Macro 7 - Income Inequality and Poverty

Chapter 18

Lorenze Curve

The relationship between the cumulative percentage of households and the cumulative percentage of income

Gini Coefficient

Measure of the degree of inequality of income in a country. The higher the number between 0 and 1, the greater the inequality

Why has inequality worsened

Trade, technological change, taxation and political economy

Problems with measuring inequality

The economic lifecycle, transitory vs permanent income, economic mobility

Economic Lifecycle

the regular pattern of income variation over a person's life

What pattern does the economic life cycle follow

low income early in career, income rises and peaks at around 50 then falls sharply at retirement age of 65

Transitory Income

acts of nature, temporary layoffs due to illness or economic conditions

Permanent Income

a family's ability to buy goods and services is dependent on this, includes transitory changes in income

Economic Mobility

movement of people among income classes

If mobility is large...

Income inequality is not a huge problem

Advantages for the rich

better schools, more contacts, attitudes to effort, talent via genes

Poverty Rate

the percentage of the population whose family income is below an absolute level called the poverty line

Absolute Poverty

a level of poverty where an individual does not have access to basic requirements of life eg. food, clothing, shelter

Relative Poverty

a situation where an individual is not able to access what would be considered acceptable standards of living in society

Persistent Poverty

defined as being in poverty in the current years and in at least 2 out of 3 years preceding

Trade in worsened inequality

Trading with low wage countries, shifting production to highly skilled services. Increase wages for skilled, less jobs for less skilled

Technological change

machines replace workers, not lots of time to adapt

Taxation and Political Economy

demise of unions, relative bargaining power, less redistribution

Role of Government

Redistribution of income and policies to reduce poverty

Policies to reduce poverty

Minimum wage laws, social security, negative income tax, in-kind transfers

For minimum wage

prevents low skilled workers from being exploited, raises standard of living of those in poverty

Against minimum wage

Forces firms to pay higher wages which increase labour costs, unable to offer as many jobs, those in poverty find it harder to find jobs

Social security

government benefits that supplement the incomes of the needy eg. income support, tax credits, jobseeker's allowance

Negative income tax

collects tax revenue from high income households and gives transfers to low income households

In-kind transfers

given to poor in the form of goods and services. Those for- think they give what they need. Those against- inefficient and disrespectful

Poverty trap

as a family income rises, benefits are withdrawn which may result in them being worse off

reduce poverty traps

gradually phase out benefits or limit amount of time people can receive incentives

Utilitarian

distribution of income to maximise the sum of the utility of everyone in society

Liberal

the most redistribution, redistribute in a way that no one is aware of what they would’ve ended up with so are oblivious

Libertarian

least redistribution, only wealth that is acquired illegally can be redistributed