Topic 10 Economic Inequality - Sources and Redistribution PDF

ECON 2010 BUSINESS ECONOMICS Topic- 10 ECONOMIC INEQUALITY – SOURCES & REDISTRIBUTION After studying this chapter, you will be able to:  Describe global inequalities of income and wealth  Explain the sources of economic inequality and its trends ...

ECON 2010 BUSINESS ECONOMICS Topic- 10 ECONOMIC INEQUALITY – SOURCES & REDISTRIBUTION After studying this chapter, you will be able to:  Describe global inequalities of income and wealth  Explain the sources of economic inequality and its trends  Describe the concepts of income redistribution © 2019 Pearson Education Ltd.  Inequality in the World Economy Global Inequality and Its Trends The global distribution of income is much more unequal than the distribution within any one country. Of the world population: 50 % live on $2.50 (QR 9.10) a day or less per person 30 % live on between $2.50 and $10 (QR 36.40) a day That is, 80 percent of the world population is very poor. The average American has $115 (QR 418.60) a day. What about Qatar? > US$ 230 a day (QR 837.20) © 2019 Pearson Education Ltd. Inequality in the World Economy © 2019 Pearson Education Ltd. Inequality in the World Economy Global Wealth Distribution 2020 (Property) © 2019 Pearson Education Ltd. How Rich Are You? Let’s check this… (Click anywhere on the slide) © 2019 Pearson Education Ltd.  The Sources of Economic Inequality Inequality arises from unequal labor market outcomes and from unequal ownership of capital. The first three sources below are features of labor markets. The fourth is due to unequal ownership. 1. Human Capital 2. Discrimination 3. Contests among superstars 4. Unequal Wealth Ownership © 2019 Pearson Education Ltd.  The Sources of Economic Inequality 1. Human Capital The more human capital a person possesses in terms of education, experience and skills the more income that person likely earns, other things remaining the same. The increase in globalization has: Decreased demand for low skilled labor and their wage rate has fallen. Increased demand for high-skilled workers and their wage rates has risen © 2019 Pearson Education Ltd. What do you see? © 2019 Pearson Education Ltd.  The Sources of Economic Inequality 2. Discrimination Human capital differences can explain some of the economic inequality we observe. Discrimination is another possible source of income inequality. If the value of marginal product of one sex (or race) is perceived to be higher than that of another sex (or race), the equilibrium wage rates will vary across the gender (or racial) groups, despite holding human capital constant. Example: Suppose females and males have identical abilities as investment advisors. Then the market determines the same wage rate for both groups. But if customers are prejudiced against women, this prejudice is reflected in the wage rates—men will earn more than women. This extends to races as well. © 2019 Pearson Education Ltd. © 2019 Pearson Education Ltd.  The Sources of Economic Inequality 3. Contests Among Superstars Human capital differences can’t account for some of the really large income differences. The huge difference in what the super rich earn cannot be explained by human capital differences. Contests among superstars can explain large differences in incomes. Scarce resources are offered by contests when it is hard to monitor and reward performance directly. There is only one winner who takes it all. Prizes are hugely different to induce participation in the contest and generate high quality performance. © 2019 Pearson Education Ltd. © 2019 Pearson Education Ltd.  The Sources of Economic Inequality 4. Unequal Wealth The inequality of wealth (excluding human capital) is much greater than the inequality of income. This greater wealth inequality arises from two sources: 1. Life-cycle saving patterns 2. Transfers of wealth between generations The significant aspect of intergenerational wealth transfers that increase economic inequality is that marriage concentrates wealth.  1. Talent, ideas, or effort of citizens become irrelevant to cumulate wealth or start new business projects © 2019 Pearson Education Ltd.  4. Unequal Wealth Let’s talk millionaires & billionaires How many new millionaires were added in the US from 2019 to 2020  2,251,000 What is the total number of US$ millionaires in the US?  20.27 million  China 5.3 million How many US$ billionaires are there in the US?  788  China 1058 © 2019 Pearson Education Ltd.  50K millionaires 110 billionaires © 2019 Pearson Education Ltd.  4. Unequal Wealth Let’s talk companies & countries The size of companies compared to countries https://companiesmarketcap.com/ https://www.worldometers.info/gdp/gdp-by-country/ © 2019 Pearson Education Ltd.  Income Redistribution The three main ways most governments in the world redistribute income are: 1. Income taxes 2. Income maintenance programs 3. Subsidized services © 2019 Pearson Education Ltd.  Income Redistribution 1. Income Taxes By taxing incomes of different levels at different tax rates, economic inequality can be decreased. A progressive income tax is one that taxes income at an average rate that increases with income. Most income tax systems in the world are progressive income tax systems. 2. Income Maintenance Programs Three major types of programs provide direct payments to individuals: 1. Social Security programs 2. Unemployment compensation 3. Welfare programs © 2019 Pearson Education Ltd.  Income Redistribution 3. Subsidized Services A great deal of redistribution takes the form of subsidized services—services provided by the government at prices below the cost of production. Example is primary and secondary public education, as well as health care. The students at these institutions generally pay no tuition and fees or about 20 to 25% of the actual cost. Families also get free or low cost health care from governments. © 2019 Pearson Education Ltd.  Income Redistribution The long-term solution to their plight is education and job training—the human capital acquiring skills and equal opportunities. Is it better for a family, to be the poorest in a rich but unequal society or equal with everyone else in a poor society? © 2019 Pearson Education Ltd.  Recent Article https://www.ndtv.com/india-news/indias-richest-1-own- more-than-40-of-countrys-total-wealth-report- 3695407#pfrom=home-ndtv_m_topscroll © 2019 Pearson Education Ltd.