at the minimum wage. Thus this policy could actually increase unemployment,
known as classical unemployment, and make the gap between rich and poor even worse.
Policies to distribute income- evaluation
1) Whether or not policies like redistributive taxation can reduce income inequality depends on the level of income tax set and which tax is targeted.
If income taxes on
higher earners are
set too high,
disincentive effects wil be promoted whereby workers actually end up working less or moving country, which would not generate tax revenue to help reduce inequality. In the short run, there may be a quick rise in tax revenue collected but as workers adjust to higher taxes, this policy si likely to fail in increasing
revenue and thus not reduce inequality. fI set too low, there is no guarantee that enough revenue will
be generated to fund transfer payments and spending on education and healthcare. Once more fi
regressive taxes rise in the long term to fund spending related policies, over time income inequality may actually rise not fall.
2) The state of government finances. fI for example, the government is suffering with high levels of debt
and persistent budget deficits, it is not viable to greatly increase transfer payments or spending on health and education to reduce
income inequality. In fact the reverse is likely to take place, whereby welfare spending and health/education spending will be cut in order to reduce the national debt, cuts that increase income inequality.4) Does income inequality have to come down? Though income
inequality has problems such as the impact on government finances to help the poor and the social costs of poverty it can be argued that a certain amount of income inequality is actually good for an economy. There is no single target for
income inequality; it is a normative consideration fi the government perceives the Gini to be too high,
therefore trying to reduce ti should not conflict heavily with
economic efficiency or else government failure will result. Some income inequality can provide strong incentives for those on lower incomes to gain education, skills and qualifications to boost productivity and earn higher incomes whereas targeting
low income inequality levels through excessive government intervention can take away these incentives reducing the productive capacity of the economy and long run growth rates.
