Class X: Chapter 30

REDISTRIBUTION
OF INCOME
 Income inequality in the US

 In American politics, the issue of income inequality

comes up frequently. As wealth continues to
concentrate at the top – now the wealthiest 10% of
American households control nearly 75% of
household net worth – the middle continues to
shrink, and some previously thriving metro areas
have been hard hit by extreme poverty.
(USA Today, May 2019)
 Income inequality in South Korea

 With just 3.7% of its labor force out of work, South

Korea has one of the lowest unemployment rates
among wealthy nations. Still, the high-income
inequality in the country is highlighted by the fact
that, despite the low jobless rate, 17.4% of South
Koreans live below the poverty line.
(USA Today, May 2019)
 Income inequality in Chile

 Chile has one of the most developed and

fundamentally sound economies in South America. It
also has some of the continent's worst income
inequality. Just over 16% of the coastal country's 18.1
million residents live below the poverty line – and
many of them are likely among the 7% of workers
who are unemployed.
(USA Today, May 2019)
 Income inequality

 Differences in income that exist

between the different groups of earners
in society, that is, the gap between the
rich and the poor.
Causes of income inequality
 Lorenz curve

 Definition: The Lorenz curve is a way of showing

the distribution of income (or wealth) within an
economy. It was developed by Max O. Lorenz in 1905
for representing wealth distribution.
 The Lorenz curve shows the cumulative share of
income from different sections of the population.
 If there was perfect equality – if everyone had the
same salary – the poorest 20% of the population
would gain 20% of the total income. The poorest
60% of the population would get 60% of the income.
Lorenz curve cont.
 Poverty

 In simple terms, poverty is not having

enough money or access to resources to
enjoy a decent standard of living; be
that the lack of access to healthcare,
education or water and
sanitation facilities etc.
 Absolute poverty

 Absolute poverty is when household

income is below a certain level, which
makes it impossible for the person or
family to meet basic needs of life
including food, shelter, safe drinking
water, education, healthcare, etc.
 Absolute poverty

 In this state of poverty, even if the

country is growing economically it has
no effect on people living below the
poverty line. Absolute poverty
compares households based on a set
income level and this level varies from
country to country depending on its
overall economic conditions.
 Relative poverty

 Relative poverty is when households

receive incomes at a certain level below
the median income for that country, so
they do have some money but still not
enough money to afford anything above
the basics. This type of poverty is, on
the other hand, changeable depending
on the economic growth of the country.
 Relative poverty cont.

 Relative poverty is sometimes described as

“relative deprivation” because the people
falling under this category are not living in
total poverty, but they are not enjoying the
same standard of life as everyone else in the
country. It can be TV, internet, clean clothes,
a safe home (a healthy environment, free
from abuse or neglect), or even education.
 Relative poverty cont.

 Relative poverty depends on the level of

development of the country. It’s about giving
everyone the chance to enjoy the same living
standards so that everyone has an equal opportunity
to live their life to their full potential. In that sense,
fighting poverty is about unlocking huge, untapped
economic potential within each country.
Reasons to reduce poverty and inequality

Guidelines:
 Pages 244, 245 of school textbook
 Class lectures
 Articles posted on Google Classroom
 Government intervention

The tax and benefits system

 Governments can intervene to promote
equity, and reduce inequality and poverty,
through the tax and benefits system. This
means employing a progressive tax and
benefits system which takes proportionately
more tax from those on higher levels of
income, and redistributes welfare benefits to
those on lower incomes.
 Indirect taxes have regressive effect

 In contrast, indirect taxes are regressive

meaning that, as a percentage of
income, the proportion of tax paid
declines at higher income levels, and, as
such, the burden of the tax is largely on
the poor. This means that, as a rule,
indirect taxes widen the income gap.
 Government intervention

Cash benefits
 Cash benefits are designed to help
those on low or zero original income.
 Examples include pensions and job-
seekers’ allowance, housing benefit,
income support, carer’s benefit and
child support.
 Government intervention

The National Minimum Wage

 The long-term aim of a minimum wage
is to remove the problem of poverty
pay, which exists when the earnings
from paid work do not result in a living
wage and fail to push people out of
poverty.
 Government intervention

Policies to reduce unemployment

 Unemployment is a major cause of poverty and
inequality. Unemployment can be reduced by:
 Government sponsored job creation schemes.
 A monetary or fiscal stimulus to increase
aggregate demand.
 Active labour market policies to increase
employability, such as re-training schemes.
 Welfare-to-work schemes which encourage labour
market participation.
 Government intervention

Education is directly related to many

solutions to poverty, including:
 Economic growth
 Reduced income inequality
 Reduced infant and maternal deaths
 Reduced vulnerability to disease
 Reduced violence at home and in society
 Government intervention

 According to UNESCO, if all students in

low-income countries had just basic
reading skills (nothing else), an
estimated 171 million people could
escape extreme poverty. If all adults
completed secondary education, we
could cut the global poverty rate by
more than half.
 Government intervention

Healthcare
Good health contributes to development
through a number of pathways.
Higher labour productivity. Healthier workers
are more productive, and miss fewer days of
work than those who are ill. This increases
output, reduces turnover in the workforce,
and increases enterprise profitability and
agricultural production.
 Government intervention

Healthcare cont.
 Higher rates of national savings. Healthy people
live longer and have more resources to devote to
savings and retirement.
 Improved human capital. Healthy children have
better cognitive potential. As health improves,
rates of absenteeism and early school drop-outs
fall, and children learn better, leading to growth in
the human capital base.
Does Government intervention work?

Criticisms of progressive taxes and benefits

 It may create a disincentive effect, which occurs
when individuals are discouraged from working
hard because they pay more of their income in
taxes.
 It may create moral hazard, where some
individuals may not look for ways to improve their
own position because the state provides insurance
against poverty, unemployment, and disability.
 Guidelines for chapter revision

Resources

 School textbook
 Class lectures and notes
 Additional materials posted on Google
Classroom
 Extended reading