Factors influencing the distribution of income
1. Factors of production
The owners of large land holdings receive large incomes in the form of rent
The share of national income of landlords and owners of capital has grown, whereas labour’s share
has fallen
Wages have not been rising as fast as productivity and hence labour’s share of national income has
fallen
Many owners of capital receive their income in the form of dividend on the shares they own
Profits and entrepreneurial incomes have increased at the expense of wages and salaries although
salaries by top execs. have grown much faster than wages
2. Earned and unearned income
Earned income includes wages, salaries, and another employee compensation
Unearned income is income derived from sources other than employment like interest and
investment income
Unearned income depends primarily on inequalities in wealth whilst earned income is inequality in
income
3. Wage and salary differentials
Differences in labour productivity and skill determining the relative position of the demand curve
Training periods determine supply
4. Globalisation and the international migration of workers
Have widened the differences between the wages and salaries paid to different groups of workers
Wage discrimination here is high
Within the UK, low paid workers are in competition, both with incoming migrants from poorer parts
of the world and with overseas based workers employed in developing countries to which UK
employers have outsourced
A call centre worker, serving the UK market but employed in India, earns a much lower wage than a
similar worker employed in Britain
International competition has led to falling wages in UK labour markets where workers are
competing for jobs against similar workers in other countries
Similar competition does face high skilled workers however, they are successful in raising their pay
otherwise they will move to better paid jobs overseas
Factors influencing the distribution of wealth
1. The ability to benefit from capital gains
A capital gain occurs when the value of an asset like a house increase
Most consumer durable goods like cars and TV sets depreciate over the years
However, the value of land and property generally increases in the UK
Share prices also tend to rise in the long run, although they can also fall in value
Overall, the already wealthy own the most expensive houses often also owning more than one
house and gaining capital gains from this
The least wealthy often rent rather than own the house they live in
2. Private pension assets
Houses and shares are marketable wealth
Non-marketable private pension assets also make up a large part of wealth
Until very recently, in house pension schemes weren’t available for many low paid workers and they
themselves haven’t contributed to private pension schemes
This has meant low paid workers relied solely on state pension which is little more than poverty
income
3. Inheritance, gifts, and luck
Wealthy families are often divided into new wealth and old wealth
, Entrepreneurs who have built up large personal fortunes often categorise into new wealth though
successful risk taking and building up their wealth from scratch
Old wealth includes people who inherit wealth through the luck of having been born into very rich
families rather than through exercising their own entrepreneurial skills
Members of the landed aristocracy who passed wealth holdings from generation to generation are
old wealth
New wealth can create old wealth and vice versa
4. Wealth tax vs income tax
In the UK, a much larger fraction of government tax revenue comes from income tax than wealth
tax
Wealth is lightly taxes and there are many loopholes through which the already wealthy can legally
avoid paying like inheritance tax
The wealthy can also afford to employ accountants and financial advisers who minimise the tax
they are liable to pay and, in this way, the wealthy become even wealthier
The causes and effects of poverty in the UK
1. Old age and poverty
Old age causes relative poverty as many old people rely on state pensions and lack private pension
Before 1980s, state pension rose each year in line with average earnings
This means that pensioners shared in the increase in national prosperity through economic growth
and income
However, pensions have moved away from being index linked to be linked instead with inflation
Pensions no longer rise in line with standards of living and pensioners’ living standards have been
kept at 1980
Old people who were reliant solely on the state for their income become increasingly worse off
compared to people in work
2. Unemployment and poverty
Unemployment benefits are generally lower than the pay workers received before losing their job
An increase in unemployment therefore increases poverty
As part of a policy to reduce spending, the Coalition government introduced a limit on the total
benefits
The limit may further increase poverty tough this effect could be offset by a rapid fall in
unemployment
Absolute poverty can be best reduced by rapid and sustained economic growth
3. Low wages and poverty
Wage differentials and wage discrimination may influence this
International migration and globalisation
The low-waged may include unskilled workers together with skilled workers who have lost their jobs
in industrial sectors like manufacturing and coal mining who have had to accept employment in low-
waged and unskilled jobs
, The labour market
Demand for labour (MRP = MR x MPP)
MRP is the money value of the addition to a firms’ output from employing an additional unit of labour.
