Distribution of Income and Distribution of Income and WealthWealth

IntroIntro Study of the Study of the distribution of wealthdistribution of wealth and the and the

distribution of incomedistribution of income show a similar trend in show a similar trend in the UK: the UK: of rising inequalityof rising inequality between the richest between the richest and poorest households in the UK.and poorest households in the UK.

Wealth and income Wealth and income not the same thing not the same thing (although they are related).(although they are related).

Wealth:Wealth: the the stock of financial and real assetsstock of financial and real assets e.g. property, savings in a bank/building society, e.g. property, savings in a bank/building society, ownership of land and rights to private pensions, ownership of land and rights to private pensions, equities, bonds etc. equities, bonds etc.

Income:Income: the the flow of factor incomesflow of factor incomes such as such as wages and earnings from work, rent from the wages and earnings from work, rent from the ownership of land and interest and dividends ownership of land and interest and dividends from ownership savings and sharesfrom ownership savings and shares

WealthWealth The The stock of financial and real assets.stock of financial and real assets.

Marketable e.g. property, shares (can Marketable e.g. property, shares (can be be sold) [approx 2/3 of household wealth]sold) [approx 2/3 of household wealth]

WealthWealthNon-marketable e.g. Life assurance, Non-marketable e.g. Life assurance,

salaries, pensions (cant be sold).salaries, pensions (cant be sold).

Wealth has tended to be more unequally Wealth has tended to be more unequally distributed than income in the UK.distributed than income in the UK.

1% of the population own approx 1/5 of 1% of the population own approx 1/5 of marketable wealth in the UKmarketable wealth in the UK

Sources of WealthSources of Wealth

1.1. Inheritance – “old money” – property Inheritance – “old money” – property accumulated over generations (is “self accumulated over generations (is “self perpetuating”).perpetuating”).

2.2. Saving – accumulated through savings – Saving – accumulated through savings – (is easier for high income earners + older (is easier for high income earners + older people who have been living longer).people who have been living longer).

3.3. Entrepreneurship - people who are ‘self Entrepreneurship - people who are ‘self made’ – Bill Gates/Richard Branson etc.made’ – Bill Gates/Richard Branson etc.

4.4. Chance – ‘Instant millionaires’/jackpot Chance – ‘Instant millionaires’/jackpot winners.winners.

Causes of Wealth InequalityCauses of Wealth Inequality

1.1. Inheritance – old money!! Properties, land Inheritance – old money!! Properties, land passed down through generations.passed down through generations.

2.2. Marriage – wealthy people marry wealthy people Marriage – wealthy people marry wealthy people – reinforcing concentration of wealth amongst a – reinforcing concentration of wealth amongst a few people.few people.

3.3. Income inequality – high earners have higher Income inequality – high earners have higher savings ratio and can earn interest + invest in life savings ratio and can earn interest + invest in life assurance etc.assurance etc.

4.4. Chance – Depends on random chance – e.g. Chance – Depends on random chance – e.g. competitor closing/winning probability competitor closing/winning probability competitions e.g. national lotterycompetitions e.g. national lottery

IncomeIncome

the the flow of factor incomes such as wages flow of factor incomes such as wages and earnings from work, rent from the and earnings from work, rent from the ownership of land and interest and ownership of land and interest and dividends from the ownership of shares.dividends from the ownership of shares.

http://tutor2u.net/economics/revision-notes/ahttp://tutor2u.net/economics/revision-notes/a2-micro-distribution-of-income-and-wealth.ht2-micro-distribution-of-income-and-wealth.htmlml

Re-capRe-cap Wealth:Wealth: the the stock of financial and real stock of financial and real

assets.assets. Income: Income: the the flow of factor incomesflow of factor incomes Wealth is marketable and non-Wealth is marketable and non-

marketable.marketable. Causes of wealth inequality: inheritance, Causes of wealth inequality: inheritance,

savings, marriage, income inequality, savings, marriage, income inequality, chance.chance.

