Inequality 1

What is economic inequality?

Refers to the differences in the distribution of income and wealth of individuals across an area. Split into:

Income inequality:

• Difference in peoples earnings over time

Wealth inequality:

• Differences in peoples owned assets minus any debt they have

Three ways economic inequality affects?

Social cohesion:

• How well groups in societies get along

Political stability:

• Whether inequality contributes to political tension

Economic growth:

• The rate at which the economy grows

Types of measurement of economic inequality

• Lorenz Curve: graph showing income or wealth distributed across population

• Gini coefficient: Numerical ratio showing an unequal distribution

• Income/wealth shares: Proportion of wealth/incomes of different classes eg top 50%,10%,1% earners

• Poverty headcount rate: Number of those under a poverty threshold

How does national income become household income?

Through wages, self employment and capital returns, with taxes, transfers and financial intermediaries affecting how it is distributed.

Why is wealth inequality larger than income inequality?

Because Wealth can accumulate over time, which then can generate even more wealth as many flows of income come in.

Two way of measuring global inequality

Between country inequality:

• This is comparing the average incomes in one country compared to another.

Within country inequality:

• measuring income inequality of individuals within the country.

The key conclusion is that since 1980, between country inequality has fallen, whilst within country inequality has risen.

Poverty Vs Inequality

Poverty refers to the amount of people below a particular poverty threshold, whereas income inequality is the measure of disproportion in income.

Poverty can reduce while inequality remains high.

Three mains reasons for income inequality

Human capital differences:

• Differences in education, skills and experience people have

Job market factors:

• Level of supply and demand for particular jobs

Institutional factors:

• Differences in level of trade unions, wage bargaining power and discrimination

What is automation and digitalisation?

The process of digital machinery carrying out tasks previously done by humans.

This leads to lower skilled jobs being replaced.

What is Skill-bias technology change (SBTC)?

The idea that as technology evolves, more skilled people are demanded for jobs to operate them, hence lowering demand for less skilled.

This increases the relative demand of skilled workers to less skilled, hence widening the gap.

Idea of the digital divide?

The idea that there is disparity in the opportunities of work due to difference in availability of technology as well advancement of the tech, as well as the skills possessed to operate the tech.

Labour share of income vs capital share of income

Labour share of income:

• The amount of national income that goes to the compensation of employees and self employment.

Capital share of income:

• The amount of national income that goes to capital gains through returns of investment or dividends.

Changes in technology affects this, for example:

If more machinery is implemented into a firm, more human labour is replaced as less are needed to operate, hence labour share of income increases.

In contrast, there is increased return on investment from investing into the machinery.

Three main driver of inequality from globalisation

Wage competition:

• Companies may have to compete with other companies in different countries

• For example cost of production may be lower in another country putting pressuring on another

Offshoring:

• Where a company moves an area of the business to another country

• Putting wage pressure on that country, whilst improving the owners and investors wage in the company

Capital benefits:

• Taking capital elsewhere can benefits certain investors depending on where they invest.

How does labour-institution factors affect inequality?

trade unions:

• Fall in trade unions means that wage bargaining power may decrease causing less high wages

Minimum wage:

• A min wage lagging behind inflation leads to less purchasing lower

• And overall increases inequality

How does taxation and redistributive policies affect inequality?

• A regressive taxation system results in the poorer households being taxed more, eg an increased tax on consumption, poorer are more likely to use most of their income on consumption

redistributive policies such as:

• Progressive taxation where the richer get taxed

• Social welfare where those eligible receive transfers

• Public services investment for education and healthcare