3.4 INEQUALITY & POVERTY 

"Imagine I decided to give everyone the same IB predicted grade in order to improve equality. Do you think this is fair?" "Why not?" "In reality, what do you think teachers base their predicted grades on?"

• THE INTERNATIONAL POVERTY LINE is a monetary threshold under which an individual is considered to be living in poverty. It is calculated by taking the poverty threshold from each country—given the value of the goods needed to sustain one adult—and converting it into dollars. The current international poverty line is $1.90 per day.

WB_VID_1, WB_VID_02, WORLD VISION AUSTRALIA.  

• MINIMUM INCOME STANDARDS (MIS) is a research method to identify WHAT INCOMES DIFFERENT TYPES OF HOUSEHOLDS REQUIRE TO REACH 'A SOCIALLY ACCEPTABLE 'LIVING STANDARD'. 

  • • • MIS is the BASIS FOR THE CALCULATION OF THE UK LIVING WAGE, which is defined as the MINIMUM INCOME NECESSARY FOR A WORKER TO MEET THEIR BASIC NEEDS. This is not the same as a subsistence wage, which refers to a biological minimum. 

      • Needs are defined to include FOOD, HOUSING, and other essential needs such as CLOTHING. The goal of a living wage is to ALLOW A WORKER TO AFFORD A BASIC, BUT DECENT STANDARD OF LIVING through employment without government subsidies.

• LINK: Q. HOW DO MINIMUM INCOME STANDARDS (MIS) MEASURE POVERTY?, MIS-SINGAPORE

• MULTIDIMENSIONAL POVERTY INDICES (MPI) use a range of indicators to calculate a summary poverty figure for a given population, in which a larger figure indicates a higher level of poverty. 

• The Global MPI uses three standard dimensions: Health; Education; Standard of Living. This mirrors the Human Development Index (HDI)

• LINK

• Using 'HOUSEHOLD INCOME' alone may OVERSTATE the true level of poverty as people may hold wealth in the form of property or gold, whilst also having access to savings, all of which will not be included in income. 

• Alternatively, households differ in the NUMBER OF DEPENDENTS as such HOUSEHOLD INCOME may UNDERSTATE the level of for example the household has multiple dependents.

• SEE: DEPENDENCY RATIO LIST

  • • • The total dependency ratio is the total numbers of the children (ages 0–14) and elderly (ages 65+) populations per 100 people of adults (ages 15–64)

      • The children dependency ratio is the number of the children population (ages 0–14) per 100 people of adults.

      • The elderly dependency ratio is the number of the elderly population (ages 65+) per 100 people of working age

• Much of the data is collected via surveys which can be unreliable for the following reasons: 

  • • • 1) People may provide inaccurate information

      • 2) These surveys ignore homeless people.

      • 3) People will not reveal income earned in the informal markets 

• The COST-OF-LIVING differs greatly between regions and therefore THE LEVEL OF INCOME EARNED may be CONSIDERED ABOVE the relative POVERTY LINE in a more RURAL region but be CONSIDERED BELOW the relative POVERTY LINE in another more URBAN area.

• For example in the UK, salaries are often higher in London than in other parts of the country due to the high cost of living.

• It is in the government's best interests to OVERESTIMATE POVERTY LEVELS, in order to RECEIVE MORE FOREIGN AID.

• It is in the government's best interests to UNDERESTIMATE POVERTY LEVELS, in order to JUSTIFY REDIRECTING FUNDS AWAY FROM ITS 'POVERTY-REDUCTION' EFFORTS, so they can use the money elsewhere.

• LOW LEVELS OF HUMAN CAPITAL: 

  • • • LOW LEVELS OF EDUCATION/SKILLS => LOW INCOMES

        • • • Because there is generally a positive (direct) relationship between skill/educational attainment and income levels. 

• LOW LEVELS OF HEALTH => LOW INCOMES

  • • • Because an unhealthy person is likely to be less productive and therefore more poorly paid. Unskilled people may rely on the minimum wage, which may be insufficient to support a family.

