INCOME DISTRIBUTION

This refers to how the total National Income of a country is divided among the
population. It is illustrated by the Lorenz curve. The Lorenz curve shows how National
income is distributed among the people showing a given percentage of income that is
received by a given percentage of the population.
A Lorenz curve is illustrated below:

Line of perfect equality

Lorenz curve
50
25

0 50 % of the population
The line of perfect equality shows perfect distribution of income i.e. 50% of National
income goes to 50% of total population. However, this cannot be achieved, the Lorenz
curve shows that 50% of the total population receives 25% of country’s National
income.
INCOME INEQUALITY /UNEVEN DISTRIBUTION OF INCOME
It refers to the disproportionate distribution of earnings (income) in an economy
usually with a few people who are rich (or poor) and on the other hand the majority
of the population being poor (or rich).
Forms of inequality
1. Personal /individual inequality. This is where there are inequalities among
individuals/persons caused by differences in incomes, educational attainment, age,
sex, etc. i.e. inequalities between literates and illiterates, men and women, poor
and rich.

2. Regional /Geographical inequality. This is whereby people in different

regions/areas have different incomes. This is caused by differences in (natural)
resource endowment, differences in the development of infrastructure e.g.
inequalities between rural and urban areas.

3. Sectoral inequality. This is where people in different sectors have different

incomes. This is caused by difference in resource distribution etc. e.g. inequalities
between formal and informal sectors, between agricultural and industrial sectors,
between rural and urban areas.

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4. Intra-sectoral inequality. This is where people in the same sector have
difference incomes e.g. in the Agricultural sector i.e. commercial farmers have
higher incomes than subsistence farmers.

CAUSES OF INCOME INEQUALITY /UNEVEN DISTRIBUTION OF INCOME

1. Difference in distribution of natural resources. People who have more access

to natural resources such as fertile land and minerals, etc. produce more output
and earn higher incomes than people who live in less endowed areas with limited
access to natural resources.

2. Differences in the level of education and skills. People who are highly
educated and skilled are more efficient and therefore earn more income than those
who are less educated and skilled hence less efficient.

3. Differences in the quantity of output produced. For people who are paid
using the piece rate system, produce more output and contribute more to the
revenue of the firm and they are therefore paid a higher wage than those wo
produce less output and contribute less to the revenue of the firm.

4. Differences in family background. People who are born in rich families inherit
wealth from their families which enables them to earn higher incomes than those
people who are born in poor family and have almost nothing to inherit.

5. Differences in natural talents/physical abilities. People with natural talents

like the musicians, footballers etc. are more influential and therefore earn more
incomes than those who are less talented because they are not influential.
OR
Differences in physical abilities. Likewise, people who are physically strong
produce more output which is sold to earn high revenue and are therefore paid
more than those who are physically weak and produce less output.
6. Differences in experience at work place. People who are more experienced
are more efficient are therefore paid more than who are less experienced and less
efficient.

7. Difference in elasticity of supply of labour. The skilled labour whose supply

is inelastic, is not easily replaced at work and therefore are paid a higher wage
than the unskilled labour whose supply is elastic and can be easily replaced.

8. Non-matching government wage policy. In determination of wages paid to

its worker government favours some of them and pays them highly which enables
them to earn higher incomes than those who are less favoured and therefore paid
less.

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9. Differences in the ability of trade unions to bargain for higher wages.
Workers who belong to strong trade unions have higher income since their leaders
can convince their employers to pay-them highly while those workers who belong
to weak trade unions can hardly convince their employers to pay them highly and
therefore earn low income.

10. Differences in employers’ ability to pay wages. Employers who have large
and successful enterprises earn a lot of profits and are able to pay their workers
high wages. This enables such workers to have higher income than those who
work in small enterprises with low profit levels and whose ability to pay is low.

11. Political influence in allocation of resources in favour of certain

areas/regions/sectors. People who live in areas which are favoured by
politicians have access to national resources which they utilize and earn higher
income than those who live in areas that are less favoured and have limited
national resources.

