Detailed Overview on Income and Wealth Inequality

Income and Wealth Inequality

• Definitions:
  • Wealth: A stock of assets (e.g., houses, shares, land, cars, savings).
  • Wealth Inequality: Unequal distribution of these assets.
  • Income: Regularly received money (e.g., salary, welfare payments, interests, dividends).
  • Income Inequality: Unequal distribution of income across a nation.

Importance of Even Income Distribution

• High levels of poverty can lead to:
  • Lower population health levels.
  • A less cohesive society and greater divides between income earners.
• Achieving a more even income distribution may lead to better macroeconomic stability and social cohesion.

The Lorenz Curve and Gini Coefficient

• Lorenz Curve: Measures actual distribution of income and wealth.
  • Line of perfect equality indicates that the richest x% owns the same cumulative income as x% of the population.
• Gini Coefficient: Numerical value from the Lorenz curve indicating inequality.
  • Value of 0: Perfect equality (everyone has the same income).
  • Value of 1: Perfect inequality (all wealth concentrated in one household).

Types of Poverty

• Absolute Poverty: Living below subsistence; unable to meet basic needs (food, water, sanitation, health, etc.).
  • Defined by the World Bank as living on less than $1.25/day.
• Relative Poverty: Comparison to country’s average; in UK, those below 60% of median income considered in relative poverty.
  • Highlights inequality within the context of specific societies.

Causes of Poverty and Inequality

• Wage Inequality and Unemployment:
  • Education level impacts wage earning potential. Higher education = Higher wages.
  • Lack of a National Minimum Wage can exacerbate relative poverty.
• Job Market Changes: Shift towards part-time and temporary jobs leads to underemployment, affecting income stability.
• Structural Unemployment:
  • Result of deindustrialization and skills deterioration due to long-term unemployment.
• Discrimination: Various forms (gender, age, race) contribute to wage disparities.
• Welfare Payments: Often increase less than wages, leading to higher relative poverty.
• Regressive Taxes: Lower income households bear a larger tax burden; disproportionately increases inequality.

Health and Social Issues

• Poor health can limit job opportunities and increase vulnerability to poverty.
• Health Problems: Cause high absenteeism and deter foreign investment, pushing populations into absolute poverty.

Natural Disasters and Wars

• Natural Disasters: Can destroy livelihoods (e.g., Nepal earthquake).
• Wars: Displace individuals and destroy assets, thrusting populations into extreme poverty.

Global Inequality

• Inequality exists between countries influenced by various factors (ethnicity, gender, disasters).
• Comparative Life Expectancy: Significant disparities (e.g., Japan vs. Sierra Leone).
• Economic Development: Historically, Western nations grew faster due to favorable social conditions leading to industrialization.

Kuznets Hypothesis

• Suggests that as societies transition from agriculture to industry, inequality rises temporarily, then redistributes with development.
• Challenge by Thomas Piketty: Argues capitalist markets perpetuate inequality, creating a dependency on capital returns.

Impact of Poverty and Inequality

• Effects of Inequality:

  • Drives productivity through motivation but allows monopolies to exploit lower-income consumers.
  • Wealth concentration limits opportunities for lower classes.
  • Can foster negative externalities, such as social unrest and misallocation of resources.

• Consequences of Poverty:

  • Health: Associated with lower life expectancy and higher infant mortality due to malnutrition.
  • Societal Issues: Ties to crime, mental health issues, and poor community cohesion.
  • Poor Education and Economic Limitations: Families may prioritize survival over education, leading to cycles of poverty and limiting economic growth potential.