Income Inequality

Presented by:
Utsav Sachdeva
Samir Jaju

An imbalance between rich and poor is the oldest and

most fatal ailment of all republics.
-Plutarch

Income Inequality
The unequal distribution of
nations GDP across various
participants in an
economy.Income inequality
is often presented as the
percentage of incometo a
percentage of population.
The issue of economic
inequality is related to the
ideas ofEquity:

Equality of Outcome.
Equality of Opportunity.

The Gini coefficient

The Gini coefficient can then be
thought of as theratioof
theareathat lies between the line
of equality and theLorenz
curveover the total area under
the line of equality.
The Gini coefficient can range
from 0 to 1. A low Gini coefficient
indicates a more equal
distribution, with 0 corresponding
to complete equality, while higher
Gini coefficients indicate more
unequal distribution, with 1
corresponding to complete
inequality

Causes of Income
Inequality

Scarcity of Skill
The availability of
expertise and skill
could not keep pace
with the growing
requirements of the
industry. More and
more employers need
expertise they did not
require a generation
ago. Thus, a higher
education translated
into more economic
rewards.

Automation and Digital Age

Technological changes
and advancements has
eliminated labourintensive jobs and
created jobs requiring
lots of requisite skill.
These changes have
driven people from the
manufacturing to the
service industry.

Discrimination
Despite overall progress
in pursuing gender and
racial equality, income
levels varies by gender
and race.
Males usually earn more
than women for the same
job with the same
qualifications.
Similarly, Whites and
Asians earn more than
Blacks.

Inflation
High inflation, caused by a
country'smonetary policy,
can sharply contribute to
economic inequality.
This theory argues that
inflation of themoney
supplyis a coercive
measure that favours those
who already have an
earning capacity,
disfavouring those on fixed
income or with savings,
thus aggravating inequality.

Wages
In modern free market
economies, income
inequalities is caused by
determination of wages by
the market. Inequality is
caused by the differences
in thesupply and
demandfor different types
of work.
Wages work in the same
way as prices for any other
good. Thus, wages can be
considered as a function of
market price of skill.

Effects of Income
Inequality

Social Cohesion
Research has shown an
inverse link between
income inequality and
social cohesion.
In more equal societies,
people are much more
likely totrusteach other,
measures ofsocial
capitalsuggest greater
community involvement,
andhomiciderates are
consistently lower.

Population Health
There is a continual
gradient, from the top to
the bottom of the socioeconomic ladder,
relating status to health.
This phenomenon is
often called the "SES
Gradient".
Lower socioeconomic
status has been linked to
chronicstress,heart
diseases,ulcers,diabete
s,rheumatoid arthritis,
cancer, and premature

Essential Consumption
Certain costs are difficult
to avoid and are shared by
everyone, such as the
costs ofhousing, pensions,
educationandhealth care.
If thestatedoes not
provide these services,
then for those on lower
incomes, the costs must be
borrowed. Often, they fall
into the Debt trap and
have to file for bankruptcy.

Income Inequality and Economic

Growth

The classical theory: Initial theories stated that

inequality had a positive effect on economic
development. The marginal propensity to save
increases with wealth and inequality increases
savings, capital accumulation, and economic growth.
The modern theory suggests that income
distribution plays an important role in the
determination of aggregate economic activity and
economic growth. The political economy argues that
inequality is harmful for economic development
because inequality generates a pressure to adopt
redistributive policies that have an adverse effect on
investment and economic growth.

Income Inequality in India

1980s: Regulation and

Protectionism
Despite the apparent betterment of the upper class in the
1980s, the poor also reaped the benefits of increased
government expenditures in the form of projects intended
to reduce poverty.
A substantial amount of government expenditures were in
the form of subsidies and transfer payments to rural
households in India and largely benefited the poor.
It therefore stands that the socialist policies of the 1980s
contributed to some degree of growth, although slow, as
well as economic benefits to all segments of the population .

1990s: Liberalization
Allowing market forces to influence investment decisions.
Permitting international competition and the resulting
prices to prevail.
Reducing the role of the government in production and
trade.
Reducing regulations on the banking system to permit
foreign entrance into the financial market.
It should also be noted that unlike the economic growth
of the 1980s in which both the highest and lowest
quintiles of the population benefited, the growth of the
1990sbenefited only those who were well-to-do.

Globalization
Indias shift towards
globalization on the poor
proves that the saying the
rich get richer while the
poor get poorer.
Globalization has largely
benefited certain businesses
and contributed to the
growth of the middle class.
As a result, the purchasing
power of the country has
increased, which has lead to
an overall increase in prices.
Price increases have made it
difficult for the poor to
afford basic necessities.

Statistics
Following is the distribution of peoples of our society on the basis
of their income.
Those who were already the richest people in India - that is the top
20per cent of the urban population. Their per capita consumption
hasincreased by around 40 per cent since 1989-90 .
The top 20 percent of the rural population - the rural rich - whose
per capitaconsumption increased by more than 20 per cent since
1989-90.This wassimilar to the increase in consumption among
the next 40 per cent of theurban population.
the bottom 40 per cent of the urban population relatively
little increase in per capita consumption compared to these other
groups, at only around 14 per cent since 1989-90.
the bottom 80 per cent of therural population - well more than
half of India's total population. Forthese people, who now number
nearly 600 million, per capita consumptionhas actually declined
since 1989-90.