12. Discrimination in the labour market on the basis of race, sex, tribe,
religion, political affiliation etc. People who are favoured at their work places
because of their tribe, religion etc. are high wages and therefore have higher
incomes than those who are less favoured and are paid low wages and therefore
get low income.

13. Differences in accessibility to developed infrastructure. People who stay

in areas with developed infrastructure such as roads have easier access to raw
materials and market. They therefore exploit them and sell more output enabling
them to earn higher income than those who stay in areas with under developed
infrastructures and have limited access to sources of raw materials and markets.

14. Differences in the nature of jobs. People who work in risky jobs, areas are
paid higher wages so as to attract them to do such jobs. This enables them to earn
higher income than those who work in non-risky jobs.

15. Differences in the degree of political stability. People who live in areas with
high degree of political stability are able to engage in income generating projects
without fear for their investment and property and therefore they earn higher
income than those who live in areas of political instability who find it difficult to
engage in income generating projects for fear of losing their life and property.

16. Differences in the ability of individual workers to bargain for wages.

Individuals who have high bargaining power are able to convince their employers
to pay them higher wages that those individuals with low bargaining power who
cannot convince their employers to pay them high wages.

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17. Differences in the number of hours worked. People who work for long hours
sacrifice their leisure time and therefore are compensated by being paid higher
wages than those who work for short hours and have more leisure to enjoy.

18. Differences in the cost of living. People who work in areas with high cost of
living need more money to survive and therefore they are paid higher wages than
those who work in areas with low cost of living and need less money to survive.

19. Differences in access to credit and contracts. People who have access to
credit borrow money and invest in more profit making ventures earn higher income
than those who have limited access to credit and invest in less profit making
ventures.

CONSEQUENCES /EFFECTS OF INCOME INEQUALITY/UNEVEN

DISTRIBUTION OF INCOME

Positive effects/consequences

1. It encourages hard work among the poor. The poor/low income earners are
encouraged to work harder so as to catch up with the rich, as a result more output
is produced in the long run.

2. It encourages greater saving and investment. This is because the rich have
a high marginal propensity to save, thus high level of saving ensures high level of
investment in an economy.

3. It enables employers to access cheap labour. This is because the poor are
willing to work even at a low wage because they are desperate to earn a living.

4. It increases government revenue. This is because government taxes heavily

the income of the rich and the commodities mainly consumed by the rich.

5. It encourages labour mobility. This is because the poor are ready and willing
to move to high paying jobs and ready to move and work in any part of the country
where they can find employment.

6. It encourages harmonious relationship between workers and employers.

This is because the poor workers ensure that they respect their employers so that
they do not lose their jobs.

7. It awakens government to undertake measures that can increase the

income levels of the poor so that they are able to get the necessities of life.

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8. It promotes innovativeness among the poor. The poor devise better
techniques of production so as to increase their efficiency in utilization of resources
and be able to provide more output and increase their incomes.

9. Unpleasant jobs get done. Unpleasant jobs get done because the poor need
alternative sources of income which makes them to take on the only available
employment even if it is unpleasant.

Negative effects /consequences of income inequality/costs of income

inequality.

1. Increases brain drain. This is because the educated who are poor leave the
country to go and work in other countries where they expect to get high paying
jobs. This increases resource outflow of skilled labour thus retarding growth and
development.

2. It results into misallocation of resources. This is because the rich influence

allocation of resources towards production of luxurious goods, and the production
of goods that are demanded by the poor is neglected and this worsens their
welfare.

3. It worsens balance of payment position. This is because the rich have a high
marginal propensity to import and this increase expenditure on imports thus
balance of payments deficits.

4. It reduces aggregate demand /leads to small size of market. This is

because the majority who are poor, have a high marginal propensity to consume
and have very little to spend on consumption.

5. It leads to rural urban migration and its associated evils such as

development of slums, increased social evils in urban areas. This is because the
poor move to urban areas hoping to get higher paying jobs and higher incomes.