• LOW LEVELS OF CAPITAL & LAND OWNERSHIP: 

  • • • • Whereas some people may inherit financial capital (stocks and bonds) or other forms of property (such as agricultural land or home), which gives them both an income advantage and something to fall back on in case of unemployment, many others have no resources to rely on other than their labour, which for the reasons noted above may not provide them with an adequate income. 

        • NO HOME/FINANCIAL CAPITAL => RENTAL BURDEN =>, which may take up a substantial portion of their income. Low incomes may mean POOR HOUSING, affecting health and further lowering one’s income potential, and may even lead to homelessness.

• DISCRIMINATION: 

  • • • Some social groups (racial and ethnic groups, women) may face discrimination in the job market, with the result that they may receive lower wages than others for the same work, or may find greater difficulty finding work than the worker who does not face discrimination.

GEOGRAPHY: Some people may live in REMOTE, ISOLATED GEOGRAPHICAL REGIONS, with limited possibilities for employment, and with limited possibilities to relocate (move) to other more economically active regions (due to poverty, age, or lack of communication and lack of marketable skills); this problem may be especially significant in some rural areas in less developed countries.

AGE: Older people may receive pensions that are barely enough to cover minimum needs, and in many countries (particularly less developed ones) may receive no pension at all if they have been living and working in the informal economy.

• LIMITED SOCIAL SERVICES: (merit goods). People on low incomes must often rely heavily on social services (health care, education, housing) provided or subsidised by the government, as their incomes are insufficient to purchase these in the market. 

SEPERATION?

INEQUALITY leads to LOWER GROWTH for the following reasons:

• The GREATER the level of INEQUALITY 

  • • ...the LOWER the ability of LOW-INCOME earners to invest in their own HUMAN and PHYSICAL CAPITAL, meaning they remain LESS PRODUCTIVE, impacting POTENTIAL OUTPUT.

    • ...the LOWER the ability of LOW-INCOME earners to OBTAIN CREDIT (as they have no collateral), meaning POTENTIAL BENEFITS of greater investment are not achieved.

    • ...the greater the amount of wealth owned by HIGH-INCOME earners, who TEND to SAVE MORE and INVEST OVERSEAS, limiting the SPENDING on DOMESTIC GOODS.

    • ...the greater the POTENTIAL for the highest earners to wield significant POLITICAL POWER, which could go against national interests in favour of their own.

• LACK OF ACCESS TO HEALTHCARE & EDUCATION limits the ability of LOW-INCOME HOUSEHOLDS to IMPROVE their HUMAN CAPITAL, and PRODUCTIVITY, leading to low-paid jobs and earning prospects.

• HIGHER INFANT, CHILD, and MATERNAL MORTALITY as a direct result of the lack of access to HEALTHCARE.

• HIGHER LEVELS OF PREVENTABLE DISEASES due to POOR HYGIENE and inability to receive inoculations, leading to weak immune systems and lower life expectancies.

• SOCIAL PROBLEMS occur as people turn to crime, families break down over financial issues, etc...

• HUGE WASTE OF HUMAN TALENT due to the inability of low-income earners to realise their full potential. 

Go to https://www.straitstimes.com/singapore/what-you-need-to-know-about-the-impending-gst-hike read the article and watch the video. Then write TWO opposing emails, one supporting the GST hike and one opposing it. In your answer you need to name a minimum of 3 justifications why it will/won;t meet its objectives.

• TRANSFER PAYMENTS refer to PAYMENTS MADE BY THE GOVERNMENT TO INDIVIDUALS specifically FOR THE PURPOSE OF REDISTRIUBUTING INCOME away FROM THOSE WHO WORK AND PAY TAXES, TOWARDS THOSE WHO CANNOT WORK OR NEED ASSISTANCE. 

• The groups of people who receive the transfer payments may include OLDER PEOPLE, SICK PEOPLE, very POOR PEOPLE, UNEMPLOYED PEOPLE...

• Transfer payments include OLD-AGE PENSIONS, DISABILITY PENSIONS, UNEMPLOYMENT BENEFITS, HOUSING BENEFITS, etc...

