Question

Explain why the productivity standard for the distribution of income entails rewarding people based on their contribution to society’s total output. Why does the productivity standard typically fail to yield an equal distribution of income?

Answer 1

First Part

Income distribution is extremely important for development, since it influences the cohesion of society, determines the extent of poverty for any given average per capita income and the poverty-reducing effects of growth, and even affects people’s health. The paper reviews the connections between income distribution and economic growth. It finds that the Kuznets hypothesis that income distribution worsens as levels of income increase is not at all strongly supported by the evidence, while growth rates of income are not systematically related to changes in income distribution. However, the evidence is accumulating that more equal income distribution raises economic growth. Both political and economic explanations have been advanced. The finding suggests that more equal income distribution is desirable both for equity and for promoting growth.

Strategies to promote more egalitarian growth are reviewed, with examples given. However, although these strategies seem both feasible and desirable, in the 1980s and 1990s there has been a strong tendency for income distribution to worsen in both developed and developing countries. A variety of explanations as to the cause for this have been advanced including trade liberalization, technology change, and the impact of liberalization and globalization more generally. Most of the paper is concerned with the distribution of pre-tax household income. A brief survey of findings on the incidence of taxation and expenditure shows that tax incidence is often neutral, or proportionate to income, and occasionally either progressive or regressive. In contrast, the incidence of public expenditure is mostly progressive, so an increase in the levels of taxation and expenditure would tend to improve the distribution of welfare. Little direct evidence has been collected on the distribution of measures of well-being, such as human development indicators, but there is strong evidence that health achievements are related to income levels, while average societal health standards tend to worsen as inequality increases. In conclusion, all the analysis and evidence points to the desirability of achieving egalitarian income distribution for development. Yet current trends seem to be going in the opposite direction.

Second Part

Income distribution refers to several different topics in economics.

When you look around you, it’s obvious that some people are richer than others. How many are rich and how many are poor? How did it get to be that way? Does it change over time, and if so, how and why? What is the difference between income and wealth? Not all happiness comes from having a lot of money, so why is there so much emphasis on making money, anyway? These are a few of the many questions economists ask when they talk about income distribution.

It is difficult to talk about the distribution of income without triggering strong feelings about wanting to help those less fortunate than you. It is equally hard to talk about the distribution of income without feeling some envy for those who are more fortunate than you. Economists recognize both of these feelings. Economists also recognize that not all happiness derives from being financially well off. We call these questions about fairness, the economics of well-being, or welfare economics. Is the difference in income because some people are just born into wealthy families or are just born with exceptional natural talents? Is it because some cultures or countries have social or government laws or institutions that encourage education, savings, social mobility, etc.? Is it good luck, hard work, free markets, property rights, government intervention, or some combination?

*Unequal wealth or endowments.:-

If there are just two people in the economy–say, you and someone else–and if you have lots of resources such as great soil for growing crops while the other person has lots of rocks and scrabbly soil to work around, we would say that you are rich and he is poor. In fact, in that simple two-person economy, 50% of the population is rich, and 50% of the population is poor unless by happenstance the two of you both have identical endowments. That’s a statistical description, a fact about the economic world in which you and the other person live. In a more complex economy with lots more people, be it a country or the entire world, it can be difficult to pin down the facts about the distribution of wealth. However, that statistical description is what economists typically mean when they talk about the distribution of income.

*Wealth and income are not the same.:-

Looking at or thinking about the statistical distribution of income leads economists to many interesting questions. The first question to ask is: Why are incomes unequal? Why are some folks rich, some poor, and some in the middle? Is it because some people save more than others? Is it because some people are naturally endowed with unusual talents, ranging from great football players like Peyton Manning, multitalented pop entertainers like Jennifer Lopez, entrepreneurs like Steve Jobs or Bill Gates, to less-famous folks who just happen to have skills and drive? Is it because some people are born into wealthy families and inherit wealth they start off with? Is it because some countries have laws and institutions that encourage education, social mobility, or savings? Is high income due to luck, effort, or a combination? If you are born with special natural talents–which economists call being “endowed” with natural talents–should you get to earn more than someone less well endowed? If you work hard, should you get to earn more? Should you get to inherit income from your parents?