Income inequality


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Income inequality

  1. 1. Income inequality is the gap between rich and poor i.e. is the differences in the distribution of economic assets (wealth) and income within or between populations or individuals. It is the state of an economy in which the shares of total income earned by the rich and poor are highly unequal According to the United Nations Human Development Report, the ratio of the income earned by the richest 10% to that of the poorest 10% of the population was 15.9 in the United States in 2007; that ratio was 4.5 in Japan, 9.4 in Canada, 17.7 in Singapore, and 40.6 in Brazil. Economic inequality varies between societies, historical periods, economic structures and systems (for example, capitalism or socialism), ongoing and past wars, and between individuals' abilities to create wealth. It can refer to cross sectional descriptions of the income or wealth at any particular period, and to the lifetime income and wealth over longer periods of time There are various numerical indices for measuring economic inequality. Economic policy makers can face a tradeoff between promoting equity and economic growth. As income shares become more equal, the incentive for individuals to accumulate skills, work hard, and take risks might become smaller, thus shrinking the size of the economy.
  2. 2. CAUSES OF INCOME INEQUALITY • Labour market outcomes • Globalization • Technological changes TRADE LIBERALISATION CHANGES IN TAXATION • Policy reforms • More regressive taxation • Access to education • IN MARKET ECONOMIES • Gender pay gap • Nepotism • Wealth concentration Racial discrimination
  3. 3. As development proceeds, the earnings of different groups rise differently. The incomes of the upper-income and middle-income groups rise more rapidly than those of the poor, during the early stages of growth through which India is passing at present shift of population from agriculture which is a slow growing sector to the modern large industrial sector which grows more rapidly. Again, there is the capitalintensive nature of the development of the modern sector. Since this absorbs less labour, wages form a smaller proportion of total income. Hence, the income spread is not wide enough. On the other hand, the capitalintensive type of growth leads to concentration of income in those few hands who supply capital.
  4. 4. Incomes are derived from two main sources, namely, assets like land, cattle, shares, etc., and labour. In India a few own a large chunk of income – earning assets. Some others, who do not own, or own a part of the assets they operate, organize finances through banks, cooperatives, etc, and acquire/hire productive assets. These inequalities enable the few to get incomes in the form of rent, interest and profit. As these assets accumulate and pass on from generation to generation, the earning capacity of these increases continuously. As for rural areas, the ownership pattern of the most important asset, namely, land, is highly unequal. The marginal households (with holdings less than 1 hectare), which account for as many as 72 per cent of the rural households own very little about 17 per cent of the land. Alternatively, there are those with large holdings (of more than 10 hectares) who are about 1 per cent of the rural households. But they have under their ownership as much as 14 per cent of the area. Private ownership of property and inheritance laws is mainly responsible for highly unequal distribution of assets.
  5. 5. Of the large many at the bottom rung of incomes, a very great proportion lives in the poor backward states regions, and most of the few at the top live in the high- income states regions. This is the geographical facet of income inequalities for the country as a whole. Within the states also there are inequalities, perhaps larger in the poorer states. Both these aspects are the outcome of the different growth rates of the states, with a few having grown at a fast rate, and many having lagged behind. People at the bottom could raise their economic status and to an extent reduce the distance separating them from those at the top, if they could get work. In other words, if they did not possess adequate earning assets, they could at least earn from their labour.
  6. 6. Rising income inequality is a source of social and political unrest as it can lead to social discontent and higher crime rates, in turn undermining investor confidence and adversely affecting the business environment and a country's economic growth. Across a number of Arab states, high unemployment and growing inequality has fuelled political and social unrest from early 2011 Higher income inequality can also result in nonincome disparities such as health and education, thus hindering a government's effort to reduce poverty. High incidence of poverty remains a severe problem in some SubSaharan African and South Asian countries; A widening income gap can impede the development of a country's consumer markets as purchasing power becomes concentrated among a small elite. In Kenya, for example, the richest 10.0% of households (decile 10) spent on average 14.3 times more than the poorest 10.0% of households (decile 1) in 2011.
