Topic 10. Household incomes: formation and distribution.

1. Household Incomes: types, sources, distribution. Essence and forms of wages.

2. Income inequality. Lorenz curve and Gini coefficient.
3. Government regulation of income distribution.

1. Income: types, sources, distribution. Essence and forms of wages.

Household is an association of individuals who have the common housekeeping

and common budget, who are engaged in the activities on looking after the house
together. Household, unlike family, can consist of one person.
Households perform several important functions in The national economy:
reproduction of the human capital;
ownership of production factors;
supplying the production factors on the relevant markets;
formation of consumer demand;
consumption, making savings, investments, etc.

As a whole, the earnings in a market economy are distributed to the owners of

the factors of production in economy in the form of wages, profits, rent, and interest.

Household Incomes are formed as a result of selling factors of production

owned by households, that are labor, capital, natural resources and entrepreneurial
ability.
Personal income equals market income plus transfer payments. Most market
income comes from wages and salaries; a small, affluent minority derives its market
income from earnings on property. The major component of government transfers is
social security payments to the elderly.
In details, personal disposable income of households can be defined by the
formula:

Y (DI) = W + MI + EP + TR,
Y - personal Disposable income, W - wages, MI - mixed income (IIO), EP
-earnings on property, TR - social transfers.
 Labor is more than an abstract factor of production. Workers are people who want
good jobs with high wages so that they can buy the things they need and want.
Wage is a transformed form of value and price of the "labor force" as a
commodity, depending on the quantity and quality of labor input трудовой вклад.
Volume of Wage depends on the following factors:
1. value of labor force;
2. demand and supply on labor market;
3. the quantity and quality of goods produced;
4. length of a working-day;
5. legislature on minimum wage and indexation of income
6. competition and monopoly on labor market, impact of unions
Wage performs functions:
reproductive, providing expanded reproduction of the labor force;
stimulating, motivating employees to improve the skills, quality and efficiency;
distributive, promoting overflow of labor from less to more efficient industries.

There are two main forms of wages: salary and wage. Salary depends on the
amount of time worked. Wage depends on the number of goods produced.
On the basis of these forms of wages the following wage systems are built:

1. Wages based on wage rate scale тарифная сетка

2. piecework and bonus system
3. time and bonus Wages
4. forfeit system
5. participating in profits
6. accord wages

In analyzing labor earnings, economists tend to look at nominal wage (wage in

monetary form) and real wage, which represents the purchasing power of an hour of
work, or the money wages divided by the cost of living.

2. Income inequality. Lorenz curve and Gini coefficient.

Differentiation of incomes is the difference in the level of monetary incomes of

various segments of the population.
 Causes of Income inequality are:
1. existence of social classes in a society
2. ownership on means of production;
3. substantial wage differentials
4. differences in education level and qualification
5. existence of shadow economy
6. stage of business cycle (crisis or upswing)
7. inefficient government economic and social policy

Various methods and indicators are used to assess the level of households’
differentiation of incomes. Lorentz curve, decile coefficient, Gini coefficient are
applied most often.
Lorenz Curve is a graph of the actual distribution of income among families with
different incomes compared with even distribution.

Gini coefficient of income concentration shows the deviation of actual income

distribution from a line of uniform равномерный distribution:

area of OCA
Gini coefficient = area of OAD triangle
 Gini coefficient in differ. countries in 2011-2014: Ukraine 0,24, Sweden and
Belarus 0,27; Germany France UK 0,33; USA 0,41; Brazil 0,52.
Decile coefficient reflects the ratio of the average income of the 10% of richest
population to the average income of the poorest 10%. In EU Decile coefficient is 6:1,
in Ukraine 30:1.

Ia of the 10 % of the richest

Decile coefficient = Ia of the10 % of the poorest

3. Government regulation of income distribution.

Government policy of incomes is aimed at preventing unjustified Income inequality

and polarization of society, removal of social tensions, fight against poverty,
mitigation смягчение of contradictions between economic efficiency and social
justice.

Government policy of incomes uses the following measures:

1. income redistribution through the state budget;
2. establishment of a minimum wage and living wage per month; с 01.12.2016
1496,00 грн. прожиткового мінімуму с 01.12.2016 1550,00 грн. мінімуму
заробітної плати
3. introduction of a progressive income tax.
4. providing superior growth rates of labor productivity comparing with growth
rates of wages;
5. stimulation of increase in people incomes;
6. indexation of incomes depending on inflation;
7. regulation of prices for social groups of goods
8. transfer payments: targeted aid for the poor, the unemployed, pensions,
scholarships
9. combating shadow economy