The distribution of income and wealth Flashcards
(21 cards)
Wealth v Income
Wealth
- Stock of assets that you own
- Property, shares, savings
- The distribution of wealth measures how evenly wealth is hared out between the population
Income
- Flow of earnings
- (That often come from a stock or wealth)
- Salary, share dividends, rent
Marketable wealth
- Wealth that can be bought or sold
- Property, shares, savings
Non-marketable wealth
- Wealth that cannot be bought or sold
- Salaries or pensions
- I.e. Human capital
Human capital
Human capital is the knowledge, skills and attributes that enables a person to perform work that produces economic value
The Gini co-efficient
Gini co-efficient = Area A / (Area A + Area B) [Of the Lorenz curve]
- The Gini co-efficient is a numerical representation of the Lorenz curve
- If the Gini co-efficient is closer to 0 it means the distribution of income is more equal
- If the Gini co-efficient is closer to 1. It means the distribution of income is more unequal
- A Gini coefficient above 0.4 is often seen as an important point
- Inequality above this level is frequently associated with political instability and growing social
Underlying causes of inequality
- Skill bias arising from technological change - super-high pay for some people
- Rising share of capital income - concentrated among the rich (Piketty)
- Tax systems have become less progressive + welfare cuts
- Executive pay and bonuses rising faster than for ordinary employees
- Rise in scale of in-work poverty, reduced employee bargaining power
- Increasing urban-rural and deep regional economic inequalities
- Hollowing out of employment in manufacturing, increasing economic inactivity
Economic effects of rising inequalities
Social unrest and civil disobedience
- Strikes and demonstrations over poor pay and conditions at Fox con in China which produces iPhones and iPads
Self perpetuating poverty cycle
- Limited access to health care and education
- Volatile incomes, high debts
- Low savings
Misallocation of scarce resources
- Capital investment skewed towards preferences of the rich
- Low collateral - limits entrepreneurship
- Capital flight by the rich
Wealth inequality
Inheritance
- Large stocks of wealth passed from one generation to another
Marriage
- Wealthy people tend to marry other wealthy people
Income equality
- High earners are able to save - access’s to higher interest savings account - Marginal propensity to save higher
Chance
- Business ventures, lottery
Income inequality
Wealth inequality
- Wealthier households earn more income
- E.g. Dividends, interest
Household composition
- Number in employment
Skills and qualifications
- More skills
- Higher demand
- Higher income
Differences in earning
- Wage differentials
- Some workers have higher income
Equity vs Equality
- Equity is the fair distribution of resources in society
- It involves bias in the treatment of people dependent on their requirements
- Equality is the equal distribution of resources in society
- It involves giving the same amount of resources to all people regardless of their requirements
Equity
- Equity is he concept of what is fair and just in society and there fore involves vale judgements
This normally achieved through the tax system:
- Vertical equity suggest that those on higher incomes should pay more in tax, either progressively or proportionately. This will benefit society as a whole
- Horizontal equity suggests that those people on the same income should pay the same tax. This is deemed to be morally correct as it does not discriminate against people on the grounds of sex, race
Equality
- Equality is the extent to which people in society have the same income and wealth
- This can be measures e.g. through the Lorenz curve
- Therefore we are able to make positive statements based on evidence
Policies to reduce inequality
Redistribute welfare transfers
- Higher child benefit and the triple lock on state pensions
- Expanded supported for disadvantaged students in paying tuition fees
- Public goods free at the point of consumption
- Minimum income scheme + capital endowments for young people
Progressive incomes, consumption and wealth taxes
- Higher taxes on property
- Increased income tax allowance and higher marginal rate on incomes above £100,000
- Progressive consumption tax
Strengthening wage floors and employments rights in the labour market
- National living wage, rising minimum wage
- Improved employment rights, affordable child care, tackling monopsony employers
Tackling structural barriers to employment
- Early years education and more nutritional schools meals to improve brain development
- Improved access to new technologies is disadvantaged communities
- Better vocational education, coding, STEM subjects
- Targeted measures to address long term unemployment/ hysteresis effect
Evaluating policy’s to reduce inequalities
Policy intervention
- Higher minimum wage
Real world example
- Living wage
Analysis
- Boosts work incentives and take-home pay
Evaluation
- Might cost some jobs and lead to higher prices
Policy intervention
- Higher rates of income tax
Real world example
- 45% top rate of income tax and PA loss over £100,000
Analysis
- Progressive taxes on the rich lower inequality and raise revenue
Evaluation
- Risk of a brain drain an increased avoidance tax
Policy intervention
- Investment in training
Real world example
- Subsidies for workplace training/ internships
Analysis
- Helps to raise productivity, jobs and real wages
Evaluation
- Effective, but quality of child care needs improving
Absolute poverty
- When a household does not have sufficient income to sustain even a basic acceptance standard of living/meet basic needs
-Absolute poverty thresholds will vary between developed and developing countries - The extreme poverty measure now used by the World Bank is the percentage of the population living on less that $2.15 a day (PPP)
Relative poverty
- A level of household income that is considerably lower than the median level of income within a country
- The official UK relative poverty line is household disposable income (adjusted for household size) of less than 60% of median income
- The official poverty line is an income level that is considered minimally sufficient to sustain a family in terms of food, housing, clothing, medical needs.
