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Topic 3.3
Fair Distribution of Income
This topic covers the distinction between wealth and income, and the causes of inequality in both income and wealth. You will also learn about why income inequality is bad to economies.
Wealth vs Income
Wealth
Wealth refers to the total stock of assets owned by an individual or household at a specific point in time, including property, savings, and investments.
Income
Income is a flow of money received over a period of time, such as wages from employment, interest from savings/capital, or dividends from shares (rewards to the factors of production)
Distribution of income/wealth
The distribution relates to how these stocks of wealth and flows of income are spread across the population, often highlighting disparities.
Causes of Wealth Inequality
Inheritance
Wealth is often passed down through generations. Significant inheritances allow some individuals to build extensive asset portfolios without relying solely on earned income, widening the gap over time.
Entrepreneurial Success
Successful business ventures can generate vast amounts of personal wealth very quickly. While innovation drives the economy, it also results in substantial wealth concentration among successful entrepreneurs and early investors.
Asset Price Inflation
Rapid increases in the value of assets like housing and stocks benefit those who already own them. This capital appreciation creates wealth for owners while making it harder for others to enter.
Differential in Earnings
Persistent gaps in income lead to long-term wealth inequality. High earners are better positioned to acquire property and financial assets, which generate further returns and increase the overall wealth stock disparities.
Savings
Individuals with higher incomes can afford to save a larger proportion of their earnings. These savings are then invested into interest-bearing assets, leading to exponential wealth growth compared to lower earners.
Causes of Income Inequality
Gender - women less likely to get hired/promoted due to 39 weeks of paid maternity leave
Wages - Different wages create income inequality because higher pay gives some workers much more money than others.
Choice - Some people spend most of their money, while others an save and invest more, widening inequality.
Age - a younger person is more likely to be hired as they will stay working for longer
Technological Change - Automation and the rise of information technology have increased demand for highly skilled workers while displacing routine, lower-wage jobs, widening the wage gap
Education - Differences in educational attainment often lead to significant wage gaps between highly skilled professionals and lower-skilled workers in the economy.
Globalisation - trade and technology reward skilled workers and can push low-skill jobs into lower pay or unemployment. (more in topic 4.4)
Location - Regional disparities in economic development can lead to significant income variations between urban centers and rural or disadvantaged geographic areas.
Evaluating the consequences of uneven distribution of income to the economy
Points
Evaluations
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Poverty - due to the poverty trap. Low wages lead to low saving, leading to low investment which leads to low economic growth which can further decrease wages. This causes low levels of education and healthcare, so the human capital of workers decreases, so productivity decreases. This causes economic decline and forces increased spending on public services by the government, and also leads to lower incomes which traps those in poverty into a vicious cycle which is hard to get out of.
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It can also lead to poor health and housing in areas of financial deprivation, as healthcare services and education services are poor quality. This leads to an inequality of opportunity, which creates a multiplier effect, making it harder for people who have lower relative incomes to earn more money, which further perpetuates this poverty and inequality and inequity.
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It can also create more of a social divide between both the rich and the poor. This can create social tension and lead to crime, and cause reduced happiness in the economy. It can put more stress on healthcare services, and more need for spending on police forces to suppress crime, causing less investment in businesses. Overall, the productivity of the economy will fall.
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The divide in wealth distribution might incentivise and encourage those in poverty to work hard to gain more skills, increase their productivity and overall increase their human capital. This can create economic growth and might be beneficial in the long-run as the productive capacity of the economy will increase
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Depends on how large the inequality is - if it relatively small then it might be good as it is a fair reflection of workers' efforts without causing much social tension, and even incentivising some to work harder. If it is bigger then people might be disheartened and turn to crime or just stop trying as hard.
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Potential for a 'trickle down' - successful entrepreneurs who make a lot of profit might end up creating jobs in their firms, which can allow those in poverty access to more jobs, so they can make more income and stop relying on benefits which can help increase their quality and standard of living