6. It leads to political unrest and insecurity. This is because the poor feel
neglected by government and many of them join demonstrations and rebel
activities when they are mobilized.

7. It strains government budget. This is because government has to increase its

expenditure on provision of free services to the poor who cannot afford to pay
for them.

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 8. It leads to low tax revenue. This is because the majority are poor and their
incomes are below taxable income and therefore cannot afford to pay taxes.

9. It worsens the exploitation of the workers by the employers. This is

because the poor are so desperate to earn a living and they are ready to take up
any job at any wage rate.

10. It breads apathy among the poor (this is a feeling of not being
interested in something). This is because the poor feel disappointed and feel
that there is no need to work harder because they do not benefit from their effort.

11. It accelerates crime rates and immorality. This is because the poor are
forced to participate in immoral acts and commit crimes such as theft, prostitution
etc. so as to raise incomes to meet the basic necessities.

12. It leads to high population growth among the poor. This is because the
poor produce many children as social security to look after them in old age. This
leads to high dependence ratio and low levels of saving/investment.

13. It leads to limited investment. This is because the poor have low aggregate
demand which discourages investment.

14. It limits consumption among the poor. This is because they have little
income to spend to satisfy their needs leading to low standard of living.

15. It leads to social tension between the rich and the poor.

POLICY MEASURES THAT CAN BE TAKEN TO REDUCE INCOME

INEQUALITY/ TO PROMOTE EVEN DISTRIBUTION OF INCOME

1. Government should subsidize the poor. Especially those who have their small
income generating activities. This reduces the production costs and they increase
their incomes.

2. Government can impose progressive taxes. This rich should be taxed more
than the poor and the revenue obtained can be used to provide public and merit
goods which are mainly consumed by the poor leading to increase in their incomes.

3. Education reforms should be put in place. Government can provide free,

practical and compulsory education especially for the children of the poor to enable
them acquire skills to set up income generating activities to increase their income.

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4. Economy should be diversified. This increases the level of economic activities
and ensures that the poor get involved in economic activities thus increasing their
incomes.

5. The disadvantaged groups of people especially the women and the

disabled should be empowered through creation of special programs for them
so that they get involved in income generating activities and raise their income.

6. Government can develop social and economic infrastructure especially

in backward areas. This reduces production costs and attract investments in
such areas thus increasing economic activities and the income levels of the people
in those areas.

7. Agriculture should be modernized. This enables farmers to access high

yielding breeds, seeds and animals and also access better methods of production
to increase productivity and enable farmers earn higher incomes.

8. Government can encourage establishment of small scale industries

/firms. This increases provision of employment opportunities to the poor and
enable them increase their incomes.

9. The poor can be provided with affordable credit/loans. This increases their
capacity to buy inputs, machinery etc. to enable them set up income generating
activities and increase their incomes.

10. Economy should be liberalized. This reduces production costs and increases
economic activities which enables more people to get employment and increase
their incomes.

NB. Liberalization of economy. Involves removal of unnecessary restrictions to

trade and production by government.

11. Government should maintain political security. This attracts investment

since it ensures safety of both life and property and enables people to concentrate
on economic activities and raise their income.

12. Government may provide investment incentives especially the poor who
own small scale income generating projects. This reduces production costs
and increases profits which enables them to expand the scale of production and
increase their income.

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13. Land reforms should be put in place. This enables the poor to access land
on which they can establish income generating activities which increases their
incomes.

14. Government may encourage population control. This reduces the

dependence burden leading to increase in saving and investment in come
generating activities thus increase in incomes.

15. Government should increase wages of low income earners. i.e. through
minimum wage legislation.

16. Government should be decentralized.

SAMPLE QUESTIONS

1. Why is income inequality desirable in an economy?

2. Why may it be necessary to reduce income inequality?
3. Suggest measures that may be taken to promote even distribution of
income in Uganda.
4. Discuss the measures that are being taken to promote even distribution
of income in Uganda.
5. Explain the measures that have been taken to promote even distribution
of in Uganda.
6. Why should income inequality be encouraged in an economy?