CH15: Income, Wealth and Poverty

5 Factors Influencing the Distribution of Wealth

Inequality of Income Existing Wealth Inheritence Traditions-inheritance tax Government Policy Propensity to Save

causes of absolute poverty?

1. LR structural unemployment 2. Homelessness 3. Addiction

Policies used by government to alleviate poverty and influence distribution of income and wealth?

1. Taxation -progressive 2. cash welfare benefits -means-tested (lax credit, pension credit) -universal (child benefit, job seeker's allowance) ie. unemployment benefits, child support, disability benefits 3. Gov spending 4. NATIONAL MINIMUM WAGE

Explain Government policy as a factor which influences distribution of income...

-progressive taxation -benefits (Means-tested benefits (low incomes and few assets) vs universal benefits (available to all) government currently encourages workers to seek employment rather than benefits, if everyones in employment GDP should increase thus income on the whole, however if this doesnt work inequality likely gets greater

Why is wealth more unequally distributed than income?

1. CUMULATIVE nature of wealth -MUTUAL reinforcement -Inheritance 2. PENSION RIGHTS -SECOND biggest type of wealth in the UK -generous pension entitlements e.g. public sector workers 3. Asset prices rise FASTER than incomes e.g. Housing 4. Wealth is less easy to DISTRIBUTE than income

Evaluation about inequality

1. Degree of inequality can be measured but whether the degree of inequality is fair involves a value judgement

Effects of poverty?

1. HEALTH -low LE -stress (high debts)&mental health -limited access to healthcare/under consumption of merit goods 2. EDUCATION-(limited) mean poor JOB prospects 3. PRODUCTIVITY (lower)-for individual and economy 5. POVERTY TRAP -disincentive to work caused by means tested benefits and PROGRESSIVE taxation (burdens as higher income earnt) -REPLACEMENT RATIO (ratio of income when out of work to income when in work) may be close or greater than 1->possibly removing incentives to work completely -government failure=conflict objectives between EQUITY (alleviating poverty) and EFFICIENCY (incentives to work). 4. SAVINGS GAP-AFRICA -harrod-domar model -theory developed in the 30s=savings, investment and technological advancement are determinant in LR ECONOMIC GROWTH

Causes of poverty?

1. Low education/training levels -low MRP->low income job -not employable in UK: TERTIARY and more and more quaternary -> secondary workers in competition with CHEAP labour from EU 2. Unemployment -structural in manufacturing (deindustrialisation) -cyclical (higher poverty during a recession) -poverty trap -unemployment trap (discouraged->welfare dependency) 3. Single parenthood -increasing trend -one potential wage earner -unable to work without affordable childcare/spend a large proportion of wages on childcare -social immobility: catchment areas stop children accessing academic schools, surrounded by same classed people 4. COUNTRY - in Africa INFRASTRUCTURE is not adequate to support its population in achieving living standards considered relative poverty in EU -additionally subsistence AGRICULTURE keeps children on farms over schooling -country of residence is invairably a key factor for an individual living in absolute poverty

Evaluation headings for gov policies to tackle poverty?

1. effect on incentives to work 2. does the policy target the TARGET group? 3. Admin cost 4. Stigma? 5. TAKE UP rates?-how many people use the help offered? 6. PREDISTRIBUTION or redistribution policy?

Explain Globalisation as a factor which influences distribution of income...

1. global trade&immigration decrease wages for low skilled labour whilst INCREASING high skilled labours' wages 2. Trade liberalisation->Foreign COMPETITION 3. Higher labour SUPPLY->no shortage in workers->no wage rises 4. Impact of global trade>immigration E.g. DYSON used to produce in the UK but has moved to South Asia so workers have lost their jobs

What factors influence the distribution of income ?

5 Factors Influencing the * SKILLS and Qualifications * Inequality in Levels of Wealth *GLOBALISATION * Government Policy *WAGE differentials

The likely benefits and costs of more unequal distributions.

BENEFITS 1) Incentive to Improve Skills -incentive to work rather than claiming unemployment WELFARE BENEFITS -incentive to take education/training seriously to increase value of work and productivity to obtain higher wages 2) Redistribution of Income is Unfair -unfair to take money from those who have worked hard and contributed to economy 3) Labour is Not HOMOGENOUS -rely on PRICE MECHANISM to allocated resources -Wages reflect demand and supply which operate via incentives 4) Represents the reward for Risk Taking -High inequality in the UK due to the self-employed: often risk takers -encourages innovation and entreprise COSTS 1) DIMINISHING MARGINAL UTILITY of income 2) SOCIAL DISOBEDIENCE&civil disobedience *External costs: Crime *BREXIT *breakdown in trust 3) Structural unemployment *poverty trap *cash benefits dependency *reduced work incentives 4) MACRO IMPACT -FISCAL DEFICIT -NHS cost due to poor health -lower ECONOMIC GROWTH (less consumption as higher incomes have higher saving ratios)

What is excessive inequality?

BOTH A CAUSE AND A CONSEQUENCE OF MARKET FAILURE

What is the difference between equality and equity?

Equality a measure of the EXTENT to which different individuals have the same level of income this is a positive concept as it can be measured using FACTUAL DATA on income and wealth measured using LORENZ CURVE or GINI COEFFICIENT Equity fairness, examining the DESIRABILITY of the extent to which different individuals have the same or different levels of income or wealth equity is a normative concept as it's a value judgement on what's considered fair

Evaluate gov spending as gov policy to reduce poverty?

