4.1.8.7 Distribution of income and wealth

What does the distribution of income and wealth look at?

• the differences for individuals and households

• This might be geographically, occupationally, by gender etc.

• An individual’s ability to consume goods and services depends upon his/her income and wealth

• An unequal distribution of income and wealth may result in an unsatisfactory allocation of resources

What is the correlation between income and wealth?

• As income flows from the stock of assets a nation’s income and wealth are directly correlated

What is income?

flow of money going to factors of production over a period of time:

1. Wages and salaries paid to people from their jobs

2. Money paid to people receiving welfare benefits such as the state pension and tax credits

3. Profits flowing to businesses and dividends distributed to shareholders

4. Rental income flowing to people who own and lease out property

5. Interest paid to those who hold money in deposit accounts or who own bonds etc.

What is wealth?

large amount of money or valuable possessions and can be held in different ways:

1. Savings held in bank deposit accounts

2. Ownership of shares issued by listed companies and equity stakes in private businesses

3. The ownership of property

4. Wealth held in bonds

5. Wealth held in occupational pension schemes and life assurance schemes

What factors influence the distribution of income?

• the government

• Wealth

• Human Capital

• Wage differentials between workers

• Wage differentials due to discrimination

• Age

• Low wages and unwaged

How does the gov influence the distribution of income?

• Government policy redistributes income from richer to poorer members of society.

• A progressive tax will increase the proportion of tax as workers earn more, a regressive tax the opposite.

• The extent of this redistribution depends on the government of the day.

• The UK has a welfare system e.g. the National Health Service and Universal Credit which is replacing benefits and tax credits:which redistribute income to the less well off in society through welfare benefits

How does wealth influence the distribution of income?

• provides people with a stream of income in the future:

  • Shares provide capital growth if the share price rises and income growth through dividends

  • Property provides capital growth through house price appreciation and income growth through rent

  • The ownership of capital provides profit

  • Savings provide interest

How does human capital influence the distribution of income?

• The skills, qualifications and experience of a worker based on their value to a firm

• Skilled workers tend to be more wage inelastic and can bid up their wage price

• Workers might increase their human capital by:

  ❑ Attaining higher educational qualifications e.g. degree level or beyond

  ❑ Training

  ❑ Gaining experience in the workplace

How does wage differentials between workers influence the distribution of income?

◎ The demand for and supply of labour create differences in the wage rates of workers

◎ High demand and low supply will mean that wages are inelastic and the wage rate is bid up

◎ Low demand and high supply will mean that wages are elastic and the wage rate is bid down

◎ For example, skilled workers will be able to earn higher rates of pay than unskilled workers and the distribution of income will be skewed in their favour

How do wage differentials due to discrimination influence the distribution of income?

❑ Age

❑ Disability

❑ Gender

❑ Race

❑ Religion

❑ Sexual orientation

How does age influence the distribution of income?

• As the economy grows each generation is richer than the previous one

• Many retired people rely on the state pension

• This is linked to inflation but has fallen behind the level of real earnings

• Therefore, older people are more likely to suffer relative poverty

How do low wages and unwaged influence the distribution of income?

• Average earnings growth has outstripped that of unemployment benefit payments

• Low skilled workers have found earnings are not enough to pay for basics such as heating

• The national minimum wage was introduced in 1998 to help alleviate this and firms in London have signed up to a ‘living wage’

• Supply of labour is elastic in low paid industries leading to low wage rates

How can an increase in income have a direct impact on wealth?

• providing the finance for investment

◎ Investing in the productive capacity of the economy will increase the stock of physical assets, therefore increasing wealth

◎ This will lead to economic growth and higher income in the future

◎ In turn, this will allow us to further increase our stock of wealth

◎ There is an opportunity cost between consumption today and consumption in the future

◎ By investing in our stock of wealth by increasing productive capacity we can increase our future income

What factors influence the distribution of wealth?

◎ Inheritance

❑ Many people are born into wealth and are left wealth by relatives,

particularly grandparents and parents

◎ Income

❑ As incomes rise people are more willing and able to acquire wealth e.g. property

◎ Marriage

❑ People often marry into wealth, commonly wedding those with similar levels of human capital or social standing

What are consequences of inequality?

◎ Less equal distribution of income and wealth will lead to increased poverty as more people live below the poverty line leading to a less fair and less inclusive society

◎ If people don’t feel a part of society and have enough means for a decent standard of living greater social problems are likely to occur leading to:

❑ Increased crime

❑ A less safer environment for all

❑ Social tension

❑ Reduced happiness

What are the other consequences of inequality?