Inequality

What is income?

The flow of money earned over a period of time

How is income earned?

→ Wages/salary

→ Rental income

→ Dividends

What is absolute poverty?

When a individual earns less than $1.20

→ Can’t afford essential needs for living

What is relative poverty?

When income is lower than 60% of median household income in a country

What are the causes of income inequality and poverty:

→ Differences in skills and qualifications

→ Unequal holding of wealth

→ Differences in household competition

→ Unemployment

Differences in skills and qualification:

Low skilled labour → low paid salary → output decreases

High skilled:

→ More bargaining power

→ Capital compliments skilled labour

→ UK specialises in tertiary sector

→ No jobs without qualifications

Unequal holding of wealth:

Homeowners can rent out → rental income

→ May have a stock portfolio → Dividend flow

→ Multiple income streams and salaries

→ Depends on tax → Progressive/capital gains

Differences in household competition:

Single parent → dependents → LIH

→ Cost of childcare high → just on benefits

→ No training → leads to poverty cycle

Unemployment:

Little income from benefits → doesn’t rise with inflation

→ If benefits high → people get complacent

→ Poverty trap

→ Stigma of claiming benefits

What is wealth?

A stock of assets with monetary value

What are the causes of wealth inequality?

→ Income inequality

→ Inheritance

→ Difference in entrepreneurial skills

→ Marriage patterns

Income inequality:

If on benefits → can’t save → it only covers needs

→ HIH: have a higher MPS → more wealth

→ Multiple income streams → invest in shares

→ Get dividends

Inheritance:

HIH → assets inherited are large → they give it to children

LIH → may get little to nothing

→ Causing intergenerational income inequality

Difference in entrepreneurial skills:

LIH → don’t take as much risk to start a business

→ Use profits to invest in properties/equities

→ Requires talent

→ Poverty drives entrepreneurship

Marriage patterns:

People tend to marry of the same class

→ Power couples → causes greater income inequality

→ India → caste system → only marry of the same caste

What is the Lorenz Curve?

A line of inequality which implicates progressive taxation

\
The last household income has 100%

Perfect inequality

What is the gini co-efficient?

Perfect equality : Gini co-efficient is 0

What are the consequences of inequality and poverty?

→ Absolute poverty

→ Homelessness

Absolute poverty:

Can’t meet basic needs → living standards low

→ Less development → kids in poverty go to work

→ Can’t go to school/college → no skills gained

→ Structurally unemployed → hysteresis

Homelessness:

May not be able to pay rent

→ Can’t setup accounts without proof of address

→ Absolute poverty → OCG formed

→ Government spending increases

→ Resort to payday loans → likely to default

→ Worsens credit store → assets taken

→ Wealth decreases

What does the consequences of inequality depend upon?

→ Inequality being a problem

→ Trickle down effect

Inequality isn’t a problem:

Creates incentive to work hard

→ Less spending on benefits if jobs gained

→ Generated income destroys incentive

→ Low labour productivity

→ Lose output → PPF shifts inwards

→ Depends on the welfare state

→ Could provide free education/healthcare

Trickle down effect:

Real high income earners generate the income to setup businesses to employ people

→ They become employed, no benefits

What are policies to reduce inequality and poverty?

→ Tax and Benefits system

→ Improve education and training

→ Increase national living wage

→ Improve social council housing

Tax and Benefits system:

Progressive taxation system

→ When income inequality worsens

→ Tax revenue increases

→ Government will hypothecate tax revenue to low earners

→ Means tested benefits

→ Income inequality decreases

Whats a negative of tax and benefits system:

If you cut benefits → WRR lowers → more incentive to work

→ Occupational mobility

\
ARTHUR LAFFER CURVE:

→ Tax rev decreases → human capital flight

→ Take business with them → leaving people unemployed

→ G>T → regressive effects

Improve education and training:

Better skills → occupational mobility increases

→ Productivity increases → bottom decile earn more wages

→ {use same analysis as SSP}

→ Reduces income inequality

Negatives of education and training:

Could be an uneven distribution of good education

→ Regional inequality

→ Graduate unemployment

→ Underemployed → big time lag → expensive

Increase national living wage:

WRR decreases → Incentive to work increases

→ Develop skills and training

→ Occupational mobility increases

Negatives of increasing national living wage:

Labour costs increase

→ If salaries increases → people above also demand higher wages to maintain gap in status

→ Maintains incentive to get promoted

Improve social housing:

LIH mostly rent → unable to get a mortgage

→ Better incentive to find work → RDY increases

→ Good QOL → More productive

Negatives of improving social housing:

Big opportunity cost

→ PES