The Distribution of Income and wealth: poverty and inequality

Wealth

Stock of assets - house,shares,land,cars and savings - wealth inequality is the unequal distribution of these assets

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Income

Money received on a regular basis - job,welfare payments,interest and dividends - income inequality is when income is unevenly distributed across a nation

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The Lorenz curve diagram

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The Lorenz curve

Measures distribution of income and wealth in a country, line of perfect equality shows distribution of income when richest x% of the population owns x% of the cumulative income, Lorenz curve shows actual distribution

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Gini coefficient

Numerical value for inequality which is derived from the Lorenz curve

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How do you work out the Gini coefficient?

Gini = A/(A+B), a= area between line of perfect equality and Lorenz curve, b=area under Lorenz curve

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What does a value of 0 indicate on the Gini coefficient?

Perfect equality

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What does a value of 1 indicate on the Gini coefficient?

Perfect inequality

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Equality

Equal distribution of wealth and income - everyone has the same

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Equity

Fairness - what is considered to be an acceptable distribution of income and wealth in society - subjective

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Factors influencing the distribution of income

Factors of production, The distinction between earned and unearned income, Wage and salary differentials, Globalisation and the international migration of workers

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Factors influencing the distribution of wealth

The ability to benefit from capital gains, Private pension assets, Inheritance,gits and luck, Wealth taxation versus taxation of income

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How do factors of production influence the distribution of income?

Owners of large land holdings receive large incomes in the form of rent - top income quintiles, Wages have not being rising as fast as productivity and hence labour's share of national income has fallen, Profits have risen at the expense of wages

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How does the distinction between earned and unearned income influence the distribution of income?

Earned income - wages,salaries and other forms of employee compensation and self employment income, Unearned income-derived from sources other than employment, interest/investment, Differences unearned income - inequalities in distribution of wealth

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How do wage and salary differentials influence the distribution of income?

Salaries of those at the top and bottom have widened - can be explained supply and demand, Difference in hourly wage rates-differences in labour productivity and different elasticities, long training periods, unskilled do not require much training

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How does globalisation and the international migration of workers influence the distribution of income?

Competition among low paid workers with migrants from poorer parts of the world, overseas based workers employed in developing countries, UK employers have outsourced jobs, Brain drain - move to better-paid jobs in other countries

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How has international competition affected UK wage rates?

Led to falling wages in UK labour markets where workers are competing for jobs against similar workers in other countries, Similar competition does exist at the high end of labour markets too

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How do high incomes affect wealth?

Leads to larger savings and spending on more expensive items such as houses

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How does the ability to benefit from capital gains influence the distribution of wealth?

Capital gain occurs when the value of an asset such as a house increases, Most consumer durable goods depreciate in value, Value of land and property and share prices generally increases in the LR

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How do private pension assets influence the distribution of wealth?

Until very recently, in-house pension schemes were not available for many low-paid UK workers, and neither did they contribute to priv pension schemes sold, Low paid workers expect their retirement income to be provided solely by state pension(low)

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How do Inheritance, gifts and luck influence the distribution of wealth?

'New wealth' - Entrepreneurs who have built up large personal fortunes start from scratch, 'Old wealth' - Inherit wealth w rich families, landed aristocracy, Old wealth can lead to new wealth and vice versa

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How does wealth taxation versus income taxation influence the distribution of wealth?

Income taxation is much larger part of gov rev then wealth taxation, Wealth is lightly taxed + loopholes - wealthy can afford accountants and financial advisers who minimise the tax - wealthy become even wealthier

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Benefits of more equitable distributions of income and wealth

More spending - welfare,satisfaction, less prominence of diminishing MU, Less reliance on gov funding, inequality of opportunity reduced, Higher growth-living standards

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Costs of more equitable distributions of income and wealth

Reduces incentives, Less labour mobility, Loss in creating increased savings and a more higher standard of living (among the few)

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Absolute poverty

Living below subsistence - Severe deprivation of basic human needs - World bank uses a measurement based on the number of people living on less than $1.25 per day

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Relative poverty

Comparison to the avg in the country - UK below 60% of the median income, US - basket of goods which maintains the average standard of living of society - can be seen as one way of measuring inequality

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Causes of Poverty

Old age, Unemployment, Low wages, Regressive taxes, Low welfare payments, Health problems, Wars and conflicts, Corruption and political oppression, Natural disasters

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Effects of poverty (Categories)

Health, Society, Poor sanitation, Education, Economy

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Effects of poverty on health

Associated with lower life expectancies, poorer standards of health and underdeveloped infants. Malnutrition - poor cognitive development - not as productive and more vulnerable to infections - increases risk of death

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Effects of poverty on society

Poor housing, crime and mental health issues. Social unrest more common - creates problems within communities

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Effects of poverty on sanitation

Cannot afford basic levels of sanitation, and clean water is a rarity - more vulnerable to fatal diseases - simply cannot afford to improve their situation

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Effects of poverty on education

Children might be sent to work to support the family, which leaves them with poor literacy skills later in life - limits their ability to escape poverty as an adult

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Effects of poverty on the Economy

Basic level of education - higher paying jobs/opportunities for career progression are not accessible - hinders economy's ability to improve its productive potential - 22% of India's population is still in poverty which limits their rate of economic

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How can old age cause poverty?