Causes of poverty
Unemployment within a society
- Lack income or other means to survive
- Joblessness explains higher rates of children, elderly and women in poverty in the UK
Lack of human capital - lack of education
- Restricts people to low paid jobs
- Positive correlation between number of years in education and income levels
Lack of financial capital (such as savings)
- Particularly hit the elderly as they may retire without any savings - reliant on small pension to survive
Health problems affect a persons ability to work
Being dependant on others for income
- Particularly affects child poverty
- Effects those on unemployment benefits
Inheritance and social class
- Those born into poor families have a higher chance of remaining poor - “cycle of poverty”
- This holds true between countries
Physical and intellectual capital between countries
- Poor infrastructure like roads and hospitals, and intellectual capital like R&D facilities or patents l and intellectual capital between countries
Effects of poverty
- Less equal distribution of income and wealth will lead to increased poverty a more people live below the poverty line leading to a less fair and less inclusive society
- If people does feel a part of a society and have enough means for a decent standard of living greater social problems are likely to occur leading to:
- Increased crime
- A less safe environment for all
- Social tension
- Reduced happiness
- Income will be redistributed back to higher earners with increased savings and wealth
- There may be increased investment as the returns for entrepreneurs improve e.g. lover tax rates
- Capitalism can exacerbate levels of inequality as the capitalist owns the means of production
- The ownership of assets will lead to a higher income leading to an even greater inequality in the future
Policies that could be introduced to reduce poverty
A variety of policies are used to influence the distribution of income and wealth, including:
Taxation
- Such as income tax and inheritance tax
Transfer payments
- They are a redistribution of income for which no product has been produced e.g. jobseekers allowance, child benefit
Provision of goods and services by government
- E.g. Education and health care
Legislation
- National minimum wage (NMW) or Living wage
- Anti discrimination laws
Consequences of these policies (more equal society)
More equal society:
- Might allow greater opportunities for lower paid people to realise their human capital, leading to:
- Greater enterprise amongst this income group
- Increased employment and associated benefits such as higher government revenue from taxation
- Higher economic growth as productive potential is more likely to be realised
- Can lead to higher spending as the marginal propensity to consume is higher amongst this income group, leading to the benefits associated with greater demand in the UK economy
- Can reduce social costs as individuals and communities feel as though they are part of an inclusive nation where opportunities exist for all
- However government expenditure is likely to be higher resulting in increased taxation or borrowing
Consequences of these policies (less equal society)
Less equal society
- Might create incentives for lower paid people to work harder and unemployed people to enter the labour market as welfare becomes less attractive
- Can lead to greater enterprise amongst this income group
- Can lead to a trickle don effect as richer individuals spend increased income in the UK economy leading to more demand
- Might lead to a greater savings and investment as richer people look for reward from their increased income
However social costs will arise
- Crime and unrest will increase
- Hopelessness in some communities as a generation feel passed by due to less opportunities
