Inequality

Introduction

This lesson focuses on the level of income equality in the country. A good way to start this lesson off is with the simple question: 'has income inequality, within your country, got better or worse in the last decade?' The answer, for most nations will be that society has got less equal, not more. While there have been significant reductions in absolute poverty in this period, the richest members of the society have got increasingly wealthy while the incomes of many families on low and middle incomes have remained largely the same.

The next part of this question, which has a TOK element is 'does this matter'?

Enquiry question

What is the difference between equity in the distribution of income and equality in the distribution of income? How is inequality measured?

Lesson time: 2 hours

Lesson objectives:

Explain the difference between equity in the distribution of income and equality in the distribution of income.

Analyse data on relative income shares of given percentages of the population, including deciles and quintiles.

Draw a Lorenz curve and explain its significance.

Explain how the Gini coefficient is derived and interpreted.

Teacher notes:

1. Beginning activity - start with the beginning activity which can take just 15 - 20 minutes minutes to discuss, depending on how many times you wish to complete the activity.

2. Processes - technical vocabulary - students can learn the content watching the two videos on activity 2, reading the key terms and then completing the first tree activities, which should take around 20 minutes.

3. Applying the theory to TOK - activity 4 includes three TOK questions on this topic. I suggest your classes research one of these topics and then present their findings to the class. (40 minutes)

4. Developing the theory - activities 5 and 6 look at the technical calculations of inequality - how is it measured. (15 minutes)

5. Group discussion - activity 7, patterns of global inequality (10 minutes)

6. Reflection activity - activity 8 contains an example of a paper one type question. Allocate 10 minutes for this activity.

Key terms:

Wealth - the available assets that a person owns which may include property, stocks and shares, personal savings or easily tradable valuable items such as gold or Jewellery.

Income - the amount that an individual receives from income (if they have a job) from rent on land or property, interest on their savings in the bank or profit on stocks and shares that they may earn. These monies when added together collectively make up the individual’s income or gross income.

Net income - a person's gross income minus taxes paid.

Equality - fairness in terms of providing each member of society with the same opportunities to be successful - access to healthcare, education and training e.t.c.

Equity - recognises that each individual has different advantages and skills and allocates the required resources and opportunities needed to reach an equal outcome.

Relative poverty - the condition in which people lack the minimum amount of income needed in order to maintain the average standard of living in the society in which they live. A person is described as relatively poor if they ear less than 50% of the mean wage in the country.

Lorenz curve - developed by Max Lorenz in 1905 and illustrates the level of income inequality within an economy.

Gini coefficient - a formulae developed by Corrado Gini in 1912, it measures the level of income inequality within a society, but in numerical form. Nations given a Gini coefficient of between 0 and 1, with 1 being the most unequal and 0 representing a nation where ever citizen earned the same.

Universal basic income - a governmental public programme for a periodic payment delivered to all on an individual basis without means test or work requirement. The income provided would be unconditional, automatic, non-withdrawable, paid on an individual basis and delivered as a right.

Positive discrimination - the act of favouring someone based on a "protected characteristic". This could be: Hiring someone with a disability in order to fulfil a quota.

The activities on this page are available as a PDF file at: Income inequality

Beginning activity

Bring to your class a large bag of sweets and divide your class into groups of 4. Give each group some sweets and you may decide to provide each group with the same number of sweets or instead have each group represent different nations e.g. rich, middle income and poor. For each group assign each member to an income quartile - the richest 20%, the next richest e.t.c.

The game starts with the richest person in the group deciding how many of the nations sweets they would like them for themselves. They may choose to select only their fair share or they may choose to take all of them, Next, if there are any sweets left the second wealthiest individual can decide how many they would like. This continues until there are no sweets left to allocate.

This activity also works well with just two people in each group.

You can repeat this exercise as many times as you feel appropriate. Review this game after the exercise.

Activity 1: Wealth and income

Are wealth and income connected meaning is it the case that a person with a high disposable income will also be wealthy? Do wealthy people generally have high incomes?

There is not an automatic correlation between wealth. Some individuals or households may be asset rich (i.e. wealthy) but cash or income poor. Examples of this might be a retired couple who own their own property and perhaps a portfolio of shares but live a fairly simple existence on a relatively low income. At the other end of the scale we could include high earning young professionals, recently graduated from university (with a considerable college debt) who have not yet purchased their first property and have minimal savings.

