2.7 Income distribution and welfare

Income

A flow of money going to factors of production e.g. Wages, pension, profits, dividends, rent, interest

Wealth

Wealth can be held in different ways such as savings, shares, property, corporate bonds, government bonds, pension schemes

Why government aims to have a more equitable distribution of income

Social housing is more difficult for low-income families to access

GDP per capita figures skewed (the average of extremely rich people and extremely poor people will not be representative)

Poverty trap (cycle of poverty, extremely difficult to get out)

Social tensions/political upheaval (people will turn against government if inequality becomes severe)

Explanation of Kuznet’s curve

Suggests that economic development initially leads to a deterioration in the environment, but after a certain level of economic growth, a society begins to improve its relationship with the environment and levels of degradation fall

Criticisms of Kuznet’s curve

It suggests that economic growth is good for the environment, but in fact the opposite is often the case

Industrial progress has a massive impact on the environment (factories burning fossil fuels, pollution etc.)

The turning point in Kuznet’s curve may never come, without government intervention

Kuznet’s inequality curve

Suggests inequality often rises during a phase of rapid industrialisation and urbanisation, but there may come a point where increased welfare provision, progressive taxes and more balanced income growth across industries may lead to a fall in overall inequality at higher per capita incomes

Causes of shape of Kuznet’s environmental curve

Spare income with growth: With more economic growth, people have more income after paying for necessities, so are more willing to pay higher prices for better environmental standards

Improved technology: Leads to higher productivity, which leads to more output with less raw materials used.

Deindustrialisation: The first shift from farming to manufacturing initially leads to greater environmental degradation. However, increased productivity and rising real incomes will see another shift from industrial to the services sector, which has a lower environmental impact than manufacturing

Absolute poverty

Condition where household income is insufficient to afford basic necessities of life (food, shelter, clothing)

This criteria does not change with economic growth

Relative poverty

When households receive 50% less income than average median incomes

This criteria will change with economic growth

Causes of poverty

Population growing faster than GDP in low income countries

Severe savings gap, families unable to save money

Absence of basic government/public services

Effects of endemic corruption in government and business

High levels of debt and high interest rates

Damaging effects of civil wars and natural disasters

Low employment rates, vulnerable jobs, poverty wages

Absence of basic property rights

The Lorenz curve

Gives a visual interpretation of income or wealth inequality

The diagonal line shows a situation of perfect equality of income e.g. 50% of the population has 50% of income

The closer the curve is to the diagonal line, the more income equal it is

Gini coefficient formula

Area A divided by Area of A + B

Gini coefficient

Condenses the entire income distribution of a country into a single number between 0 and 1: the higher the number, the greater the degree of income inequality

0 means everyone has the same income, 1 means a single individual receives all the income

A Gini coefficient above 0.4 is linked with political instability and growing social tensions

Alternative measures of income inequality

Quintile ratio: Ratio of the average income of the richest 20% of the population to the average income of the poorest 20% of the population

Palma ratio: Ratio of the richest 10% of the population’s share of gross national income divided by the poorest 40%’s share

Consequences of extreme poverty for development

Low life expectancy and fewer years of healthy life expectancy

Low school enrolment rates as families cannot afford education (widens gender opportunity gap)

Low access to basic healthcare

Vulnerability to loan sharks (for families in major debt)

Limited access to technology

Threats to democracy and stable institutions

Low real spending power limits the size of domestic markets for consumer goods and services

How government spending can affect incomes

Welfare state transfers: Universal benefit, unemployment benefit, public pensions

State provided services: Education, healthcare, social housing, employment training

Role of taxation in promoting equity

Progressive taxes take a higher % of income from richer households

Tax free allowances can help lower income families to keep more earned income before they start to pay tax

Limits gap between original and final wealth

Most indirect taxes have a regressive impact on equity, though levying higher duties on luxury products could be effective