Term 2 Week 10: Inequality Flashcards
(22 cards)
When are different types of inequality (3)
-Wealth (value of assets owned by a household (net debt))
-Earnings (income from labour)
-Disposable income (income after taxes and transfers)
How does the distribution of wealth, earnings and income compare (2,1)
-Wealth is much more unequally distributed than earnings
-Earnings are much more unequally distributed than disposable incomes
-Sweden is a country with relatively low disposable income inequality, due to its system of taxes and transfers which benefit the less well off
What is the relationship between macroeconomic variables and inequality (2)
-Macroeconomic variables affect inequality, as shocks affect resource distribution and policies affect inequality
-Inequality affects macroeconomic variables, such as growth and national-wellbeing
What is the missing middle (1,3)
-The missing middle is that both high and low wage occupations are adding many jobs, but employment gains amongst the middle are more limited
-Jobs replace work once done by family members, with large job increases in human services
-Machines do routine work (sorting mail), with digitalization reducing demand for jobs with routine tasks. Tasks not replaced tend to be well paid (personal financial advisors) or not (taking care of elderly)
-High wage job-gainers work with information technology, where digital information has greatly increased the productivity of workers
What is the lorenz curve (4)
-The lorenz curve can be used to represent the distribution of income
-Have the cumulative % of the population on the x axis, and cumulative share of income on the y axis
-Draw a perfect equality line, linear from (0,0) to (100,100)
-The line below it represents the lorenz curve, going from lowest to highest income
What is the gini coefficient (3)
-The gini coefficient is a measure of inequality
-We work it out by dividing the area under the lorenz curve by the area under the perfect equality line (a/a+b)
-0 = complete equality, 1 = complete inequality
How can we represent the labour market on the lorenz curve (1,3)
-Draw our axis (cumulative share of population on x, cumulative share of income on y), and our perfect equality line
-the unemployed is a small portion of the x axis, and none of the y
-The employed is the majority of the x axis, and a lot of the income
-Firm owners are a very little bit at the top of the x axis, a decent portion of the y axis (gradient steeper for them)
How can we illustrate a more educated population on the WS-PS curve and lorenz curve (3)
-An increase in education shifts the PS curve upwards, reducing equilibrium unemployment
-This then pivots the lorenz curve, decreasing the unemployed size and increasing the employed (firm owners stay the same)
-This means the gradient of the employed becomes flatter
How can we implement labour market segregation on the lorenz curve, and what are its impacts on the gini coefficient (2,1)
-Instead of having an employed section on your lorenz curve, you now have a secondary and primary labour market
-Whilst they take up similar levels of population to each other, the primary labour market ahs a lot more of the cumulative income than the secondary (secondary comes first, much flatter slope)
-This increases the area between the perfect equality line and the LC, thus increasing the gini coefficient and inequality
What are policies which have an impact on the distribution of earnings (3)
-Increased education of the workforce will change the endowments of employees, adding skills and other capabilities
-Eliminating/reducing labour market segmentation will alter the wages a persons endowments will be paid in the labour market
-Basic institutional structures of the economy (property rights, unions, competition policy) all change the relative bargaining power between groups as well as reservation options, which in turn changes the income distribution
Why can redistributive policies be controversial (3)
-Differences in self-interest (rich people typically oppose redistribution which benefits the poor)
-People hold different beliefs on why people are poor (opportunity or effort)
-Political debate shapes demand for redistribution policy
What is the difference between redistributive and predistributive policies (2)
-Redistributive policies are taxes and transfers that result in a distribution of disposable income which differs from the distribution of market income, and by expenditure that provides public services to households
-Predistributive policies are where by affecting the endowments people have, governments can change inequality in market income
How do we get from market to disposable to final income (1,2,2)
-Market income is the income from wages, salaries, businesses and investments
-The taxation system subtracts direct taxes, and adds cash transfers
-This gets us to disposable income
-The welfare state then subtracts VAT paid, and adds the value of public services received
-This gets us to final income
What is South Africa’s gini coefficient in market, disposable and final income (3,2)
-Market income: 0.771
-Disposable income: 0.694
-Final income: 0.596
-Direct taxes and transfers reduce GC by 0.08
-Indirect taxes and public services reduce GC by 0.09
How can the gini coefficent show how governments can influence the degree of inequality in a country (2)
-Income is similar in advanced and developing countries before, but not after taxes and transfers
-0.48 vs 0.49 before, 0.31 vs 0.45 after
What is a welfare state (4)
-A welfare state is a set of government policies designed to provide improvements in the welfare of citizens by assisting with income smoothing (benefits, pensions)
-Policies which try to minimise final income differences are welfare states
-These policies can be broken down to the tax and expenditure sides
-In countries where redistribution reduces inequality a lot, most of this is done by expenditures rather than taxation
How can transfers reduce inequality (2,3)
-In the EU in 2015, the GC for market income = 0.46, GC for disposable = 0.27
-Taxes only achieved 0.04 of this, 0.15 being driven by transfers
-Transfers (both cash or in kind) can have a large impact on inequality, but this is not their main purpose
-In countries with large welfare states, much expenditure is on social insurance, including assistance to poor households but also pensions, child benefits and other spending not characterised by low income
-These forms of social insurance aren’t specifically targeted at poor people, but have a large impact on inequality as most poor people would be v poor without them
What are policies to tackle/increase inequality (1,2,1,1)
-Spending on education and health, although there are still significant gaps in access in the world
-Universal Basic Income is a cash transfer of an equal amount to all individuals
-However, there are debates on the cost of the programme, and recent changes in perception due to the causes of inequality and changes of economic shocks
-There has been a decline in union power/membership since the 1980s, unionisation correlated with greater redistribution
-There was a decline of personal income tax progressivity in the 1980s/1990s, and a greater access to tax relief for top incomes
How has UK inequality changed over the years (1, 3, 2)
-Currently, the top 20% of the UK population represent 40% of disposable income, the bottom 20% representing 8%
-The UK gini coefficient is currently 0.35
-The UK peaked in 1980 with around 0.24, and has had little change over the last 20 years
-This remains high by international standards
-UK inequality is important due to the high impact it has on growth
-There is a correlation between long term average inequality and long term average GDPpc growth
How did COVID affect different groups in the UK (4)
-The pandemic affected all, but not equally, as existing inequalities determined the effects on the population
-People in low socio-economic status were more exposed to covid, due to overcrowded accommodation, employed in occupations with fewer opportunities to WFH
-Younger workers are more likely to have worked fewer hours or lost their jobs due to COVID
-Women increased childcare and housework more than men
What is the difference between the primary and secondary labour market (2)
-The primary labour market is better paid and regulated
-The gig economy and agriculture are in the secondary labour market
-What are endowments (2)
-Endowments are facts about an individual which may affect their income
-All individuals don’t have the same reservation wage irrespective of their endowments