In time of course the young professional, providing that there career progresses well and they are sensible with their salary, will end with a property and perhaps sizeable assets in the long term. Similarly the cash poor but asset rich retired couple can also cash in their assets to improve their disposable income.

Activity 2: Income inequality

(a) The following chart which illustrates the changes to all income groups in the USA since 1980. Describe what has happened to the incomes of the different wage earners in the country and describe the impact that this had on the level of income inequality in the economy?

While all income earners enjoyed a rise in living standards in that period, the gains from growth were significantly greater among the wealthiest income groups, for example, the lowest quintile saw a rise of 46% in their real income levels. By contrast, the wealthiest quintile saw real wages rise by almost 200%.

(b) Watch the following short youtube video, which features an interview with former president Barack Obama and then summarise why he believes that inequality grew in this period, including when he was President.

Barack Obama highlights two main reasons for the growth of income inequality in the USA. He started by saying that taxes, during his presidency, were neither high nor particularly progressive. Countries with lower levels of income inequality will generally have high progressive income tax rates. Secondly there was a trend for many businesses to pay their top executives according to company performance. This benefited many wealthy households, whose incomes rose in line with the sharp rise in company profits over the previous two decades.

As a general rule there are probably more costs than benefits arising from greater levels of income inequality in the economy. While Conservative commentators will correctly identify that the wealthiest households in society have largely deserved their rich financial rewards through hard work and risk taking, the impact on the remaining groups in society must not be ignored either.

Vast income gaps are likely to encourage resentment among other members of the society which can result in higher levels of crime and other social problems. The lowest income groups may also feel disenfranchised at the real or perceived injustices in the society and simply give up.

There is also the very reasonable economic argument which states that low income consumers generally have a higher MPC than high income households and reduced wealth amongst this sub group reduces economic activity in the economy.

(d) So in conclusion, does income inequality matter providing that everyone is getting a little richer?

The video includes two different perspectives, on one hand Andy Green claims that despite the rise in national income the lower and middle class are barely any better off than 10 years ago. By contrast, Joel Griffith quotes former UK Prime Minister Margaret Thatcher who claimed that many 'would be happy for the poor to the be poor providing the wealthy are also less rich'.

(e) Why did Andy Green describe taxation as the price we pay for a civilised society?

The basis for this argument is that tax revenue pays for improved social services, education, law enforcement e.t.c. meaning that everyone benefits.

Activity 3: Link to TOK (equity v equality of opportunity)

1. How far should the state go in correcting for social advantage, for example, should governments devote more resources to schools in poorer neighbourhoods than wealthier ones?

If so, how much tax should the wealthiest individuals pay in order to provide equity for all?

2. Should the state attempt to correct for the uneven distribution of natural abilities such as IQ by devoting proportionally more resources to children of less than average IQ?

If so, to what extent should the government go to in order to correct this?

3. What is meant by a fair distribution of income.

For example, is it fair that the wealthy pay more tax than poorer households. Alternatively does fair mean everyone pays the same?

Activity 4: Measuring inequality using the Lorenz curve

The diagram to the right illustrates the Lorenz curve for two nations, Germany and USA.

(a) According to the diagram which of the two nations has the greater level of inequality?

The USA, for example, the poorest 20% of households own just 7% of the total income of the country. By contrast in Germany the bottom 20% collectively own 10% of the total income - making it more equal.

(b) Why does the blue line represent the line of perfect equity.

According to this line everyone in the nation earns the same. For instance the poorest 20% of the population possess exactly 20% of the nation's wealth.

There are no examples of this in the world – even communist countries such as Cuba or N. Korea reward workers differing amounts based on their position in those societies, though possibly at lower extremes that in many other economies.

(d) How are nations with smaller income inequalities represented on a Lorenz curve?

The further to the left of the line of equality that a Lorenz curve lies, the smaller the level of inequality in that nation.

Note about drawing the Lorenz curve

The Lorenz curve is a difficult concept for some IB students to understand and is best learnt through practise. A difficult area is in labelling the diagram accurately. As an examiner I will sometimes see Lorenz curves diagrams with the axis drawn around the wrong way. Students are also advised to include either numbers on their diagram to illustrate the examples on the diagram.

