4.1.7.1 - The distribution of income and wealth

Wealth =

Stock of assets that have value accumulated over time

• e.g. property, shares, pensions, physical items

Income =

Flow of money/earnings into one's finances

• e.g. wages, salaries, interest from capital

Distribution of Income =

How income is shared out between individuals, households and groups

Distribution of Wealth =

How wealth is shared out between individuals, houesholds and groups

Relationship between wealth and income

Positive correlation between wealth income

Virtuous circle - higher wealth results in higher incomes and vice versa

‎

Because:

• Wealth can be used to generate income (e.g. through investing, renting out property)

• As incomes rise, marginal propensity to consume falls, so save proportionately more and more → further gains of wealth

UK Statistics for Household Income Distribution

• Richest 10% make 28% of income

• Median Household Income greatest in South-East England, lowest in Yorkshire and the Humber

• Distribution of Income has remained mostly stable since 2000, with none of highest income groups seeing a significant change.

UK Statistics for Household Wealth Distribution

• Richest 10% hold 50% of wealth - wealth much more unequally distributed than income

• London has comparatively low median household wealth when it has one of the highest median incomes

• Wealth increases with age, peaking at 65-74, then starts to fall

Factors influencing the Distribution of Income

Distribution of FoP within economy:

• Land owners tend to receive higher incomes than workers offering Labour.

• → unequal distribution

‎

Wealth:

• Wealthier individuals can generate more ‘unearned’ income (money earned passively through investments, interest), which adds to their ‘earned’ income (money from active work).

• This increases their income past those who don’t have any wealth to add additional income.

• → unequal distribution

‎

Wage & Salary Differentials:

• Forces of supply & demand in labour markets for different jobs →

• Jobs that produce higher MRP and jobs with more inelastic supply (high-skilled jobs) result in higher wages than low-skilled jobs

• → different salaries → unequal distribution

‎

Globalisation & Migration of workers:

• Inward migration → ↑Supply of low-skilled workers → Downward pressure on wages for already low-income workers → Lowers wages of low-skilled/low-income workers

Factors influencing the Distribution of Wealth

Unequal Incomes:

• Income inequality → Wealth inequality

• Higher income individuals have lower MPC → save more of their income → Wealth accumulates faster than low income

• low income individuals have high MPC → spend most of their income so low savings → wealth does not grow

‎

Capital Gains:

• When the value of an asset you own rises (house, shares)

• Wealthier people have more assets, so have more ability to benefit from capital gains, while those without assets do not see any gains.

• → Already wealthy get wealthier → widening wealth inequality

‎

Inheritance & gifts:

• Personal wealth passed down through generations in the form of inheritance

• → wealth remains in family → wealth inequality maintained

‎

Wealth taxation vs taxation of income:

• More tax is generated by gov through taxes on income sources compared to wealth

Why is Wealth more Unequally Distributed than Income?

• Cumulative Nature of Wealth - Higher income people have less MPC, so have more excess income to purchase further assets → further increase in wealth.

• Asset Prices rise faster than Income

• Wealth is less easy to distribute

Equality =

Concerned with sameness. Whether everyone gets exactly the same income/wealth

Equity =

Concerned with fairness.

• requires value judgement

Equality vs Equity

Equality can be measured, equity requires a value judegement.

Equality about sameness, equity about fairness.

Lorenz Curve

Cumulative & of total income plotted against cumulative % of population (ranked in increasing size of share)

• The extent to which the curve dips below a straight diagonal line indicates the degree of inequality of distribution

Gini Coefficient

Measures the extent to which the distribution of income/wealth deviates from a perfectly equal distribution.

• Value of 0-1 where 0 is perfect equality, 1 is maximum inequality

Benefits of Greater Equality

Faster Economic Growth:

• Lower income earners have higher MPC → ↑C → ↑AD → SREG

‎

Greater Equality of Opportunity:

• Increases social mobility (better access to education, qualifications, skills) → More higher-skilled workers (better quality labour) → boosts productivity → ↑LRAS

‎

Decreases Poverty:

• Decreases relative poverty → improves living standards

Costs of Greater Equality

Reduce Incentives:

• More progressive taxation + higher benefits → less incentive to work → poverty trap → less available labour → lower EG

• + tax rev might fall (laffer curve)

‎

Trickle-down Effect:

• Rising inequality, but lowest earners are still better off

  • Entrepreneur sets up business → becomes millionaire, widening inequality → But he also created jobs and provided incomes for other workers → Lowest earners still better off with entrepreneur

‎

Brain Drain / Capital Flight:

• High progressive tax → rich & talented people leave overseas to countries with lower tax