  7. 7. High inequality reduces the pool of people with access to the resources—such as land or education--needed to unleash their full productive potential. Thus a country deprives itself of the contributions the poor could make to its economic and social development. High inequality threatens a country’s political stability because more people are dissatisfied with their economic status, which makes it harder to reach political consensus among population groups with higher and lower incomes. Political instability increases the risks of investing in a country and so significantly undermines its development potential. High inequality limits the use of important market instruments such as changes in prices and fines. For example, higher rates for electricity and hot water might promote energy efficiency , but in the face of serious inequality, governments introducing even slightly higher rates risk causing extreme deprivation among the poorest citizens.
  8. 8. ADVANTAGES OF INCOME INEQUALITY Rising income disparities around the globe split consumers into two primary groups, the rich and the poor, thus providing more opportunities for both luxury and budget goods. Countries such as China and Russia, for example, are now among the fastest growing markets for luxury goods in the world Growing income disparities impede the growth of the middle class, an important consumer segment for discretionary (non-essential) goods. In Russia, for example, the share of social class C to total population aged 15+ contracted significantly from 16.3% in 2006 to 13.5% in 2011. In China, social class C accounted for 15.8% of population aged 15+ in 2011, slightly down compared to 16.2% in 2006
  9. 9. SOCIALIST ECONOMY Low inequality (with no private profits and minimal differences in wages and salaries) deprived people of the incentives needed for their active participation in economic activities—for diligent work and vigorous entrepreneurship. The consequences were poor discipline and low initiative among workers, poor quality and limited selection of goods and services, slow technical progress, and eventually, slower economic growth leading to more poverty. INVESTMENT AND OPPORTUNITIES Inequality is necessary to encourage entrepreneurs to take risks and set up new business. Without the prospect of substantial rewards, there would be little incentive to take risks and invest in new business opportunities Advancement through education: it improves standard of living of people and brings prosperity. It rewards actors of the economy for increased investment in future; suppression of inequality has an affect of discouraging output.
  10. 10. INEQUALITY ARISING FROM MONOPOLY POWER DIMINISHING MARGINAL UTILITY OF INCOME • If firms have monopoly power, they are in a position to set higher prices to consumers. This leads to a redistribution of income from consumers to the shareholders of monopolies. Here, the inequality is based on an unfair distribution of power in society. • Income has a diminishing marginal utility. The first £1,000 of income you earn gives substantial benefits. With this first £1,000 we can buy food to eat and contribute towards your rent and other basic necessities. Our first £1,000 has the highest utility because it is essential to maintain life and avoid absolute poverty. If we gain another £1,000 income this also increases your utility (satisfaction) because we can now buy better quality food and have improved shelter. But, the increase in utility is less than first £1,000 • However, if we are a millionaire and gain an extra £1,000. The extra (marginal) utility is very limited. We can maybe buy a slightly more expensive car, we can buy a yacht that is 3ft bigger. But, the increase in utility / satisfaction is fairly limited. • Therefore increasing income equality can lead to an overall net gain because the poor see a bigger increase in utility than the loss faced by high earners.
  11. 11. MEASUREMENT OF INEUALITY IN THE MODERN WORLD LORENZ CURVES AND GINI COEFFICIENTS Lorenz curve: A Lorenz curve shows the degree of inequality that exists in the distributions of two variables, and is often used to illustrate the extent that income or wealth are distributed unequally in a particular society. Gini coefficient: A Gini coefficient is a summary numerical measure of how unequally one variable is related to another. The Gini coefficient is a number between 0 and 1, where perfect equality has a Gini coefficint of zero, and absolute inequality yields a Gini coefficint of 1.