Falling MRP is due to diminishing MPP of labour due to diminishing returns. MRP declines faster in
imperfectly competitive markets due to MR also slopes down as output increases
1. Marginal Revenue which is the price of the good determined by demand for good and thus
derived demand for labour shows how firms will only demand labour if profits can be increased
through more
2. Marginal Physical Product is the addition to a firms’ output from hiring one additional worker.
The law of diminishing marginal productivity operates here as firms employ more workers meaning
a downward sloping curve. This relies on worker productivity
3. Marginal Cost which is the wage rate of the workers
Shifts in labour demand due to:
1. Change in labour productivity – as labour productivity increases, MPP increases, and more labour
is demand at each wage rate. Efficiency wage theory may act here
2. Change in derived demand – causes MRP to increase as increased demand means firms can sell
units for more than before
3. Changes in technology – automation will increase capital to labour substitution as it will decrease a
firms’ unit costs leading to lower prices, higher demand, and higher profits. Technical progress may
be used to decrease unit costs to provide extra profits to keep labour if it can’t be substituted
Labour demand elasticity due to:
1. Wage as a proportion of total production costs
2. Elasticity of demand for product
3. Substitutability
4. Short run vs long run
Supply of labour
Supply shows how many hours of labour the worker plans on supplying at different hourly wages. The
market supply of labour is the sum of the individual’s worker supplies and mirrors the general trends.
The worker supplies where MPB = MPC where the utility of welfare equals the utility of leisure
sacrificed.
1. Substitution effect occurs when higher wages are more attractive than leisure, so workers
substitute them
2. Income effect means at a certain boundary, workers are less willing and may substitute leisure for
income. However, usually, the substitution effect is larger than the income effect
3. Net advantage is the sum of the monetary and non-monetary benefits of working. It refers to the
utility or welfare derived from money wage or non-monetary benefits. Non-monetary benefits
include job security, promotion prospects and holiday entitlement
Shifts of the market supply of labour
1. Factors of production
The owners of large land holdings receive large incomes in the form of rent
The share of national income of landlords and owners of capital has grown, whereas labour’s share
has fallen
Wages have not been rising as fast as productivity and hence labour’s share of national income has
fallen
Many owners of capital receive their income in the form of dividend on the shares they own
Profits and entrepreneurial incomes have increased at the expense of wages and salaries although
salaries by top execs. have grown much faster than wages
2. Earned and unearned income
Earned income includes wages, salaries, and another employee compensation
Unearned income is income derived from sources other than employment like interest and
investment income
Unearned income depends primarily on inequalities in wealth whilst earned income is inequality in
income
3. Wage and salary differentials
Differences in labour productivity and skill determining the relative position of the demand curve
Training periods determine supply
4. Globalisation and the international migration of workers
Have widened the differences between the wages and salaries paid to different groups of workers
Wage discrimination here is high
Within the UK, low paid workers are in competition, both with incoming migrants from poorer parts
of the world and with overseas based workers employed in developing countries to which UK
employers have outsourced
A call centre worker, serving the UK market but employed in India, earns a much lower wage than a
similar worker employed in Britain
International competition has led to falling wages in UK labour markets where workers are
competing for jobs against similar workers in other countries
Similar competition does face high skilled workers however, they are successful in raising their pay
otherwise they will move to better paid jobs overseas
Factors influencing the distribution of wealth
1. The ability to benefit from capital gains
A capital gain occurs when the value of an asset like a house increase
Most consumer durable goods like cars and TV sets depreciate over the years
However, the value of land and property generally increases in the UK
Share prices also tend to rise in the long run, although they can also fall in value
Overall, the already wealthy own the most expensive houses often also owning more than one
house and gaining capital gains from this
The least wealthy often rent rather than own the house they live in
2. Private pension assets
Houses and shares are marketable wealth
Non-marketable private pension assets also make up a large part of wealth
Until very recently, in house pension schemes weren’t available for many low paid workers and they
themselves haven’t contributed to private pension schemes