Causes of Income InequalityCauses of Income Inequality

1.1. Wealth inequality – some assets will lead Wealth inequality – some assets will lead to ‘unearned incomes’ e.g. property = rent, to ‘unearned incomes’ e.g. property = rent, shares = dividends etc.shares = dividends etc.

2.2. Household composition – no. of people in Household composition – no. of people in household working.household working.

3.3. Level of skills and qualifications – life Level of skills and qualifications – life earnings of graduates are substantially earnings of graduates are substantially higher than non graduates.higher than non graduates.

4.4. Differences in earnings – full-time workers Differences in earnings – full-time workers earn more than part-time workers, also earn more than part-time workers, also jobs that have opportunities for over-time.jobs that have opportunities for over-time.

3. e.g. Lawyers Vs McDonalds 3. e.g. Lawyers Vs McDonalds WorkersWorkers

lawyers Number of McDonalds workers1. Supply is inelastic because

of the qualifications required 2. MRP of lawyers is high. If

they are successful they can make firms a lot of revenue.

1. Supply is elastic, because few skills and qualifications are required

2. The MRP of a McDonalds worker is much lower because there is a limited profit to be made.

Some FactsSome Facts

UK National Income = 2.5 Trillion (US$)UK National Income = 2.5 Trillion (US$) UK Population = 60million peopleUK Population = 60million people

Distribution of household disposable Distribution of household disposable income in the UK (% of national income)income in the UK (% of national income)

Quintile Quintile groupgroup

19791979 2002/20032002/2003 2005/062005/06

Bottom 20%Bottom 20% 1010 77 77

22ndnd 20% 20% 1414 1212 1212

33rdrd 20% 20% 1818 1717 1717

44thth 20% 20% 2323 2424 2424

Top 20%Top 20% 3535 4040 4040

Homework Homework

Find out the difference between Find out the difference between inequality inequality and and inequityinequity..

Lorenz CurveLorenz Curve

Lorenz curve: a diagrammatic Lorenz curve: a diagrammatic representation of the distribution of income representation of the distribution of income

See diagramSee diagram

Gini CoefficientGini Coefficient

Pronounced “genie” or “guinea”Pronounced “genie” or “guinea” Gini coefficient: a ratio showing the area Gini coefficient: a ratio showing the area

between the 45 degree line and the Lorenz between the 45 degree line and the Lorenz curve divided by the total area below the 45 curve divided by the total area below the 45 degree line (see diagram)degree line (see diagram)

(a (a ÷ a + b).÷ a + b). Ratio: 0 = perfect equalityRatio: 0 = perfect equality Ratio: 1 = perfect inequalityRatio: 1 = perfect inequality

See handoutSee handout

Uses and Limitations of Uses and Limitations of GINI CoefficientGINI Coefficient

AdvantagesAdvantages1.1. is a more representative is a more representative

measure than GDP or measure than GDP or GDP per head.GDP per head.

2.2. used to indicate how the used to indicate how the distribution of income has distribution of income has changed between different changed between different countries or over time.countries or over time.

3.3. Can compare income Can compare income distributions regionally e.g. distributions regionally e.g. North West vs South East, North West vs South East, or between rural and urban or between rural and urban areas.areas.

4.4. Is an ‘objective’ measure Is an ‘objective’ measure of inequality.of inequality.

Disadvantages Disadvantages 1.1. Economies with similar Economies with similar

Gini coefficients can still Gini coefficients can still have very different income have very different income distributions. This is distributions. This is because the Lorenz curves because the Lorenz curves can have different shapes can have different shapes and yet still yield the same and yet still yield the same Gini coefficient.Gini coefficient.

