Unit 4 Macro: Income and Wealth Inequality

Globalisation has brought about a sustained rise in the value of global production, trade and wealth and has helped to lift hundreds of millions of people out of extreme poverty. But one of the paradoxes of globalisation is that, despite bringing about a degree of convergence in incomes between countries, the scale of relative poverty in income and wealth within nations has increased in many cases. Video: Joseph Stiglitz on rising income inequality in the United States (December 2012)

Income and Wealth

Income is a flow of money going to factors of production:

1. Wages and salaries paid to people in work
2. Money paid to people receiving benefits such as the state pension and tax credits
3. Profits flowing to businesses and dividends going to shareholders
4. Rental income flowing to people who own and lease out property
5. Interest paid to owners of capital who hold money in deposit accounts or who own bonds etc.

Wealth is a stock concept and can be held in different ways:

1. Savings held in bank deposits
2. Ownership of shares issued by listed companies and equity stakes in private businesses
3. The ownership of property
4. Wealth held in corporate bonds, national savings certificates and other government bonds
5. Wealth tied up in private (occupational) pension schemes and life assurance schemes

In terms of global wealth inequality, UNDP figure find that the richest 10% own 85% of global household wealth, while the bottom half collectively owns barely 1%.

Inequality in the distribution of income and wealth

The level of inequality of income and wealth can be measured in several ways:

• The share of income going to different groups in society, the poorest 20% of households at the bottom of the income scale through to the richest 20%
• The proportion of all households who live on an income below an official ‘poverty line’.
• For the UK and other European Union countries, the current poverty line is an annual income of less than 60% of median income. The median individual is in the middle of the income distribution
• Another key measure of inequality is something known as the Gini Coefficient

Mean and Median Income

If income in a country is highly unequally distributed, GDP per capita gives misleading view of what the “average person” has: For example:

· Person 1: £240k

· Person 2: £50k

· Person 3: £10k

In our simple example above, income per capita is £100k - but median income is £50k

The Gini Coefficient

The Gini coefficient is a commonly-used measure of income inequality that condenses the entire income distribution for a country into a single number between 0 and 1: the higher the number, the greater the degree of income inequality.

A value of 0 corresponds to the absence of inequality, so that, having adjusted for household size and composition, all individuals have the same household income.

In contrast, a value of 1 corresponds to inequality in its most extreme form, with a single individual having all the income in the economy

Gini coefficients for a selection of countries

(Data is taken from the World Bank databank, most recent published data is used, mainly for 2008-09)

1. Thinking about countries with much higher values for the Gini coefficient, can you think of reasons why income inequality is much higher?
2. Considering countries with lower levels of income inequality – can you spot anything about those countries selected that might explain why their Gini coefficient is lower than for the UK?
3. If you were constructing a Gini coefficient for wealth rather than income, would you expect inequality to be higher or lower for the United Kingdom?

“The world’s richest five percent now earn in 48 hours what the poorest earn in a year.” (UNDP, 2012)

One way of showing the gap between rich and poor is to look at the percentage of total income flowing to the poorest fifth of households in a given country.

Shares of Income – Quintile Distribution

Which of the countries shown has the highest and the lowest level of income inequality?