Activity 5: Gini coefficient

The Gini coefficient measures inequality in a numerical form and is calculated by the formulae A / (A+B). Each nation is ranked on the Gini scale from 0 to 1.

Examples of Gini coefficients

If the richest 1% of the population owned 50% of the nation's wealth / income this would mean a Gini coefficient of 50%.

Other Gini coefficients

African continent 0.52 - 0.7

Mid ranking nations 0.3 - 0.4

Lowest Gini coefficient was in Europa and ranged from 0.25 - 0.36.

(a) Explain possible reasons for different levels of income inequality between nations?

The different levels of income inequality between nations can be explained by some or all of the following reasons:

The level of progressive taxation
The level of government spending especially on transfer payments
The level of minimum wage (if appropriate) in the economy
The type of government, for instance left leaning liberal governments would be more inclined to promote greater income equality and poverty reduction measures.

(b) Why might a household be living in poverty as a result of low income levels?

They may have been born into a low income household
They may have not finished high school or possess other qualifications
They may be suffering from poor health which prevents them from working.

Further reading on the Gini coefficient and income inequality can be found at: Equality trust

Activity 6: Patterns of equality throughout the world

The map below shows the pattern of inequality around the world. What patterns emerge from this map?

Northern European nations appear to have the lowest Gini coefficients in the world, followed by other parts of the West. This is likely to be because those nations have high levels of tax and generous welfare benefits / education and health spending e.t.c.

The American continent and many Asian nations are next with the greatest level of inequality witnessed on the African government.

Activity 7: Link to the paper one assessment

Examples of relevant paper one questions on income equality include:

(a) Using a Lorenz curve and the Gini coefficient, explain how income inequality is measured. [10 marks]

Command term: Using

Key terms to define: Gini coefficient, income inequality

Income inequality is measured by the gini coefficient, a formulae developed by Corrado Gini in 1912 and illustrated via a Lorenz curve (diagram 1).

The Gini coefficient is calculated by the formulae: A / A+B and a Gini coefficient of zero would mean that everyone in a nation has the same income. At the other end of the extreme a Gini coefficient of one (or 100%) would represent a society with maximal inequality of income or where only one person (probable the king or president) has all the income and the rest of the society earns nothing.

Similarly, a case where the richest 20% of any society earned 80% of national income would mean a Gini coefficient of at least 60%.

In the Lorenz curve included the nation has a relatively equal distribution of income, with the lowest 40% of households enjoying approximately 20% of total income.

Gini coefficients are generally lower, i.e. income distributed more equally when the impact of taxes and transfer payments, such as out of work benefits are included.

(b) Using real world examples, evaluate the view that government policies aimed at reducing income inequality will always reduce economic efficiency. [15 marks]

Command term: Evaluate

Key terms to define: Income inequality, economic efficiency

The command term evaluate requires a response that addresses the question: is it inevitable that government policies aimed at reducing income inequality will always reduce economic efficiency.

A relevant real world example might be an assessment of where such policies have been used. This might include, for instance, a comparison of two countries such as Sweden and USA, which adopt different policies as regards inequality.

Responses should include the following:

A discussion of different policies that can be employed to reduce income inequality. Examples include a greater use of progressive taxes and transfer payments. In other words governments can reduce income inequality by increasing progressive taxes, the burden of which falls primarily on high income households as well as increasing government spending on transfer payments. Transfer payments include public sector wages, pensions, sickness payments and out of work benefits.

A recognition that such policies will improve income equality but may well reduce efficiency in the economy by providing a disincentive to work or set up a business. This is because the burden of progressive taxes will fall heaviest on those who benefit from working hard to increase their disposable income. At the same time transfer payments, paid out of taxation, will often benefit households on low incomes disproportionately.

A diagram showing a production possibility frontier (diagram 1), with point A drawn on the edge of the PPF curve and representing an economy running efficiently and point B lying within the boundary of the PPF. The loss of economic efficiency, resulting from a rise in progressive taxes and transfer payments, would be represented by a move from point A to point B on the diagram.

A comparison of the positive and negative impacts of different policies designed to promote income equality. This should include an evaluation on the impact on different stakeholders. Relevant stakeholders might include entrepreneurs (who may be discouraged from starting a business as a result of higher taxes), low paid workers, high paid workers as well as the recipients of social benefit payments.

Alternatively responses might include an example of where a government has implemented poverty reduction policies and seen a fall in inequality as a result.

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