Introduction to Income Distribution

DISTRIBUTION OF INCOME
Economics – a Course Companion. Blink & Dorton, 2007. p238-243

Introduction to Income Distribution

• One of the characteristics associated with free market economics is an unequal distribution of income.
• Inequality occurs to different extents in different countries.
• The reasons for difference in income and the consequences of inequality are many and complex.
• The can form the basis of considerable debate among economists, politicians, sociologists, parents, and students.

Income Inequality is Unfair

• One argument suggests that huge inequalities in income are unfair.
• People with low incomes will experience relatively low living standards, and fewer opportunities than people with high incomes
• They may live in a state of absolute poverty whereby they do not have access to basic necessities needed to sustain life.
• Or they may live in relative poverty whereby their living standards are well below the observed “average” in an economy.

REASONS FOR INCOME INEQUALITY Born into Poverty

• Incomes may be low because they themselves were born into a household where incomes were low and they experience little opportunity to break out from the conditions associated with poverty such as poor education, malnutrition, and perhaps the necessity to find work before completing an education.

REASONS FOR INCOME INEQUALITY Human Capital

• Incomes may be low because human capital keeps some people in low paying jobs.

REASONS FOR INCOME INEQUALITY Unemployment

• Income may be low due to unemployment.
• The reason the person is unemployed and their time without employment will be key issues.

Higher Incomes are Incentive to Worker Harder

• Even though unequal distribution of income is unfair, economic reasoning will show that higher incomes act as an incentive for people to work harder.
• If people did not believe that their hard work in school or at work would allow them to raise their human capital and provide them with an opportunity to earn higher incomes, then this would have huge implications for the supply side of an economy, resulting in a lower level of economic activity.