  12. 12. HHOW TO CALCULATE GINI COEFFICIENT Arrange the data from lowest to highest. Bill 1500 Zak 2000 Robert 8000 Jose 9000 Erika 10000 Kai 12000 Juan 15000 Harry 16000 Kathleen 20000 Emily 30000 2. Calculate the total income: $123,500.00 3. Divide into quintiles. 10/5 = 2 earners in each quintile. Bill and Zak compose the lowest quintile or 20% of income earners; Robert and Jose compose the second quintile or cumulative of 40% of income earners; Ericka and Kai compose the third quintile, or a cumulative of 60% of income earners; Juan and Harry compose the fourth quintile, or a cumulative of 80% of income earners; and Kathleen and Emily are the fifth quintile or a cumulative of 100% of income earners.
  13. 13. 4. Calculate the total income and convert into % : QUINTLE INCOME ( $) PERCENTAGE 20 3500 0.028 40 17,000 0.138 60 22,000 0.178 80 31,000 0.251 100 50,000 0.404 TOTAL 123,5000 5. Calculate the cumulative percentage of household income. QUINTLE INCOME($) PERCENTAGE CUMULATIVE FREQUENCY 20 3500 0.03 0.3 40 17,000 O.14 0.17 60 22,000 0.18 0.35 80 31,000 0.25 0.6 100 50,000 0.04 1
  14. 14. Calculate the area under the Lorenz Curve using the properties of a trapezoid. The formula is: ½(b1 + b2).2. Subtract area under the line of perfect equality from the area under the Lorenz Curve. In other words, .5 - .33 = .17. This is the area between the line of perfect equality and the Lorenz Curve. 15. The Gini Coefficient is found by taking the ratio of the area between the line of perfect equality and the Lorenz Curve to the area under the line of perfect equality. That is: .17/.50 = .34. The Gini Coefficient is .34.
  15. 15. Distribution of Social Class in Selected Countries: 2011 - Social Class data refer to the number of individuals whose incomes fall within a specified range of the average gross income of all individuals aged 15+ in that country or region. Social Class A: +200%; Social Class B: between 150% and 200%; Social Class C: between 100% and 150%; Social Class D: between 50% and 100% and Social Class E: less than 50% of the average gross income. Nonetheless, the middle class continues to expand in absolute terms in most developing and emerging economies as a result economic and population growth. Businesses in the non-essential goods sectors will therefore continue benefiting from the middle income groups. India's social class C, for instance, grew by 3.9% during 2006-2011 to reach 101 million people in 2011.
  16. 16. MOST EVENLY DISTRIBUTED LEAST EVENLY DISTRIBUTED Sweden 23 Namibia 70.7 Denmark 24 South Africa 65 Slovenia 24 Lesotho 63.5 Iceland 25 Botswana 63 Slovakia 26 Central African Republic 61.3 PROSPECTS: In developed economies, rapid population ageing will continue putting pressures on public expenditure, while high unemployment, budget spending cuts and economic slowdown are major factors contributing to greater income disparities in the future. The implementation of a fiscal austerity plan in the United Kingdom in 2010 in order to cut the country's large budget deficit (8.4% of GDP in 2011) has added to an increase in income disparity going forward, with the country's Gini coefficient forecast to rise from 33.7% in 2011 to 35.0% by 2020.
  17. 17. Many developed countries have seen a worsening income distributi on as continued population ageing burdens public health expenditure, while mounting government debts as a result of the global economic downturn of 2008-2009 reduced state resources to assist the poor. The median age of the world's population increased from 28.2 years in 2006 to 29.4 in 2011 - Income distribution in developing nations is uneven as the benefits of economic growth is unusually distributed, especially true in natural resources-rich nations where export revenues are controlled by a small elite. During 20062011, Indonesia and Russia saw the highest increases in income inequality levels worldwide, from a Gini coefficient of 33.0% and 41.6% in 2006 to 37.7% . 47.3% in 2011, respectively; While Latin America remains the most unequal region in the world, it has also seen some of the greatest reductions in income disparity during 2006-2011, in part due to the growing popularity of socialist and welfarefocused governments. Bolivia, for example, saw its Gini coefficient decline from 59.2% in 2006 to 55.5% in 2011.