International Income Inequality

The major component of the world's income inequality (the
globalGini coefficient) is comprised by two groups of countries
o The first group has 13% of the world's population and receives 45%
of the world's PPP income. This group includes the United States,
Japan, Germany, the United Kingdom, France and Australia.
o The second group has 42% of the world's population and receives
only 9% of the world PPP income. This group includes India,
Indonesia and rural China.
Richest 1% of adults alone owned 40% of global assets in the year
2000 . The bottom half of the world adult population owned
barely 1% of global wealth.

Ways to reduce wealth

centralization

Welfare benefits
Welfare benefits include
o
o
o
o

Job Seekers Allowance.

Income support.
Child benefit.
Pensions.
The biggest cause of
poverty is
unemployment
therefore increasing job
sources would increase
equality of distribution.

Higher Pensions
Higher pensions would
help reduce inequality
amongst pensioners;
however, it would be very
expensive to increase the
universal state pension.
o it may be more effective
to target pensions to
those who need it most,
i.e. use means tested
benefits.

Progressive Income Taxes

A progressive tax takes a higher
% of income from the rich.
If the govt increased the top
rate this would cause a
reduction income inequality as
only the well off would pay the
tax also the revenue could be
spent on increasing benefits to
those on low incomes.
This would cause problems
because higher taxes may
discourage people from working
harder

Minimum Wages
Other policies could
include theMinimum
wage, this increase
the wages of those on
low pay.
Also a minimum wage
could increase labour
productivity and
incentives to get a
job.

Rise of Welfare State and

The Leaky Bucket

Rise of Anti-Poverty Programs

The early classical economists believed the distribution
of income was unalterable. They argued tat attempts
to alleviate poverty by government interventions in the
economy were foolish endeavors that would simply end
up reducing total national income.
But at the end of 19th century, political leaders in the
Western Europe took steps that marked a historic
turning point in the economic role of government.
Bismarck in Germany, Gladstone and Disraeli in Britain,
followed by Franklin Roosevelt in USA introduced a new
concept of government responsibility for the welfare of
the populace.

Welfare State
Important welfare-state programs include public
pensions, accident and sickness insurance,
unemployment insurance, health insurance, food and
housing programs, family allowances, and income
supplements for certain groups of people.
These policies were introduced gradually in 1880
through to the modern era. The welfare state came
late of the US, being introduced in the New Deal of the
1930s with unemployment and social security. Medical
care was added in the 1960s. In 1996, the Federal
government turned back the clock by removing the
guarantee of minimum income.

The Leaky Bucket

In taking steps to redistribute income from the rich to the
poor, governments may harm economic efficiency and reduce
the amount of national income available to redistribute. The
bucket of redistribution has a leak.
Only a fraction may be one half - of the dollar paid by the
rich in taxes actually reaches the poor. Then redistribution in
the name of equity has been at the expense of economic
efficiency.
These welfare programs are huge fiscal burdens on the
government and today these programs in the US amount to
20 percent of the federal budget. The recent Patient
Protection and Affordable Care (2010) that promises wide
health care benefits to most Americans has added $2 Trillion
in the federal deficit.

Criticism of Welfare Programs

The experience of socialist countries exemplifies how
attempts to equalize incomes by expropriating property from
the rich can end up hurting everyone. By prohibiting private
ownership of businesses, socialist governments reduced the
inequalities that arise from large property incomes.
But the reduced incentives for work, investment and
innovation crippled this radical experiment of to each
according to his needs: and impoverished entire countries.
The welfare-state programs reduce the incentives of welfare
dependent adults to seek work. If a poor person gets a job,
the government will trim the welfare benefits. In other words,
the poor people face high marginal tax rates as welfare
benefits sharply reduce as earnings rise.

Anti-Poverty Programs in India

India has many programs that tackle pverty and take care of
several socio-economic issues. The Government of India
launched the Twenty Point Program (TPP) in 1975. It has been
restructured several times and continues even today.
The twenty points include subjects such as poverty eradication,
housing for all, education for all, women welfare, improvement
of slums, development of backward areas.
Poverty eradication programs such as employment generation
under the National Rural Employment Guarantee Act (NREGA);
Swarnajayanti Gram Swarozgar Yojana (SGSY) and
Swarnajayanti Shehari Rojgar Yojana (SSRY).
The Food Security Bill of 2011 that promises cheap food grains
for all households has added a fiscal burden of Rs. 6,00,000
crores.

Conclusion
To conclude, it may be possible to reduce income
inequality by increasing income tax rates and means
tested benefits such as income support. However, there
is a danger that if they are increase too much they may
cause disincentive within the economy, this is
something the govt will have to be careful about. A min
wage also appears to be a useful policy. However, some
people may question whether the govt needs to be
concerned with reducing poverty; they argue inequality
is important for certain incentives and people who work
hard should be entitled to it.

Thank You!