Economia

What factors influence the UK income distribution? Critically evaluate one approach to measuring this distribution.

In this essay I will begin by defining income and then discuss the factors that influence the distribution of income looking closely at the factors of production. I will then evaluate the Lorenz Curve and the related Gini Coefficient as a measure of this distribution.

Income is defined in ‘theory as the amount a person could have spent whilst maintaining the value of his wealth intact’. The distribution of income can be defined and represented in three sub headings when looking at inequality in distribution. These are: the size distribution of income, this covers income from all bases; the individual earners, households or all individual. There is the functional distribution of income which looks at the distribution between the factors of production (land, labour, capital), as well as the distribution of income by class recipient, e.g. a person by gender, marital status or ethnicity or by geographical location.  

The factors that influence the UK income distribution are linked to the factors of production. Labour markets are responsive to demand and supply and wage determination has an impact on income distribution which varies depending on the market structure. In a perfect labour market the employees are wage takers as the market exhibits similar characteristics to a perfectly competitive market, there would be freedom of entry, perfect knowledge and homogenous labour. The supply of labour would depend on individual and household characteristics and the demand for labour rests on the potential profit it can generate. With perfect labour markets it could mean that all employees in these markets would be earning the same. However, this is theoretical; in practice it may not be the case as there would still be labour market imperfections. There would still be earnings inequalities present in a perfect labour market and this would be because not all workers have the same skill and productivity and workers are not perfectly mobile. Therefore the low paid workers would be those whose skills are in low demand and/or those whose skills are in high supply.

Imperfect labour markets on the other hand are not instantaneously responsive to changes in demand and supply. They respond to where the power lies; in terms of whether the power is with the monopsonist/oligopsonist or whether the power is with a union which may force the monopsonist to raise wages, this will then cause the monopsonist to cut employment. This is exemplified in the UK by the continuous problems between the RMT union led by Bob Crow and Tube bosses. The tube stations are monopsony employers for tube staff and with leadership of the RMT they have voted to strike on many occasions over their pensions, against cut backs and for better wages. As yet there is no outcome to the latest round of bargaining over the cut backs to tube station staff. However, power is not the only factor that influences the distribution of income there can also be imperfect knowledge in the market and some firms may discriminate (gender, religion etc) in their employment policy thus being able to payless to anyone who falls in this category.

Land and Capital are also factors that influence the UK income distribution. Income can be generated through land and capital. This can be done through; rent and interest generated from owning land and/or capital; from land or capital that one inherits; their past income and savings made from it; and the individual entrepreneurial skills by investing in the right places. They are bought affected by supply and demand, and therefore the price the market equilibrium sets for their land and capital.

I will now move onto the critical evaluation of Lorenz Curve as a measure and graphical representation of the distribution of income. The Lorenz curve in Fig.1 shows percent of income owned by the poorest x percent of the population, for all x point. If income was distributed equally the Lorenz Curve would run the same as the line of absolute equality which emanates from the origin. This means that 10% of the income would fall to the bottom 10%, 20% of the income to the bottom 20% and so on. The Gini coefficient can be constructed from ‘the ratio of the area between the Lorenz Curve and the line of absolute equality...and the whole are under the line of absolute equality’^[1]. The Gini coefficient is a measure of inequality in the distribution of income; results can range between of 0(0%) to 1(100%), 0 being no inequality and 1(100%) would indicate complete inequality.[pic 1]

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