GOVERNMENT PROVISION OF MERIT GOODS TO IMPROVE HUMAN CAPITAL: 

• MERIT GOODS are goods that are beneficial for consumers, often with POSITIVE CONSUMPTION EXTERNALITIES, that are UNDERPROVIDED BY THE MARKET and UNDER-CONSUMED. From the point of view of income redistribution, the issue here concerns low consumer incomes and poverty. 

• If income distribution were left entirely to the market, two of the most important merit goods that would be under-consumed due to low incomes and poverty would be EDUCATION and HEALTHCARE. Education and health care are so important that they are often viewed as FUNDAMENTAL HUMAN RIGHTS. This means that it is not enough for governments just to provide education and health care (to supplement the insufficient quantities provided by the market). Governments must also ensure that these are affordable for very low-income groups. 

• This can be accomplished when GOVERNMENTS OFFER EDUCATION AND HEALTHCARE FOR FREE (or nearly free) to consumers, and is called ‘SUBSIDISED PROVISION’ of the goods and services, because the government offers them to consumers at a price (often zero) that is far below the cost of producing them. Governments may also provide subsidies to private providers to increase supply. In addition, education and health care can be made more affordable through transfer payments. 

• GOVERNMENT DIRECT PROVISION OF MERIT GOODS TO IMPROVE INFRASTRUCTURE: Other merit goods that may require subsidised or direct provision by the government, and that are especially important in developing countries that concentrate large groups of people on very low incomes, include INFRASTRUCTURE, which includes numerous kinds of PHYSICAL CAPITAL, such as CLEAN WATER SUPPLIES, SANITATION, and SEWERAGE. Subsidisation or direct provision by the government makes these more affordable to poor people. 

GOVERNMENT INTERVENTION IN MARKETS: Governments often intervene in markets in ways that change the distribution of income. Examples include:

• MINIMUM WAGE LEGISLATION: By setting a legal minimum wage, the government raises the lowest permissible wage above the equilibrium market level, thereby raising the wages of low-income (and usually unskilled) workers. 

• FOOD PRICE CEILINGS: By setting maximum prices for certain food products (prices below the market-determined equilibrium price), governments can make food more affordable for low-income groups.

• PRICE FLOORS FOR FARMERS: By setting legal minimum prices for certain agricultural products (often involving government purchases of the resulting surpluses), governments raise their prices above the equilibrium market price in order to support farmers’ incomes.

UNIVERSAL BASIC INCOME: Basic income guarantee, basic living stipend, guaranteed annual income, universal income security program or universal demogrant, is a sociopolitical financial transfer concept in which all citizens of a given population regularly receive a legally stipulated and equal financial grant paid by the government without a means test.[2][3] A basic income can be implemented nationally, regionally, or locally. If the level is sufficient to meet a person's basic needs (i.e., at or above the poverty line), it is sometimes called a full basic income; if it is less than that amount, it may be called a partial basic income. vox video

ANTI-DISCRIMINATION LAWS

Q. WHY IS INCOME INEQUALITY EQUITABLE? 

EFFICIENCY OVER EQUITY?

• We have seen how PROGRESSIVE TAXES work to IMPROVE EQUITY and how REGRESSIVE TAXES will WORSEN EQUITY, therefore we could conclude that more of the former and less of the latter right?

• 
  

• We have seen that THE MORE PROGRESSIVE the direct tax system the GREATER THE AMOUNT OF EQUITY in the distribution of income, however, PROGRESSIVE INCOME TAXES have a DISINCENTIVE EFFECT which leads to a FALL IN THE SUPPLY OF LABOUR which leads to LOWER SAVINGS.

• HIGH CORPORATION TAXES act as a DISINCENTIVE TO INVEST which leads to LESS PRODUCTION of CAPITAL GOODS.

• LESS LABOUR & CAPITAL => LOWER rates of GROWTH.

• SUPPLY-SIDE POLICIES are thus heavily based on REDUCING INCENTIVES TO STAY UNEMPLOYED.

• As a counter, we can highlight the role of PROGRESSIVE TAXES in AUTOMATICALLY STABILISING the economy during deflationary and inflationary gaps, which ultimately reduce the volatility and loss of output, hence improving EFFICIENCY over the business cycle.