Rely on state pensions and lack a private pension, the state pension will continue to be very much a poverty income

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How can unemployment cause poverty?

Benefits generally lower than the pay workers received before losing their jobs- an increase in unemployment increases poverty, 2013 Coalition gov cut public spending by putting a limit on total benefit that most people aged 16-64 could claim

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How can low wages cause poverty?

Includes many unskilled workers and skilled workers who have lost their jobs in manufacturing (hysteresis), low waged relatively poor, NMW and NLW attempt to reduce the poverty of low-waged

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How can health problems cause poverty?

Can make it harder to get a job - take a lot of time off work - deters MNCs from investing - without income - push people into absolute poverty

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How can wars and natural disasters cause poverty?

Push people to flee their homes - destroys anything they owns - people homeless - extreme poverty

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How has China's rapid economic growth between 1985-2001 affected poverty?

Lifted 450 million people out of poverty

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Inheritance tax

Gov intervention which means rich families cannot keep their entire wealth as it is redistributed

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How do progressive taxes help reduce poverty and improve the distribution of income and wealth?

Higher rates of income tax for the richest earners-increase in the avg rate of tax as income increases-income increases proportion of income taxed increases-Helps reduce inequality as lower incomes pay less tax-tax is based on payer's ability to pay

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How do progressive taxes benefit the government?

Allow the gov to reduce regressive taxes and raise welfare payments

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Negative effects of progressive taxes

Can reduce incentives and government revenue, Laffer curve

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Government policies to alleviate poverty and to influence the distribution of income and wealth

Inheritance tax,Economic growth,Progressive taxes,NMW,Supply side policies-Education more widely available,Housing,public services, Diversify economy, Increase welfare benefits

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How does the National minimum wage (NMW) help reduce poverty and improve the distribution of income and wealth?

Ensures all workers can access a minimum standard of living - prevent employees exploiting their workers - prevents people falling into extreme poverty

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Negative effects of an increase in welfare benefits

Worsen labour market incentives, competitiveness and economic growth, culture of welfare dependency - long term unemployed and reluctant to look for work

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Consequences of taxes and benefits in the UK

Lead to income shared more equally between households. The ratio between the avg incomes of the top and bottom fifth of households is reduced to four-to-one, 52% of households received more in benefits than they paid in tax 2012/13

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Fiscal drag

Occurs in a progressive income tax system when the government fails to raise tax thresholds to keep pace with inflation - individuals worse off in real terms, Inflation has dragged low paid workers into tax net and higher paid deeper

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How has the gov tried to 'claw back' some of the fiscal drag that has taken place in recent years?

Increase in the personal tax allowance, or tax threshold, have taken a sig number of the low-paid out of the income tax net and clawed back some of the fiscal drag

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Poverty trap

Can be caused by fiscal trap, traps the low-waged in relative poverty-earnings trap, affects ppl in employment on low rates of pay rather than the unemployed who are unwaged, homeless need to get a home to get a job

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Poverty trap and the overlap

Immediate cause of the earnings trap is the overlap between the income tax threshold and the means-tested welfare benefits ceiling(cease to be paid), A low paid worker in overlap pays income tax and NI + losses benefits-relative poverty

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The affect of welfare benefits being means-tested on a person on low income

A person's right to claim the benefit is reduced and eventually tappers away or disappears completely, as income rises

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How can the poverty trap be eliminated?

By getting rid of the zone of overlap, the income tax threshold could be raised to take low-waged households out of the tax net, Means-tested benefits could be replaced by universal benefits , National living wage rate (but could ^ unemployment)

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The unemployment trap

People caught in trap are out of work,Contains unwaged social security claimants who choose unemployment-decide they are better out of work and living on benefits than in low-paid jobs paying tax and losing benefits

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How is the unemployment trap closely linked to the earning's trap?

Both affect the poor and result from the nature of the tax and benefits systems, Underground economy - ppl work for cash payments

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How can low-paid workers in employment can escape the earnings trap?

By giving up declared work in order to claim unemployment benefits, while receiving income from undeclared work in the underground economy

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Positive consequences of redistributive policies

More equal and reduce relative poverty, alleviate child poverty, old age poverty and fuel poverty but these aims have been only partially achieved

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Negative consequences of redistributive policies

Reduce incentives to work hard and to be entrepreneurial, slower economic growth/international competitiveness

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Consequences of faster economic growth on poverty and distribution of income and wealth

Provides the main avenue for reducing absolute poverty, pro-free market economists - wider inequalities may be necessary if fast growth is to be achieved and sustained

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Consequences of fiscal measures on poverty and distribution of income and wealth

Used to try to reduce poverty and narrow inequalities in distribution of income and wealth, however have resulted in the development of the poverty and unemployment traps

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The Distribution of Income and wealth: poverty and inequality

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