FOR -higher productivity e.g. education spending+employment -income transfer: higher income earners pay much more tax proportionately towards public services -tackles poverty causes of poverty e.g. education, health AGAINST -opp cost+perhaps FUTURE REGRESSIVE taxes will be necessary e.g. VAT, Alcohol duty -TIME LAG -PROPORTIONAL: higher earners still benefit from NHS.education

FOR/AGAINST cash welfare benefits as gov policy to reduce poverty?

FOR 1. UNIVERSAL BENEFITS does not contribute to POVERTY TRAP because it is not taken away as income increases (CHILD BENEFIT is lost when income exceeds £60,000->reduces poverty trap) 2. means-tested benefit tackles relative poverty AGAINST -OPPORTUNITY COSTe.g healthcare which actually benefits the poor -expensive-budget deficit -unemployment trap!!!! -SOCIAL STIGMA -universal benefit: worsens distribution since even top decile receive same as lowest decile e.g. winter fuel allowance

Evaluate National Minimum wage as gov policy to reduce poverty?

FOR 1. Anti-discrimination e.g. recipients of the NMW are disproportionately female->GENDER EQUALITY differentials reduced 2. WORK INCENTIVES 3. morale boost->productivity boost AGAINST 1. Higher cost to businesses means shedding of workers->likely to be the lowest earners, who it's trying to benefit->unemployment 2. Firms become uncompetitive internationally due to higher costs 3. INFLATIONARY 4. not well targeted: fails to take into account regional cost of living, many recipients are second wage earners int their household

FOR/AGAINST progressive taxation as gov policy to reduce poverty?

FOR 1. Higher government REVENUE=spent on healthcare /cash welfare benefits 2.progressive-> lower incomes gain more income-lower SAVINGS RATIO->higher consumption->Econ growth 3. Incentive to work: increases TAX REVENUE in the LR from higher employment 4. Cancels POVERTY TRAP: progressive taxes reduce gap between benefits and lowest income rates AGAINST 1. Laffer curve->SR less taxation revenue +encourages crime through tax evasion 2. Higher earners EMIGRATE->loss of spare capacity, most skilled human capital 3. choosing level of taxation: VALUE JUDGEMENT

Explain Inequality in Levels of Wealth as a factor which influences distribution of income...

Families with high levels of wealth can 1. earn profit if the wealth is a business, 2. interest if its capital or rent if its land 3. stocks&shares->dividends thus owners of wealth have potential to generate much higher levels of income in various forms than those who don't **Both income and wealth are mutually reinforcing (high incomes->assets->income->assets) **Piketty predicts rising share of capital income to the top 1%

Gini coefficient?

Gini Coefficient a commonly used measure of income inequality that condenses the entire income distribution for a country into a single number between 0-1 the higher the number the greater the inequality 0 mean perfect equality, 1 means perfect inequity Gini Coefficient: Formula -derived from the Lorenz curve!

Difference between vertical and horizontal equity?

Horizontal equity where all individuals are treated the same Vertical Equity the treatment of individuals in different circumstances it recognises that people are different and should be treated differently but that there should be fairness in the way they are treated ie. rich people should pay more tax

poverty in the uk

In 2009, 18% of individuals in the UK were in households with an income below the poverty line

What is the difference between income and wealth?

Income: A flow of money going to factors of production wages, benefits, dividends, rental income or interest Wealth a Stock Concept held in different ways - savings held in bank deposits, - ownership's of shares, - owning property and assets, - wealth held in corporate bonds, - national savings certificates and other government bonds

How is inequality displayed on the Lorenz curve?

Line bending away from middle diagonal line

What is the Lorenz curve?

Lorenz Curve a diagrammatic way of presenting inequality, X axis measures the % of the population while Y measures % of income each point indicates the % of income held by a particular % of the population complete equality would occur if each quintile/decile etc. has exactly the same % of income/wealth=DIAGONAL LINE IN THE MIDDLE

How to measure income or wealth distribution

Lorenz curve Gini-coefficient

How do the factors that that cause poverty link with those that cause inequality in income distribution?

Poverty is the focus of those on the lowest levels of income which is both caused and causes inequality

Distribution of income and wealth in the UK?

SE: highest median household total wealth at £309,700 NE: lowest median household total wealth at £142,700 2016: The bottom 50% of London households own just over 5% of London's wealth, whereas the top 10% owns over half. In UK around 70% of national income goes to workers, in 1975 it was 78% but fell, Entrepeneurs are getting much more profit

When does unequal distribution of income and wealth occur?

absence of government intervention

Complete inequality line on the Lorenz curve?

curve running along horizontal axis from left to right and then up vertical

What are both Ad valorem and specific taxes?

excise duties charged on the sale of a particular good. Indirect means the tax is not directly paid by an individual consumer; but the producer passes it on to the consumer.

Explain Skills and Qualifications as a factor which influences distribution of income...

high skilled workers are likely to be able to sercure higher incomes for 3 reasons 1. higher Marginal revenue productivity causes higher demand for labour to increase, they can generate much more output 2. LESS workers required jobs, less supply increases wages 3. Skilled labour are INELASTIC in supply

who usually are suffering from absolute poverty in the UK?

poorly paid migrants

opposite of an Ad valorem tax? give example

specific tax (quantity not percentage)