• In addition, we could argue that GREATER EQUITY and TAX REVENUES via GREATER PROGRESSIVITY of the tax system will ALLOW THE LEAST PRODUCTIVE MEMBERS OF THE WORKING AGE POPULATION (Discouraged workers, the structurally unemployed, the malnourished, sick, and poorly educated) to INCREASE THEIR HUMAN CAPITAL, via better access to healthcare and education, and ultimately INCREASE THE LABOUR FORCE and subsequently INCREASE GDP.

• INDIRECT TAXES on DEMERIT GOODS as we know CORRECT MARKET FAILURE and IMPROVE EFFICIENCY, however, they are REGRESSIVE and can WORSEN EQUITY.

• Furthermore, INDIRECT TAXES are NOT JUST APPLIED TO DEMERIT GOODS and the RATE IS NOT ALWAYS THE SAME for example a government may choose to exempt NECESSITIES such as bread and milk from tax, while imposing different import duties on a variety of goods, meaning that RELATIVE PRICES CHANGE and thus RESOURCE ALLOCATION & ALLOCATIVE EFFICIENCY is impacted.

• Despite the obvious OPPORTUNITY COSTS, government expenditure on MERIT GOODS is aimed at IMPROVING ALLOCATIVE INEFFICIENCY, by CORRECTING their UNDERALLOCATION.

• TRANSFER PAYMENTS such as UNEMPLOYMENT BENEFIT, may ACT AS A DISCINCENTIVE TO WORK, and thus CREATE A BURDEN ON SOCIETY with little improvements in EFFICIENCY.

• WITHOUT TRANSFER PAYMENTS unemployed workers may become DISCOURAGED and leave the labour force entirely, or turn to ILLEGAL ACTIVITIES to survive, IMPACTING GROWTH and EFFICIENCY.

• TRANSFER PAYMENTS also ACT AS AUTOMATIC STABILISERS during RECESSIONARY GAPS, LESSENING OUTPUT GAPS, and hence INEFFICIENCY. 

• Government attempts to intervene in the free market by introducing MINIMUM & MAXIMUM PRICES may IMPROVE EQUITY, but as we have seen from the WELFARE LOSS diagrams, they result in MARKET FAILURE and LESS EFFICIENCY.

-USING A LORENZ CURVE, EXPLAIN HOW THE GINI COEFFICIENT IS DERIVED AND INTERPRETED. 

-EXPLAIN HOW GOVERNMENT SPENDING MIGHT PROMOTE GREATER EQUITY IN AN ECONOMY.

• With the aid of a diagram, explain how an increase in transfer payments to the poorest households in a nation is likely to affect the Lorenz curve and the Gini coefficient of that nation. 

• Explain the possible impact on the distribution of income of a government shifting its main source of tax revenue from progressive direct taxes to regressive indirect taxes. 

• Explain why the market system may not result in an equitable distribution of income.

• Explain how a government could bring about a more equal distribution of income.

• Explain two policies a government might use to redistribute income. 

• Explain the relationship between the Lorenz curve and the Gini coefficient.

• EVALUATE THE VIEW THAT ATTEMPTS TO ACHIEVE GREATER EQUITY IN THE DISTRIBUTION OF INCOME WILL REDUCE ECONOMIC EFFICIENCY. 

• Evaluate the effectiveness of the various METHODS that government may use to redistribute income.

• Evaluate the advantages and disadvantages of POLICIES aimed at reducing income inequalities. 

• Evaluate government POLICIES to promote equity in terms of their effects on efficiency in the allocation of resources.

• Evaluate the view that government POLICIES to promote greater equity will always have a negative effect on efficiency

• ‘MEASURES to promote greater income equality should be a key feature of government economic policy.’ Evaluate this statement.

• Evaluate the effectiveness of government POLICIES designed to reduce inequalities in income.

-GINI INDEX & LORENZ CURVES MS

-GINI INDEX & LORENZ CURVES MS

-GINI INDEX & LORENZ CURVES MS

-LORENZ CURVE MS