2.2. It measures current It measures current income rather than lifetime income rather than lifetime income.income.

3.3. Is only a statistic - only as Is only a statistic - only as accurate as the data used accurate as the data used to calculate it. best to use to calculate it. best to use in conjunction with other in conjunction with other data such as poverty datadata such as poverty data

AnalysisAnalysis According to the gini coefficient, inequality in income According to the gini coefficient, inequality in income

distribution has been rising in the UK. Why??distribution has been rising in the UK. Why??1.1. Reduction in top rates of income taxReduction in top rates of income tax benefited higher benefited higher

earners (although recent reversal of top rate of income earners (although recent reversal of top rate of income tax from 40 to 50%).tax from 40 to 50%).

2.2. Increase in regressive taxes Increase in regressive taxes e.g. on cigarettes, alcohol, e.g. on cigarettes, alcohol, petrol way above inflation.petrol way above inflation.

3.3. Real wages have stagnated. Real wages have stagnated. Wages/average earnings Wages/average earnings have not kept up with inflation.have not kept up with inflation.

4.4. Benefits, state pensions, JSA etc have not kept up Benefits, state pensions, JSA etc have not kept up with inflationwith inflation

5.5. ‘‘Inequality of opportunity’ existsInequality of opportunity’ exists – overwhelming – overwhelming proportion of ‘Oxbridge graduates’ still from privileged proportion of ‘Oxbridge graduates’ still from privileged backgrounds – end up getting best paid jobsbackgrounds – end up getting best paid jobs

6.6. Percentage of single parent familiesPercentage of single parent families – CLAIM – CLAIM BENEFITS and only work PART-TIMEBENEFITS and only work PART-TIME

Income Inequality by GeographyIncome Inequality by Geography UK RegionsUK Regions EU - Wide EU - Wide

Region Region Income per Income per headhead

East East MidlandsMidlands

12,52212,522

North EastNorth East 11,35611,356

South WestSouth West 13,25813,258

LondonLondon 15,88515,885

UKUK 13,27913,279

Region Region Income per Income per head (2006)head (2006)

GermanyGermany 114.3114.3

HungaryHungary 65.065.0

PortugalPortugal 74.674.6

UKUK 118.1118.1

EU27EU27 100 (index=100)100 (index=100)

1. Income inequality within UK e.g. North East compared to London

2. Income inequality within each EU country itself e.g. east & west Germany

3. Income inequality across Europe e.g. Hungary below average, UK above.

Regional inequality in UK exists because of:Regional inequality in UK exists because of:

1.1. Differences in industrial structureDifferences in industrial structure i.e. many i.e. many manufacturing industries based in the ‘north’ whilst manufacturing industries based in the ‘north’ whilst service sector industries based in the south. service sector industries based in the south.

2.2. Higher unemployment rates in the northHigher unemployment rates in the north – structural – structural unemployment due to declining industries.unemployment due to declining industries.

3.3. Lack of investment including Lack of investment including FDI (Foreign Direct FDI (Foreign Direct Investment)Investment) in certain regions. in certain regions.

Region Region International firms in UKInternational firms in UK

East MidlandsEast Midlands 4.66%4.66%

North EastNorth East 2.19%2.19%

South WestSouth West 9.18%9.18%

LondonLondon 21.69%21.69%

UKUK 100%100%

*Note: some regions are not included in table so will not total 100

Methods of Intervention to reduce Methods of Intervention to reduce Inequality of IncomeInequality of Income

2.2. Taxation – increase progressive taxes e.g. Taxation – increase progressive taxes e.g. income tax and reduce regressive taxes e.g. income tax and reduce regressive taxes e.g. VAT. VAT.

3.3. Monetary benefits – Monetary benefits – ‘means tested’‘means tested’ benefits – benefits – get cash benefit if your income is below certain get cash benefit if your income is below certain level e.g. WFTC. level e.g. WFTC. Universal benefitUniversal benefit – child – child benefit – everybody gets it irrespective of incomebenefit – everybody gets it irrespective of income

4.4. Direct provision of goods and services. – free Direct provision of goods and services. – free state education, NHS, free school mealsstate education, NHS, free school meals

5.5. Legislation and labour market policy – minimum Legislation and labour market policy – minimum wage, equal pay, anti-discrimination, equal wage, equal pay, anti-discrimination, equal opportunities policy. Also provide training to low opportunities policy. Also provide training to low skilled.skilled.

