4.2.2 Inequality

• What is income inequality?

  The unequal distribution (flow) of income to households.

  • e.g rent, wages interest & profits.
• What is wealth inequality?

  The differences in the amount of assets that households own.
• What is The Lorenz curve?

  A visual representation of the income inequality that exists between households in an economy.

  • Data is commonly represented in quintiles (20%) or deciles (10%).
  • Perfect income distribution is not the goal as that would equate to socialism & completely remove incentives for work as everyone would be paid equally.
  • More equal income distribution is desired as it reduces poverty and social unrest.
• What is this?

  The Lorenz Curve.

  • The line of equality represents perfect income distribution.
  • The bottom 20% of households receive 5% of the income flow (green line) and 9% of the income flow in the red line country.
  • The red line has more equal income distribution than the green line.

  
• What is the Gini Coefficient?

  It measures the distribution of income in a population. The closer the value to 1, the worse the income inequality.

  • The Lorenz curve can be used to calculate it.
• What is this?

  The Gini Coefficient.

  • It is calculated using the area beneath the line of equality.
  • Gini coefficient = A / A + B
  • A value of 0 represents absolute equality (socialism) & 1 represents perfect inequality.

  
• What are the causes of wealth and income inequality?

  • Education, training & skills.
  • Trade unions (countries with strong trade unions tend to have higher levels of income as they avoid exploitation).
  • Benefit system
  • Pension payments
  • Wage rates (e.g minimum wages)
  • Employment legislation
  • Tax structure
  • Asset ownership
• Who is Simon Kuznets?

  • In the 1950s he developed a hypothesis that described how income inequality changes as an economy went through stages of industrialisation and development.
  • This hypothesis was explained using the Kuznets Curve.
• What does the Kuznets curve explain?

  • Industrialisation results in increased inequality as some workers move from the lower productivity, lower paid agricultural sector into the higher productivity manufacturing sector.
  • There is now greater income inequality with the workers left behind.
  • However at some point, inequality starts to decrease.
  • This is most likely due to the government intervention funded by increased state tax revenue brough about as a result of the increased production.
• What is this?

  The Kuznets Curve.

  • The turning point usually occurs as the primary sector diminishes while the secondary and tertiary sectors increase.
  • Developed economies tend to generate more income from secondary and tertiary sectors.

  
• How does capitalism effect inequality?

  • Under capitalism, inequality is inevitable.
  • Workers with higher skills receive higher wages, and workers with little to no skills receive little to no wages.
  • Individuals with higher income will acquire more assets leading to higher levels of income. So they are able to keep acquiring assets.
  • Individuals with lower income will find it hard to acquire assets.
• Why are the principles of capitalism considered important?

  • They are important as the incentive to acquire income raises productivity & output.
  • The long-term cost of capitalism is that the factors of production become concentrated in ownership with relatively few individuals developing extreme wealth, at the expense of many who lose out.
  • It has been argued that capitalism needs checks and balances to limit the income and wealth inequality that will naturally develop. This calls for government intervention.