Question

Describe how each of these changes is likely to affect poverty and inequality:

a. Incomes rise for low-income and high-income workers, but rise more for the high-income earners.

b. Incomes fall for low-income and high-income workers, but fall more for high-income earners.

Short answer

a. Poverty will decrease but income inequality will increase.

b. Poverty will increase but income inequality will decrease.

Step-by-step solution

Step 1. Poverty and Inequality

Poverty is a term that groups the people in a country living below the level of income, termed as 'Poverty line', that is required for having a basic standard of living in that country.

Income inequality, on the other hand, describes a scenario on the extent of uneven distribution of income throughout the population of a country. It can be seen as the ratio of the share of the total income of two distinct groups. The greater the value of the ratio, the higher is the income inequality and vice versa.

a. Incomes rise for low-income and high-income workers but rise more for the high-income earners.

A rise in income for low-income workers and high-income workers will contribute to a decline in the rate of poverty because some low-income workers can now cross the poverty line and lie above the line. The level of poverty decreases.

But if the rise in income is more for the high-income workers than that of low-income workers, then it will boost the income inequality because the difference in income will be now more between the two groups.

Step 3. b. Incomes fall for low-income and high-income workers, but fall more for high-income earners.

A fall in income for low-income and high-income workers will increase the rate of poverty because no low-income workers can now cross the poverty line and it may result in an increase in the number of workers to be below the poverty line. The level of poverty increases.

But if the fall in income is more for the high-income workers than that of low-income workers, then it can bridge up the income inequality because the difference in income will be now low than before between the two groups.