theme 4 : inequality

inequality definition

refers to the unequal distribution of income and wealth (in a free market)

income definition

• a regular payment received for work, through investment or through welfare

• in a market economy individuals receive different incomes

if employees have skills that are short in supply but highly demanded, their earnings will be …

higher than those with skills that have a high supply so are not greatly in demand

diagram for pay for low skilled workers

• demand and supply diagram

• supply is to the right

• creates a low equilibrium point

• so therefore low pay

diagram for pay for highly skilled workers

• demand and supply diagram

• supply is to the left

• creates a high equilibrium point

• so pay is high

income inequality in a free market is …

inevitable since people with higher skill and ability will attract higher wages, and some people (perhaps with disabilities or poor skill levels) will earn nothing

causes of income inequality

• skills

• education

• inheritance

• racism

• sexism

wealth definition

value of all the assets of worth owned by a person, community, company or country

how can inequality be measured

• lorenz curve

• gini co efficient

Lorenz curve diagram

• y axis : % wealth

• x axis : % population

• diagonal line is absolute equality

• Lorenz curve is curved line

what does the Lorenz curve illustrate

the distribution of income / wealth in an economy

what does the line of absolute equality show

what wealth distribution would look like if there was no inequality

lorenz curve explanation

• demonstrates how much a country deviates from the equality of income and wealth

• the greater the area between the line of absolute equality and the lorenz curve, the greater the inequality

• could be asked to show / interpret a shift i.e. a change in inequality

• could be asked to compare the inequality of 2 economies

gini co efficient explained

• derived from the lorenz curve

• numerical measure between 0 and 1 of the degree of inequality in a society

• 0 : absolute equality

• 1 : absolute inequality

if income was split equally between all people what would the gini co efficient be

0

if GDP is growing and the gini co efficient is increasing what does this represent about a country

• inequality gap is widening

• while GDP is growing, only a few people are getting richer

11 potential reasons for inequality in the uk

• natural skills / talents

• education / private schools

• disposable income / investments

• discrimination

• illness / disability / mental health problems

• poverty trap

• unemployment trap

• taxation levels

• tax avoidance schemes

• interest rates

• benefits

natural skills / talent explanation

• people with natural skills / talents will overall be better off as they don’t have to try as hard to succeed

• in a free market those who are smarter will get paid more

education explanation

• those who are wealthier can afford private education and therefore get better opportunities / jobs

• this then leads to inequality in access to education

disposable income / investments explanation

• if you’re wealthy you’re able to invest (e.g. stock market, property etc) and therefore can build up your wealth

• whereas those with less money / smaller disposable incomes can’t do this

discrimination explanation

• certain groups of people are at a disadvantage due to discrimination e.g. due to gender, race

• makes it harder to earn more money (as worse job opportunities) for these groups which leads to inequality

illness / disability explanation

• if you can’t work due to an illness or disability then you can’t earn as much money as you could if you were able to work which leads to inequality

• prevents opportunities

poverty trap explanation

• people that grow up n poverty find it harder to escape poverty

• could be due to a lack of opportunities

unemployment trap explanation

• might be better off financially not getting a job

• if you’re claiming unemployment benefits they may be enough to live off of so you may then not get a job which therefore limits how much you earn leading to inequality

taxation levels explanation

• tax is discriminatory (e.g. VAT) as those who earn more aren’t taxed enough so it leads to more inequality

• effects those on lower incomes more than higher incomes which leads to inequality

tax avoidance schemes explanation

• those that are wealthier are more able to utilise tax avoidance schemes meaning they can keep more of their income leading to more inequality

• rich have the best accountants so are able to avoid paying tax / use loopholes

interest rates explanation

• if interest rates are high, poorer people with a mortgage have to pay more

• won’t affect wealthier people as much as they can save more and take advantage of interest rates

benefits explanation

• high benefit system could become an incentive not to work for poorer people

• so would remain in poverty

4 advantages of inequality

• incentive effect

• entrepreneurs require rewards

• trickle down effect

• fairness

incentive effect explanation

• payment for work which increases output and increases GDP

• without the desire to improve ones situation, people wouldn’t work

entrepreneurs require rewards explanation

• entrepreneurs create businesses which create jobs / employment

• these entrepreneurs require a reward though otherwise there would be no incentive for them

trickle down effect explanation

• businesses which create jobs create wealth for all

fairness explanation

• if you can come up with the best ideas (e.g. if you’re highly skilled / educated / intelligent innovators) and work the hardest then you should earn the most / be able to keep the money you’ve earnt

4 problems of inequality

• diminishing marginal utility of income

• social problems

• unemployment

• inherited wealth

diminishing margins utility of income explanation

• you only need so much money, after a point there’s the question of how do you spend it?

• the more wealth you have, the less you need

• there is no point in having billions - this could be redistributed and eliminate poverty

social problems explanation

• ‘haves’ vs ‘have nots’ leads to unrest as the rich get richer ad the poor get left behind

• more homelessness and crime as people seek to enrich illegally

• health problems

unemployment explanation

• education needs to be equal to enhance equate of opportunity (poverty trap)

inherited wealth explanation

• many of the richest people did not work for their wealth and instead inherited it

• this creates more inequality as if you’re born into wealth you stay in it, whereas if you’re born into poverty you don’t get the same handout