AdvantagesAdvantages

(Interventionists)(Interventionists)

DisadvantagesDisadvantages

(Free market (Free market Economists)Economists)

Increase Increase progressive progressive taxestaxes

-Raises revenue -Raises revenue

-Can be spent on -Can be spent on low income earnerslow income earners

--Disincentive to workDisincentive to work

-less labour supply – -less labour supply – potential output fallspotential output falls

--total tax revenue may total tax revenue may fallfall

- -

Monetary Monetary BenefitsBenefits

- - Direct financial help to Direct financial help to peoplepeople

- Reduces poverty- Reduces poverty

-Reduces social -Reduces social problemsproblems

-Disincentive for people Disincentive for people on benefits to actively on benefits to actively seek work.seek work.-Large spending Large spending commitments of commitments of governmentgovernment-Opportunity costOpportunity cost

Direct State Direct State ProvisionProvision

- - Equal access to merit Equal access to merit goodsgoods

- Positive externalities - Positive externalities for wider economy.for wider economy.

Boosts potential growthBoosts potential growth

--

-- -- Large spending Large spending commitments of commitments of governmentgovernment-Opportunity costOpportunity cost- Bureaucratic/less Bureaucratic/less efficient than private efficient than private sectorsector

--

Legislation and Legislation and Labour Market Labour Market PolicyPolicy

- - Ensures protection Ensures protection for workers on low for workers on low incomesincomes-Ensures equality of Ensures equality of opportunityopportunity-Reduces Reduces discriminationdiscrimination

--

-Raises costs for firmsRaises costs for firms-Unemployment in P.C. Unemployment in P.C. lab mkt.lab mkt.-Reduces overall Reduces overall international international competitiveness of competitiveness of economy – less economy – less attractive to MNC’sattractive to MNC’s

--

--

Equity vs. EfficiencyEquity vs. Efficiency EquityEquity = fairness. = fairness. Horizontal equity:Horizontal equity: no no

discrimination on the grounds such discrimination on the grounds such as race / gender / different types of as race / gender / different types of work. work.

Vertical equity:Vertical equity: people with people with higher incomes should pay more higher incomes should pay more tax. tax.

Interventionists argue: Interventionists argue: Competitive labour markets lead Competitive labour markets lead to market failure i.e. uneven to market failure i.e. uneven dist. of income. It is fair that the dist. of income. It is fair that the government intervenes to government intervenes to ‘correct’ this market failure – by ‘correct’ this market failure – by redistributing income for poorest redistributing income for poorest households, alleviating poverty, households, alleviating poverty, crime and other social crime and other social problems.problems.

EfficiencyEfficiency = optimal = optimal allocation of scare allocation of scare resources.resources.

Free market advocates Free market advocates argue:argue:

Intervention causes Intervention causes government failure. government failure. Differences in wages reflect Differences in wages reflect different MRP’s. By raising different MRP’s. By raising taxes on high earners and taxes on high earners and increasing benefits for low increasing benefits for low earners, this adversely earners, this adversely affects ‘incentives’ – affects ‘incentives’ – distorting the labour market .distorting the labour market .

Damages efficiency and Damages efficiency and potential growthpotential growth

Continued….Continued…. Legislation on Legislation on equal payequal pay and and

discriminationdiscrimination is required to is required to provide provide equal opportunitiesequal opportunities to people from all walks of to people from all walks of society and protect the society and protect the most most vulnerablevulnerable e.g. people with e.g. people with disabilitiesdisabilities..

