7.1 The distribution off income and wealth

Define distribution of income

How income is divided between rich and poor, or between different groups in society e.g. on a regional, age or gender basis

Define distribution of wealth

How wealth is divided between rich and poor, or between different groups of society

Define income

Personal and household income is the flow of money a person or household received in a particular time period

Define wealth

Personal wealth is the stock of everything that a person or household owns at a particular point time time which has values

What is the difference between income and wealth?

The main difference between them is that income is a flow whereas wealth is a stock. Personal wealth is the stock or historical accumulation, of everything you own that has value. For those households with at least one working member, wage and salary payments into the household's bank account are an inward flow of income, whereas for an owner occupying household, the house they lived in, minus any outstanding mortgage debt, usually forms a large part of their household wealth.

What are the factors influencing the distribution of income?

- Factors of production

- The distinction between earned and unearned income

- Wage and salary differentials

- Globalisation and the international migration of workers

How do the factors of production influence the distribution of income?

An important factor is the distribution of national income between the different factors of production. The owners od large land holdings receive large incomes in the form of rent.

Labour has the largest share, although has fallen. One reason for this is that wages have not been rising as fast as productivity and hence labour's; share of national income has fallen. Many of the owners of capital, including entrepreneurs receive their income in the form of dividend payments on share they own. Profits and entrepreneurial income shave rises at the expense of wages and salaries, although the salaries received by top end businesses executives has grown much faster than wages.

How does the distinction between earned and unearned income influence the distribution of income?

Earned income includes wages, salaries , other forms of employee compensation and self employment income. Unearned income is income derived from sources other than employment, including interest and investment income. The various determinants of wages can be used to explain differences in earned incomes. By contrast, differences in unearned income depend primarily of inequalities in the distribution of wealth.

How do wage and salary differentials influence the distribution of income?

Within the labour market, the difference between the wages and salaries of those at the two and those at the bottom have widened. Two of the main factors contributing to this difference in hourly wage rates are the differences in labour productivity, which determine the relative positions of the demand curves of different jobs, and the different slops and positions of the supply curves.

How does globalisation and the international migration of workers influence the distribution of income?

Globalisation and the international migration of workers have also widened the differences between the wages and salaries paid to different groups of workers. In the UK, low paid workers are in compensation, both with incoming migrants from poorer parts of the world, and with overseas based workers employed in developing countries. If their pay does not rise, they argue, they will move to better paid jobs in other countries.

What are the factors influencing the distribution of wealth?

- The ability to benefit from capital gains

- Private pension assets

- Inheritance, gifts and luck

- Wealth taxation

How does the ability to benefit from capital gains influence the distribution of wealth?

The capital gain occurs when the value of the asset such as a house increases. Most consumer durable goods, such as cars, depreciate in value over the years after they are purchased. By contrast, the value of land and property generally increases, at least in the UK. Share prices also tend to rise in the long run, though they can also fall in value. On the whole, the already wealthy own the most expensive houses, often owning more Tham one house, and they are the main owners of shares/ The least wealthy often rent rather than own the house they live at, and seldom own shares.

How do private pension assets influence the distribution of wealth?

Property and financial assets such as shares as generally forms of marketable wealth, accounting together for 48.57% of the households in 2016. Until quite recently, company pension schemes were not available for many low paid UK workers, and neither did low paid workers contribute to private pension schemes sold. This has meant that many low paid workers have expected their retirement income to be provided solely by the state, which on its own is little more than a poverty income.

How does inheritance, gifts and luck influence the distribution of wealth?

In popular parlance, wealthy families are often divided 'new wealth' and 'old wealth'. Entrepreneurs who have built up large fortunes, often starting from scratch, through founding their own businesses and successful risk taking, fall into the category of new wealth whereas old wealth includes those who inherited their wealth from rich families.

Wealthy taxation versus taxation of income?

In the UK, a much large fraction of the government's tax revenue comes from taxation of income than from the taxation of wealth. Wealth is lightly taxed and there are many loopholes which the already wealthy can legally avoid paying wealth taxes such as inheritance tax. The wealthy can also afford to employ accountants and financial advisers who minimise the tax they are liable to pay, and in this way the wealthy become even wealthier.

Define equality

When everyone is treated exactly the same. A completely equal distribution of income that everyone has the same income.

Define equity

When everyone is treated fairly.

What is the difference between equality and equity in relation to the distribution of income and wealth?

Complete equality in the distribution of income is achieved when each person receives exactly the same amount of income. The degree of inequality is indicated by the extent to which people's incomes differ. Equity is when people are treated fairly, but differently, having taken into account their different circumstances. Very few people would argue that it would be equitable if everyone received the same income, irrespective of their efforts and their contribution to society.

What is the Lorenz curve?

(page 204) A graph on which the cumulative percentage of total national income is plotted against the cumulative percentage of the corresponding population. The extent to which the curve dips below a straight diagonal line indicates the degree of inequality of distribution.

What is the Gini coefficient?

Measures the extent to which the distribution of income or wealth among individuals or households within an economy deviates from a perfectly equal distribution.

What is the formula for the Gini coefficient?

Area A / Area A + Area B

How is Lorenz curve plotted?

The Lorenz curve shows population on the horizontal axis measured in cumulative percentages from 0% to 100%. The vertical axis shows the cumulative percentage of income received by the population. If incomes were distributed equally, the Lorenz curve would lie along the diagonal line. The nearer the Lorenz curve us to the diagonal, the more equal is the distribution of income.

How to read to Gini coefficient?

The lower the value of the Gini coefficient, the more equality household income is distributed. If the Lorenz curve were to lie along a 45 degree line, every household would have exactly the same income and the Gini coefficient would be zero. at the other extreme, if one personal received all the income and everybody else no income, the Lorenz curve would be the reverse L shape lying along, first the horizontal axis and then the right hand vertical axis. Between the two extremes, Lorenz curves closer to the line of complete equality, while Lorenz curves further away from the diagonal display greater inequality.

Benefits of more equal distributions of income and wealth

- Can lead to faster economic growth, because people on low incomes generally spend all their income and don't save, so more spending will increase aggregate demand which promotes economic growth.

- Will offer more opportunities as inequality in income usually means an inequality of opportunity

- Reduces poverty

Drawbacks of more equal distributions of income and wealth

- Means people feel like there is less incentive to work hard so there is less effort put in, slowing the rate of economic growth