12.3Causes of economic inequality and poverty

Inequality of opportunity

• Inequality of opportunity refers to differences in people’s chances of achieving a certain standard of living due to factors beyond their control, such as family background, place of birth, gender, or ethnicity.
  • parents’ education and occupation
  • parents’ income
  • place of birth
  • gender
  • race and ethnicity

Different levels of human capital

• Human capital refers to the skills, education, knowledge and health that people possess, which affect their productivity and earning potential.
• low education / low skills
  • → lower productivity
  • → lower wages
  • → lower income
• poor health
  • → lower productivity / less ability to work
  • → lower wages
  • → lower income

Different levels of resource ownership

• More assets → more income
  • Stocks, bonds, land and property generate interest, dividends and rent.
• More assets → more wealth
  • Assets can increase in value over time.
• Fewer assets → reliance on wages
  • Low-income households often depend mainly on labour income.
• Renting limits wealth accumulation
  • Rent is an expense; homeowners can build wealth by repaying mortgages.
• Low income → low saving → few assets → low wealth → greater inequality.
• Low income → low saving收入低，大部分钱都要拿来支付基本生活开支，所以很难存钱。
• Low saving → few assets没有足够储蓄，就比较难买房、股票、土地等资产。
• Few assets → low wealth拥有的资产少，个人的净财富也就比较低。
• Low wealth → greater inequality而高收入者可以不断储蓄、投资、积累资产，所以他们和低收入者之间的财富差距会越来越大。

Discrimination

• Some groups may face lower wages or greater difficulty finding jobs.
• This reduces their income and employment opportunities.
• Limited access to social services can further increase poverty.
• Example: women may be more likely to do unpaid caring work and may receive lower pay or pensions.
• Discrimination → lower employment / wages → lower income → greater inequality

Unequal Status and Power

• Status = a person’s social or professional position.
• Higher status is often linked to greater power and influence.
• Powerful groups may influence policies in ways that protect their own income and wealth.
• This can reduce redistribution and increase inequality.
• High status → more power → policies favour own interests → income/wealth protected → greater inequality

Government Tax and Benefits Policies

• Low-income households often depend on:
  • transfer payments
  • subsidised healthcare
  • education
  • housing
• If government support is reduced, low-income households may have to pay more themselves.
• Tax policies that favour high-income groups or provide little redistribution can widen inequality.

Technological Change

• Automation replaces some low-skilled jobs.
• Demand for high-skilled workers increases.
• High-skilled wages rise faster than low-skilled wages.
• Owners of capital also gain more income.
• Technology → higher demand for skilled labour + less demand for low-skilled labour → wider wage gap → greater inequality

Globalisation

• FDI often increases demand for skilled workers.
• Skilled workers may gain more than unskilled workers.
• Offshoring can reduce domestic demand for some workers.
• Globalisation → unequal changes in labour demand → wider wage differences → greater inequality

Market-based Supply-side Policies

• Weaker trade unions reduce workers’ bargaining power.
• Lower minimum wages may reduce incomes of low-skilled workers.
• Less employment protection may increase insecurity or unemployment.
• Less worker protection → lower wages / higher unemployment → greater inequality

High Abnormal Profits and Market Power

• Firms with strong market power may earn high abnormal profits.
• Consumers pay higher prices.
• More income and wealth may flow to firm owners.
• Market power → high profits → more income to owners → greater inequality

Increases in Pay of Certain Occupations

• Executives and some professionals may receive very large pay increases.
• Their incomes rise much faster than average workers’ incomes.
• Rapid rise in top incomes → wider income gap → greater inequality

Unemployment

• Unemployed people lose labour income.
• Unemployment benefits are usually lower than wages.
• Long-term unemployment increases the risk of poverty.
• Unemployment → lower income → higher poverty → greater inequality

Geography

• People in remote areas may have fewer job opportunities.
• They may also find it difficult to move to areas with more jobs.
• Remote location → fewer opportunities → lower income → poverty

Age

• Older people may depend on low pensions.
• Some may receive no pension, especially if they worked in the informal economy.
• Low/no pension → low income → greater risk of poverty

Poverty

• Poverty can become self-perpetuating(自我持续）.
• Low-income households may lack access to education, healthcare and housing.
• This reduces human capital and future earning potential.
• Low income → poor education/health → low human capital → low productivity → low income