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Economics of Inequality

PPT lesson on the economics of inequality

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15 views12 pages

Economics of Inequality

PPT lesson on the economics of inequality

Uploaded by

h.danilovich.work
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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The history of economic theories

and economic reality


The economics of inequality
Learning objectives
To discuss the nature and causes of inequalities in the distribution of
income and wealth between individuals, groups of population
(strata/centiles) and countries

To evaluate main views on inequality and distribution of income ,


including those of classical economists (Adam Smith, J.S.Mill and Karl
Marx)

To understand the current economic theory behind main


measurements of inequality
What is economic inequality?
Economic inequality is traditionally understood to be based on two
main components:
- Inequal distribution of income
Income is the flow of money a person receives (hourly, weekly, monthly, annually)
- Inequal distribution of wealth
Wealth is the total stock of everything a person owns
These inequalities are said to lead to inequality in opportunity
Distribution of income
Measures how individual or household income is distributed among the groups within the
population, e.g. rich and poor
Can be used to measure inequalities in income between different groups or countries
Factors influencing the distribution of income
-the distribution of national income between the factors of production:land, labour, capital and
entrepreneurs
-the distinction between earned and unearned income
-the difference between wages and salaries of those at the top and those at the bottom
-globalisation and the international migration of workers
Distribution of wealth
Is significantly more inequal than the distribution of income
Factors influencing the distribution of wealth
-the ability to benefit from capital gains. A capital gain occurs when the value of an asset such as a
car or a house increases. Land generally increases in value. Share prices increase in the long run,
though they can fall.
-private pension assets. Until recently, company pension schemes were not available to low-paid
workers and neither did such workers contribute to private pension schemes
-inheritance. Wealthy people are often divided into “new wealth” (those who made their money)
and “old wealth” (those who inherited) “Old wealth” can lead to “new wealth”.
-taxation of income rather than taxation of wealth. In the UK, most taxation is taxation of income.
Wealth is lightly taxed allowing for accumulation
Measuring inequality
To measure inequality between groups/countries, you need to create comparable measurements
It is easier to measure income inequality than wealth inequality
To measure inequality by income you line up households by income from bottom to top. The you
split them into groups.
Dividing by deciles
Bottom1 2nd 10% 3rd 10% 4th 10% 5th 10% 6th 10% 7th 10% 8th 10% 9th 10% Top 10%
0%
£5k £15k £30k £40k £60k £80k £110k £200k £500k £1m

Dividing by quintiles

Bottom 20% 2nd 20% 3rd 20% 4th 20% Top 20%

£20k £70k £140k £320k £1.5m


Distribution of income, UK, 2018, percent Breakdown of wealth, UK, 2018, £bln

8%
13%
Top fifth Private pension wealth
23% Second fifth Physical wealth
40%
Third fifth 42% Property wealth
Fourth fifth Financial wealth
Bottom fifth
36%

17%
13% 10%
Lorenz curve (1)

This Photo by Unknown Author is licensed under CC BY


Lorenz curve (2)
Shows the relationship between the cumulative percentages of households and the cumulative
percentages of income

If income is distributed evenly, then each proportion of households account for the same
percentage of income, and the resulting line connecting all these points is a 45-degree line of
perfect equality.
Country A
Quintile Percentage share of Cumulative share of
income (%) income (%)
Bottom 20 percent 5 5
Second 20 percent 10 15
Third 20% 25 40
Fourth 20% 30 70
Top 20% 30 100

Country B

Bottom 20 percent 5 5
Second 20 percent 5 10
Third 20% 10 20
Fourth 20% 20 40
Top 20% 60 100
Gini coefficient
Measures the area between the Lorenz curve and a diagonal as a ratio
of the total area under a diagonal

The Gini coefficient is a value between 0 and 1


The closer is the value of a Gini coefficient to 0 , the more equally the
household income is distributed
The poverty rate
Poverty rate - the percentage of population whose absolute income falls below an absolute level
called the poverty line

Poverty can be absolute – when people don’t have access to basic goods and services due to
insufficient income and relative – when people are excluded from being able to take part in what is
considered normal standards of living for that particular society

People are at risk of poverty when they satisfy at least one of three criteria:
-at risk of poverty after social transfers (income poverty)
-severely materially deprived
-living in households with very low work intensity

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