4.2.2 Inequality

WEALTH INEQUALITY

• wealth is a stock of assets

• so wealth inequality is unequal distributions of these assets

• wealth is likely to be more unequally distributed than income bc assets can be accumulated over time

INCOME INEQUALITY

• income is flow of earnings

• income inequality is an unequal distribution of earnings

MEASURES OF INCOME INEQUALITY

• Lorenz curve

• Gini coefficient

LORENZ CURVE

• shows cumulative % of population plotted against the cumulative % of income that those people have

• perfectly equal society would have a straight line

• degree of bend away from straight line indicates degree of inequality

GINI COEFFICIENT

• gives a numerical value for inequality

• A/(A+B)

• measured between 1 and 0

• bigger coefficient = more unequal country

CAUSES OF WEALTH AND INCOME INEQUALITY WITHIN COUNTRIES

• wages

• wealth levels

• welfare payments and taxes

WAGES

• more part-time jobs → leaves people underemployed → limits how much they can earn

• jobs in the low-skilled service industries, especially in public sector, tend to pay less than jobs in the private sector

• women still earn less than men on average- could be due to career breaks or because women are crowded into low-paid or part-time jobs, which may only require low skill levels

• discrimination due to age, disabilities, gender and race → lower incomes

WEALTH LEVELS

• those who already has a high level of wealth are able to build up larger wealth than those on lower levels of wealth

• can undertake more risky investment (bc they have more security) which will give a higher rate of return → increases income inequality

WELFARE PAYMENTS AND TAXES

• state pensions and welfare payments tend to increase less than wages → so those on benefits see a smaller real increase in their income compared to those in jobs → increases inequality

• some taxes regressive → those on lower incomes bear a larger burden of the tax → increase inequality

CAUSES OF WEALTH AND INCOME INEQUALITY BETWEEN COUNTRIES

• some countries have been held back by wars, droughts, famines and earthquakes

• developed countries tend to favour each other when trading, negotiating etc. and this helps them to develop more than countries who are not involved in the agreements

IMPACT OF ECONOMIC CHANGE AND DEVELOPMENT

• Kuznets hypothesis says that as society develops and moves from agriculture to industry, inequality increases as the wages of industrial workers rises faster than farmers (increasing part of curve)

• wealth is then redistributed through taxation and gov spending → inequality falls (decreasing part of curve)

• but, Piketty discredited this by arguing that as a country develops → rate of return on capital grows → so rich get richer → increases inequality

SIGNIFICANCE OF CAPITALISM ON INEQUALITY

• wages vary as they are based on demand and supply in capitalist economy, and demand and supply vary for different jobs → wage differentials → inequality

• individuals own resources and thus wealth differs based on the assets they own

• inequality acts as an incentive to learn new skills and work hard → higher wage reflects higher productivity in a capitalist society → results in wage inequality