This has meant low paid workers relied solely on state pension which is little more than poverty
income
3. Inheritance, gifts, and luck
Wealthy families are often divided into new wealth and old wealth
, Entrepreneurs who have built up large personal fortunes often categorise into new wealth though
successful risk taking and building up their wealth from scratch
Old wealth includes people who inherit wealth through the luck of having been born into very rich
families rather than through exercising their own entrepreneurial skills
Members of the landed aristocracy who passed wealth holdings from generation to generation are
old wealth
New wealth can create old wealth and vice versa
4. Wealth tax vs income tax
In the UK, a much larger fraction of government tax revenue comes from income tax than wealth
tax
Wealth is lightly taxes and there are many loopholes through which the already wealthy can legally
avoid paying like inheritance tax
The wealthy can also afford to employ accountants and financial advisers who minimise the tax
they are liable to pay and, in this way, the wealthy become even wealthier
The causes and effects of poverty in the UK
1. Old age and poverty
Old age causes relative poverty as many old people rely on state pensions and lack private pension
Before 1980s, state pension rose each year in line with average earnings
This means that pensioners shared in the increase in national prosperity through economic growth
and income
However, pensions have moved away from being index linked to be linked instead with inflation
Pensions no longer rise in line with standards of living and pensioners’ living standards have been
kept at 1980
Old people who were reliant solely on the state for their income become increasingly worse off
compared to people in work
2. Unemployment and poverty
Unemployment benefits are generally lower than the pay workers received before losing their job
An increase in unemployment therefore increases poverty
As part of a policy to reduce spending, the Coalition government introduced a limit on the total
benefits
The limit may further increase poverty tough this effect could be offset by a rapid fall in
unemployment
Absolute poverty can be best reduced by rapid and sustained economic growth
3. Low wages and poverty
Wage differentials and wage discrimination may influence this
International migration and globalisation
The low-waged may include unskilled workers together with skilled workers who have lost their jobs
in industrial sectors like manufacturing and coal mining who have had to accept employment in low-
waged and unskilled jobs
, The labour market
Demand for labour (MRP = MR x MPP)
MRP is the money value of the addition to a firms’ output from employing an additional unit of labour.
Falling MRP is due to diminishing MPP of labour due to diminishing returns. MRP declines faster in
imperfectly competitive markets due to MR also slopes down as output increases
1. Marginal Revenue which is the price of the good determined by demand for good and thus
derived demand for labour shows how firms will only demand labour if profits can be increased
through more
2. Marginal Physical Product is the addition to a firms’ output from hiring one additional worker.
The law of diminishing marginal productivity operates here as firms employ more workers meaning
a downward sloping curve. This relies on worker productivity
3. Marginal Cost which is the wage rate of the workers
Shifts in labour demand due to:
1. Change in labour productivity – as labour productivity increases, MPP increases, and more labour
is demand at each wage rate. Efficiency wage theory may act here
2. Change in derived demand – causes MRP to increase as increased demand means firms can sell
units for more than before
3. Changes in technology – automation will increase capital to labour substitution as it will decrease a
firms’ unit costs leading to lower prices, higher demand, and higher profits. Technical progress may
be used to decrease unit costs to provide extra profits to keep labour if it can’t be substituted
Labour demand elasticity due to:
1. Wage as a proportion of total production costs
2. Elasticity of demand for product
3. Substitutability
4. Short run vs long run
Supply of labour
Supply shows how many hours of labour the worker plans on supplying at different hourly wages. The
market supply of labour is the sum of the individual’s worker supplies and mirrors the general trends.
The worker supplies where MPB = MPC where the utility of welfare equals the utility of leisure
sacrificed.
1. Substitution effect occurs when higher wages are more attractive than leisure, so workers
substitute them
2. Income effect means at a certain boundary, workers are less willing and may substitute leisure for
income. However, usually, the substitution effect is larger than the income effect
3. Net advantage is the sum of the monetary and non-monetary benefits of working. It refers to the
utility or welfare derived from money wage or non-monetary benefits. Non-monetary benefits
include job security, promotion prospects and holiday entitlement
Shifts of the market supply of labour
