THEORY OF DISTRIBUTION OF INCOMES

INCOME AND WEALTH

INCOME – total amount of money received by a person or household during a given time period (usually a year). Consists of:

wages or labor earnings (about two-thirds of personal income),

property income such as rents, interest, and dividends (particularly important for high-income groups),

transfer payments or receipts from the government, such as social security or unemployment insurance.

WEALTH – consists of the net euro/crown value of assets owned at a point in time

In a household’s wealth is included:

tangible items (like houses, cars and other consumer durable goods, and land),

financial assets (like cash, savings accounts, bonds, and stocks).

INCOME COMPONENTS

The total income of households can be divided into:

labor income (YL),

income from ownership of land and capital (YA, YK),

income in the form of transfer payment (YT).

Y = YL + YA + YK + YT

Sources of Inequality in Labor Income

abilities and skills

intensity of work

differences among occupations

differences in education

other factors – f. e. discrimination and exclusion from certain occupations, good/bad luck

inheritance – many wealthy people inherited a great deal of their property from their parents or grandparents,

savings – a recent study suggests that only a small fraction of personal wealth, perhaps 20 %, can be explained by life-cycle savings,

risk taking (doing business) – entrepreneurship seems to be the surest route to great wealth.

Inequalities in property income

MEASUREMENT OF INEQUALITY

how substantial is the dispersion of disposable incomes, and how the degree of inequality of income distribution can be measured explain diagram known as the LORENZ CURVE

Lorenz curve depicts relationship between: complete equality, absolute inequality and actual inequality.

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LorenzLorenz curvecurveLorenzLorenz curvecurve

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Line of completeequality

Lorenz curve

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GINI COEFFICIENT

further tool for measuring of inequality is so called Gini coefficient, which compares actual Lorenz curve with the ideal curve. Measures the difference between the area below the ideal Lorenz curve and the area below the actual Lorenz curve:

G = A /A+B Gini coefficient can vary from 0 to 1. G = 1 – corresponds to extreme case of absolute

inequality in incomes G = 0 – case of absolute equality in income distribution

fig

Lorenz curve and Gini coefficientLorenz curve and Gini coefficient

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Line of completeequality

Lorenz curve

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Gini coefficient = A / (A + B)

REDISTRIBUTION PROCESSES IN ECONOMY

primary distribution - the income distribution (wages, interests, profits and rent) among the households that is result of market mechanism

result of income redistribution is final distribution of income – income was increased by transfer payments (social security, unemployment insurance, pensions for elderly ..) and decreased by taxes, fines and other payments to state budget and other funds.

THE EFFECT OF REDISTRIBUTION ON ECONOMIC

ACTIVITY Administrative costs – there are always associated direct non-

productive (especially administrative) costs with redistribution

The impact on working effort and entrepreneurship – redistribution processes often weaken the motives to work and taking risk by entrepreneurship

Impact on savings and investment