Inequality and poverty

equity

• a condition in which people receive from a relationship in proportion to what they give to it

efficiency

• using resources in such a way as to maximise the production of goods and services

equity vs equality

• giving everyone what they need to be successful vs treating everyone the same

income inequality vs. wealth inequality

• income: unequal distribution of flow of income to households (rent, wages, profit, interest)

• wealth: differences in amount of assets households own

absolute poverty

• situation where individuals cannot afford to acquire the basic necessities for a healthy and safe existence

relative poverty

• situation where household income is a certain percentage less than the median household income in the economy

• households living with <50% of median household income considered to be in relative poverty

lorenz curve

• visual representation of the income inequality existing between households in an economy

• data presented in quintiles (population divided by 20%)

• line of equality represents perfect income distribution (not desirable)

gini coefficient

• gini coefficient = A / (A+B)

• 0 = absolute equality, 1 = perfect inequality

• governments use progressive taxation and transfer payments to shift gini coeff. closer to 0

single indicators of poverty

• international poverty line (IPL)

  • absolute minimum level of income a person must receive in order to meet basic needs required for human survival - 1.90$ a day

• minimum income standard (MIS)

  • lowest amount of income needed for what society views as an acceptable SOL in the country

  • value differs from region to region

composite indicators of poverty

• Multi dimensional poverty index (MPI)

  • survey to measure complexities of poor people’s lives each year

  • tracks deprivation across 3 dimensions and 10 indicators (health, education, living standards)

  • survey identifies which 10 deprivations each household experiences

  • household classed as poor if they suffer deprivations across 1/3 or more indicators

difficulties in measuring poverty

• multi dimensional concept, difficult to quantify

• measured through self reported surveys giving rise to multiple discrepancies

• households identifying as poor may exhibit very diff characteristics from eachother

• urban vs. rural poverty is very different

causes of poverty / poverty cycle

causes of inequality

1. differences in human capital

   • higher skill level, higher level of income

2. inequality of opportunity

   • unequal access to education and health = inequality of opportunity in job market

3. different levels of resource ownership

   • assets generate income

4. discrimination

   • gender, race, etc.

5. unequal status and power

   • economies w/ strong trade union membership provide workers w/ more power and higher levels of income and equality

6. gov taxes and benefits policies

   • countries providing range of benefits (unemployment, pension) raise income of lowest 20%, more equal distribution

   • progressive tax systems allow income earners to contribute according to their ability, more equal distribution

7. globalisation and technological change

   • integration of diff countries through increasing freedoms in cross border movement of people, goods, tech

   • globalisation speeds up industrialisation developing nations

   • more isolated countries experience higher levels of inequality

8. market based supply side policies

   • supply side policies provide great opportunities but also increase inequality

costs of inequality

1. impact on economic growth

   • increasing inequality becomes disincentive for workers to work and be productive

   • resources aren’t being used efficiently, national output falls, growth slows

   • gov unemployment payments and welfare benefits may increase

   • gov tax revenues decrease

2. impact on SOL

   • as inequality gap grows, rich get richer poor get poorer

   • wealthier people access the better education and healthcare, even less opportunity for poorer households in future

3. impact on social stability

   • more equal societies are more stable, with lower levels of crime

   • less equal societies suffer from political instability, social unrest and strife

role of taxation

• used to redistribute income as to reduce income inequality

• types of taxes:

  • direct: imposed on income and profits

    • paid directly to gov by individual or firm

  • indirect: imposed on spending

    • the less a consumer spends, the less indirect tax paid

types of tax systems

• progressive:

  • as income rises, a larger percentage of income is paid as tax

• regressive:

  • as income rises, smaller percentage of income is paid as tax

  • all indirect taxes are regressive

• proportional:

  • as income rises, same percentage of income is paid in tax

indirect taxation and reduction of income inequality

• selective use of indirect taxes can be used to improve income inequality

• higher tax on luxury goods, goods with a PED>1,

• no taxes on essential/necessity goods,

progressive taxation and reduction of income inequality

pros :

• reduces disposable income for high income earners, redistributing income from those with higher to those with lower, reducing income inequality

• redistribution often starts with provision of free education and healthcare

• many govs use tax revenues to provide financial support to poorer households e.g disability payments, heating subsidies

cons:

• discourages rich people from working as hard as large proportion of their income goes towards taxes, reducing overall productivity and growth

• higher income individuals may participate in tax evasion affecting overall revenue generated

other policies that help break poverty cycle

• investing in human capital

• more generous transfer payments

• establishment/increase of national minimum wage

• establishing universal basic income

• targeted gov spending on goods

• policies to reduce discrimination

investing in human capital

• investing in this supply side policy increases potential output of country (shifts PPC outwards)

• higher education = higher skills = higher human capital = increased productivity = higher output = higher income

more generous transfer payments

• transfer payments: payments made by gov where no goods/services are exchanged

• usually given to poorest households, include unemployment, disability, pension payments

• more benefits = higher wages = better healthcare/education = better human capital = better productivity = higher wages

• cons: disincentives for unemployed people and poor people to accept work that would shorten their period of unemployment, higher burden on gov aswell as high unemployment rates

establishment/increase of national minimum wage

• minimum wage set above free market rate

• higher wages = better education/healthcare = better human capital = better productivity = higher wages

• cons: allocative inefficiency

establishing universal basic incoem

• UBI = guaranteed minimum income level, when necessary paid by gov to each individual

• minimum income for all = better better education/healthcare = better human capital = better labour offer = decreased unemployment

targeted gov spending on goods/services

• spending can be aimed at greatest needs in society

• better education = higher human capital = increases productivity = higher output = higher wages

• cons: opportunity cost of gov spending

policies to reduce discrimination

• less discrimination leads to less social exclusion, leading to decrease in inequalities of opportunity and income

• less discrimination = better productivity = higher wages

RWE: transfer payments

• in 2003 Brazil enacted a scheme providing cash transfers of 35$ per month to families living below poverty line, aimed to reduce poverty, inequality, break poverty cycle

• roughly 11% of population lived below poverty line then

• gini coeff fell to 0.489 from 0.595, scheme reached over 46 million people

RWE: progressive taxation

• Denmark has one of most progressive tax systems in the world with highest bracket paying up to 55% of income

• Denmarks gini coeff fell from 0.282 to 0.277

• tax revenue is readily reinvested into provision of free education, healthcare, and very generous paternity leave