Chapter 10: Inequality, Poverty
and Policies to Redistribute
income
10.1 Inequality and poverty
Economists can do the following:
▪ Identify the extent of inequality and analyse how it has changed over time.
▪ Explain why a particular level of income distribution occurs and what causes
inequality to grow or to lessen.
▪ Examine the relationship between equality and other economic objectives such as
efficiency.
▪ Identify various government policies to deal with problems of inequality and poverty.
▪ Examine the effects of these policies, both on inequality itself and on other questions
such as efficiency, inflation and unemployment.
▪ Examine the effect of other policies, for example the reduction of the budget deficit,
on inequality and poverty.
Types of inequality
The distribution of income
- Size distribution of income Measurement of the distribution of income according to
the levels of income received by individuals (irrespective of source).
It can be expressed between households, or between individual earners, or between
all individuals.
- Functional distribution of income Measurement of the distribution of income
according to the source of income (e.g. from employment, from profit, from rent,
etc.).
- Distribution of income by class of recipient Measurement of the distribution of
income between the classes of person who receive it (e.g. homeowners and non-
homeowners or those in the north and those in the south).
This can be by class of person: women, men, single people, married people, people
within a particular age group or ethnic group, and so on. Alternatively, it can be by
geographical area.
The distribution of wealth
Income is a flow.
Wealth, by contrast, is a stock. It measures the value of a person’s assets at a particular point
in time. The distribution of wealth can be measured as a size distribution (how evenly it is
distributed among the population); as a functional distribution (the proportion of wealth
held in various forms, such as dwellings, land, company shares, bank deposits, etc.); or
according to the holders of wealth, classified by age, sex, geographical area, etc.
Analysis of incomes below a certain level: the analysis of poverty
The extent and nature of poverty can be analysed in a number of ways:
▪ The number or proportion of people or households falling into the category.
▪ The occupational distribution of poverty.
, ▪ The geographical distribution of poverty.
▪ The distribution of poverty according to age, sex, ethnic origin, marital status,
educational attainment, etc.
The size distribution of income in the UK
Quintiles Divisions of the population into five equal-sized groups (an example of a quantile).
Quantiles Divisions of the population into equal-sized groups.
By taxing the rich proportionately more than the poor, taxes can be used as a means of
reducing inequality.
Measuring the size distribution of income
Lorenz curve
Lorenz curve A curve showing the proportion of national income earned by any given
percentage of the population (measured from the poorest upwards).
The horizontal axis measures percentages of the population from the poorest to the richest.
Thus the 40 per cent point represents the poorest 40 per cent of the population. The vertical
axis measures the percentage of national income they receive.
If income were distributed totally equally, the Lorenz curve would be a straight 45° line.
The further the curve drops below the 45° line, the greater will be the level of inequality.
The problem with simply comparing Lorenz curves by eye is that it is imprecise.
Gini coefficient
Gini coefficient The area between the Lorenz curve and the 45° line divided by the total area
under the 45° line.
Gini coefficient = A/(A+B)
Inequality increases A Increases
The Gini coefficient rises. In the extreme case of total inequality, where one person earns the
whole of national income, area B would disappear and the Gini coefficient would be 1. Thus
the Gini coefficient will be between 0 and 1. The higher it is, the greater is the inequality.
Gini coefficients have the advantage of being relatively simple to understand and use. They
provide a clear way of comparing income distribution either in the same country at different
times, or between different countries.
Ratios of the shares in national income of two quantile groups
This is a very simple method of measuring income distribution. A ratio quite commonly used
is that of the share of national income of the bottom 40 per cent of the population to that of
the top 20 per cent. Thus if the bottom 40 per cent earned 15 per cent of national income
and Policies to Redistribute
income
10.1 Inequality and poverty
Economists can do the following:
▪ Identify the extent of inequality and analyse how it has changed over time.
▪ Explain why a particular level of income distribution occurs and what causes
inequality to grow or to lessen.
▪ Examine the relationship between equality and other economic objectives such as
efficiency.
▪ Identify various government policies to deal with problems of inequality and poverty.
▪ Examine the effects of these policies, both on inequality itself and on other questions
such as efficiency, inflation and unemployment.
▪ Examine the effect of other policies, for example the reduction of the budget deficit,
on inequality and poverty.
Types of inequality
The distribution of income
- Size distribution of income Measurement of the distribution of income according to
the levels of income received by individuals (irrespective of source).
It can be expressed between households, or between individual earners, or between
all individuals.
- Functional distribution of income Measurement of the distribution of income
according to the source of income (e.g. from employment, from profit, from rent,
etc.).
- Distribution of income by class of recipient Measurement of the distribution of
income between the classes of person who receive it (e.g. homeowners and non-
homeowners or those in the north and those in the south).
This can be by class of person: women, men, single people, married people, people
within a particular age group or ethnic group, and so on. Alternatively, it can be by
geographical area.
The distribution of wealth
Income is a flow.
Wealth, by contrast, is a stock. It measures the value of a person’s assets at a particular point
in time. The distribution of wealth can be measured as a size distribution (how evenly it is
distributed among the population); as a functional distribution (the proportion of wealth
held in various forms, such as dwellings, land, company shares, bank deposits, etc.); or
according to the holders of wealth, classified by age, sex, geographical area, etc.
Analysis of incomes below a certain level: the analysis of poverty
The extent and nature of poverty can be analysed in a number of ways:
▪ The number or proportion of people or households falling into the category.
▪ The occupational distribution of poverty.
, ▪ The geographical distribution of poverty.
▪ The distribution of poverty according to age, sex, ethnic origin, marital status,
educational attainment, etc.
The size distribution of income in the UK
Quintiles Divisions of the population into five equal-sized groups (an example of a quantile).
Quantiles Divisions of the population into equal-sized groups.
By taxing the rich proportionately more than the poor, taxes can be used as a means of
reducing inequality.
Measuring the size distribution of income
Lorenz curve
Lorenz curve A curve showing the proportion of national income earned by any given
percentage of the population (measured from the poorest upwards).
The horizontal axis measures percentages of the population from the poorest to the richest.
Thus the 40 per cent point represents the poorest 40 per cent of the population. The vertical
axis measures the percentage of national income they receive.
If income were distributed totally equally, the Lorenz curve would be a straight 45° line.
The further the curve drops below the 45° line, the greater will be the level of inequality.
The problem with simply comparing Lorenz curves by eye is that it is imprecise.
Gini coefficient
Gini coefficient The area between the Lorenz curve and the 45° line divided by the total area
under the 45° line.
Gini coefficient = A/(A+B)
Inequality increases A Increases
The Gini coefficient rises. In the extreme case of total inequality, where one person earns the
whole of national income, area B would disappear and the Gini coefficient would be 1. Thus
the Gini coefficient will be between 0 and 1. The higher it is, the greater is the inequality.
Gini coefficients have the advantage of being relatively simple to understand and use. They
provide a clear way of comparing income distribution either in the same country at different
times, or between different countries.
Ratios of the shares in national income of two quantile groups
This is a very simple method of measuring income distribution. A ratio quite commonly used
is that of the share of national income of the bottom 40 per cent of the population to that of
the top 20 per cent. Thus if the bottom 40 per cent earned 15 per cent of national income