Minimum wages ensure that Minimum wages ensure that people (especially low skilled people (especially low skilled and youth workers) are paid and youth workers) are paid a a 'fair wage''fair wage' that is not that is not eroded by inflation and also eroded by inflation and also raises employment raises employment (see (see monopsony diagram)monopsony diagram)

Cash benefits create a Cash benefits create a disincentive disincentive for those for those dependent on state assistance dependent on state assistance to improve their skills and seek to improve their skills and seek work leading to a work leading to a higher higher inactivity rate.inactivity rate.

Spending on health and Spending on health and education (free at the point of education (free at the point of use) - means that government use) - means that government spending as a proportion of spending as a proportion of GDP is higher than necessary, GDP is higher than necessary, leading to leading to higher tax burdenshigher tax burdens than would otherwise have been than would otherwise have been necessary.necessary.

Since people on high Since people on high incomes benefit most from incomes benefit most from the market economy, it is the market economy, it is equitable equitable for them to pay for them to pay a higher proportion of their a higher proportion of their income on tax so it can be income on tax so it can be redistributedredistributed to the least to the least well off in society.well off in society.

Cash benefits are Cash benefits are necessary to necessary to protectprotect those on the lowest those on the lowest incomes e.g. pensioners, incomes e.g. pensioners, single parents from single parents from poverty.poverty.

Use Use supply side policiessupply side policies to: to:

Reduce marginal tax rates Reduce marginal tax rates - it will boost incentives to - it will boost incentives to work, boosting tax revenue work, boosting tax revenue and economic growth (see and economic growth (see laffer curve).laffer curve).

policies to increase policies to increase mobilitymobility i.e. skills training i.e. skills training so people can find it easier so people can find it easier to move between jobs.to move between jobs.

Policies to increase labour Policies to increase labour market market flexibilityflexibility and and competitivenesscompetitiveness - e.g. - e.g. reducing trade union reducing trade union power, employment power, employment protection (easier to make protection (easier to make workers redundant), workers redundant), reducing employment reducing employment costs.costs.

Gross Vs. Disposable IncomeGross Vs. Disposable Income

Gross Income %Gross Income % Disposable Disposable incomeincome

Bottom 20%Bottom 20% 77 88

22ndnd 20% 20% 1111 1212

33rdrd 20% 20% 1616 1717

44thth 20% 20% 2323 2323

Top 20%Top 20% 4343 4141

After tax and benefit system

Data to show the redistribution of income from high income earners to low income earners

Types of Types of labour market failurelabour market failure are: are:

1.1. Monopsony Monopsony (imperfectly competitive lab. Mkt.)(imperfectly competitive lab. Mkt.)

2.2. Immobility (geographical and occupational)Immobility (geographical and occupational)

3.3. ‘‘Traps’ (Poverty and unemployment trap)Traps’ (Poverty and unemployment trap)

4.4. Discrimination (negative and positive)Discrimination (negative and positive)

5.5. Inequality in income and wealth distributionInequality in income and wealth distribution

PovertyPoverty

PovertyPoverty

Poverty Poverty

Is a Is a consequenceconsequence of the unequal of the unequal distribution of income.distribution of income.

AbsoluteAbsolute PovertyPoverty

RelativeRelative

Measuring PovertyMeasuring Poverty

Causes of PovertyCauses of Poverty

1.1. Unemployment (primary cause)Unemployment (primary cause)2.2. Low wages (due to demand and supply Low wages (due to demand and supply

influences influences i.e. “McDonalds worker diagram”i.e. “McDonalds worker diagram”

3.3. Sickness and disability – dependence on Sickness and disability – dependence on benefitsbenefits

4.4. Issue of incentives – poverty trap. When Issue of incentives – poverty trap. When working, if given pay rise, no better off as working, if given pay rise, no better off as taxable income increases and benefits taxable income increases and benefits withdrawn. withdrawn.

5.5. Imperfect information – low take up rateImperfect information – low take up rate