Achieving a Substantial Reduction in Income Inequalities of the UK

Achieving a Substantial Reduction in Income Inequalities of the UK

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Achieving a Substantial Reduction in Income Inequalities of the UK
Income is a flow of money measured per period of time. It can be
received in the form of wages for workers, rent for landowners or
transfers such as benefits and pensions for the unemployed or retried.
Income differs from wealth, which is a stock and accumulates with
time. Wealth may be in the form of physical assets like houses, cars
etc or in the form of financial assets such as shares, savings and

Market forces in the labour market cause inequalities in income.
Unequal incomes are due to differences in marginal revenue product,
non-workers, household composition, wage rates, number of hours worked
and discrimination. An individual with a higher MRP should expect to
earn more since they will be able to produce more. Household
composition also determines inequalities in income for households
because a household with an individual on a high salary providing for
five dependents will be less well off than a household with six
workers on small salaries. Wage rates and number of hours worked are
dependent on the supply and demand for labour, higher wage rates and
more hours will equate to higher incomes. These factors are dependent
on the existence of trade unions and monopsonies.

Trade unions in perfect competition will increase the wage rate but
result in a loss of jobs bringing about more inequalities in income.

Trade unions in a monopsony will result in higher wage rates AND more
jobs thereby reducing the inequalities in income.

However, the largest difference in incomes is between workers and
non-workers, such as the unemployed or retired. This is due to the
fact that wages increase greater than the rate of inflation whilst the
rises in benefits are index linked i.

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e. at the same rate of inflation.
As a result inequalities between households dependent on benefits and
wage earner households increase with time causing the unemployed and
retired to be poverty stricken. Absolute poverty exists when
individuals do not have the resources to survive whilst individuals in
relative poverty are those with incomes less than 60% of the median

The government’s role is therefore very important to make sure income
and wealth is distributed more evenly so that the gap between the rich
and poor is not too great. In order to correct this market failure,
policies are implemented such as taxes, introduction of trade unions
and legislations. The government imposes progressive taxes, which is
taking from the rich more proportionately than the poor (40% of an
individual’s income over £40,000 per annum goes to tax whilst none is
taken for income under £5,000 per annum). This tax is justified by the
view that ‘the rich do not need the extra money as much as the poor’.
Introduction of trade unions as shown in the previous diagram can be
beneficial in monopsonies and
Discuss the view that it is inevitable that measures designed to
reduce inequalities in income will adversely affect the performance of
the economy. (30)
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