  18. 18. BRAZIL The incidence of poverty is much higher. The gini coefficient in 2009 was 0.543, having perceived in decline over a decade. The richest quintile receives more than 30 times more than the poorest quintile. Brazil implements a regressive tax system which burdens the poor. The tax load of those in higher income brackets earning more than 30 times the income wage a month amounted to 26.3%.In juxtaposition, those with twice the minimum wage were taxed twice the amount, 48.8% HUNGARY Poverty level is lower. The gini coefficient is fluctuating with 0.463 in around 2000, 0.497 in mid 2000s and 0.466 on late 2000s. The richest 20% (quintile)of the population receives more than 5 times the poorest quintile. Low income households suffer the most from loan repayment obligations. 2002-2003: moderate decline in income inequality due to redistribution policies by increasing the transfers to lower middle class, and increasing the tax burden on upper middle class.
  19. 19. • inequality and social stratification lead to higher levels of psychosocial stress and s tatus anxiety which can lead to depression, chemical dependency, less community life, parenting problems and stress-related diseases. • In recent years, life expectancy (i.e. the pattern of higher income-longer life) has dropped among middle class earners and plateaued among the richest 30 countries). For instance, Americans live no longer on average (about 77 years in 2004) than Greeks (78 years) or New Zealanders (78), though the USA is almost twice as rich CRIME • higher rates of health and social problems (obesity, mental illness, homicides, teena ge births, incarceration, chi ld conflict, drug use), lower rates of social goods (life expectancy, educational performance, trust among strangers, women’s status, social mobility).Research shows an inverse link between income inequality and social cohesion. In more equal societies, people are much more likely to trust each other, enjoying the benefits of goodwill, fellowship with lower homicide rates. POPULATION HEALTH HEALTH AND SOCIAL COHESION ITS RAMIFICATIONS • Tendencies for violence to be more common in societies where income differences are larger. About half of all variation in homicide rates can be accounted for by differences in the amount of inequality in each province or state. Economic inequality is positively and significantly related to rates of homicide despite an extensive list of conceptually relevant controls. Higher income inequality led to less of all forms of social, cultural, and civic participation among the less wealthy. When inequality is higher the poor do not shift to less expensive forms of participation.
  20. 20. MITIGATING FACTORS • • PUBLIC EDUCATION: increasing the supply of skilled labor and reducing income inequality due to education differentials. MINIMUM WAGE LEGISLATION : raising the income of the poorest workers (for the ones that don't lose their jobs due to the minimum wage). • NATIONALIZATION OR SUBSIDISATION OF PRODUCTS: providing goods and services that everyone needs cheaply or freely (such as food, healthcare, and housing), governments can effectively raise the purchasing power of the poorer members of society. • PROGRESSIVE TAXATION: the rich are taxed proportionally more than the poor, reducing the amount of income inequality in society if the change in taxation does not cause changes in income. • UNIONIZATION: organizations may reduce inequality by negotiating standard pay rates (though probably increasing unemployment). As union power has declined, and performance related pay has become more widespread, economic inequality has mirrored productive inequality. • Tax and transfer systems play a key role in lowering overall income inequality. Three quarters of the average reduction in inequality they achieve across the OECD is due to transfers. However, the redistributive impact of cash transfers varies widely across countries, reflecting both the size and progressivity of these transfers. In some countries(e.g. Australia, the United Kingdom to a lesser extent), cash transfers are small in size but highly targeted on those in need. In some others (e.g. France or Germany), large transfers redistribute income mainly over the life-cycle rather than across individuals, and their progressivity is often low.
  21. 21. THANK YOU