There are multiple policies that the UK government can use to affect Free Essay Example

There are multiple policies that the UK government can use to affect the distribution of income in the UK, and relevant data suggests that the government should take action. As the graph below shows, the UK has significant income inequality with one of the highest Gini coefficients of the OECD at 36%, higher than almost all very developed countries.Figure 1. Graph taken from researchbriefings.files.parliament.uk/documents/CBP-7484/CBP-7484.pdfHowever, each available policy to tackle this has both strengths and weaknesses, especially when viewed from different perspectives and different arguments.

One of the key positives of all three policies given above is that they provide a strong incentive to work. In the case of a National Living Wage, requiring businesses to pay over 25s Ј7.83 at 6% higher than the National Minimum Wage previously used for employees over 25, there is a key income incentive to work. This incentive occurs as a higher guaranteed wage makes the prospect of working more attractive and is more likely to encourage people off the welfare system and into work.

This should have a positive impact on income distribution, allowing the lowest earners to earn more and move closer to higher earners, resulting in a reduction of relative poverty, and reduction in unemployment in the economy. However, this policy may not be effective without the additional Benefits Cap policy. This prevents people from earning more on welfare than they reasonably could when in employment, and so the incentive of earning from employment is ensured as being higher than remaining on welfare.

The implementation of a personal allowance on income tax should also have the same beneficial impact on income distribution an unemployment, by incentivising those not in full time employment, or not in employment at all, to take up more work and receive the benefits of not paying income tax on their earnings. This argument is supported by current economic data, with unemployment at a very historic low of 4%. However, there is no way of proving whether or not the sustained low levels of unemployment are a result of the policies given. Although theoretically incentivising work and reducing unemployment, the benefits cap may not have been effective practically, with the Equality Trust stating that the Benefits Cap only incentivised 4.7% of people into work and suggesting that the policy had little magnitude of impact. In addition to this, there are further arguments to suggest that a National Living Wage could have the opposite impact than it aims to as, although these higher wages do incentivise people to look for work, this does not automatically correlate with them entering work. It can easily be argued that through setting the National Living Wage above the market price, at Wu shown right, the government cause an excess supply, at Qs ” Qd shown below. This excess supply would result in unemployment levels equal to the excess supply, with the extra people now searching for work but not being able to find it (Qs ” Qe), being joined in unemployment by workers laid off from firms due to the now higher wage costs (Qe ” Qd). This excess supply may result in an increase in the UK’s income inequality, with greater people being unemployed and therefore earning less than those in employment. In addition to potentially having a negative effect on the UK’s unemployment, the National Living Wage could also contribute to greater inflation in the UK, due to both cost-push and demand-pull factors. Cost push inflation can occur as a result of rising labour costs for firms, through having to pay workers higher wages, which causes a shift left of the SRAS curve to SRAS2, resulting in a rise in price level from PL1 to PL2 . Although this increase in price is dependent on the price elasticity of goods, it is inevitable that a rise in wage costs across an economy will cause a general rise in prices. In addition to this, the rising incomes of employees on the National Living Wage will result in a higher level of disposable income, resulting in a higher level of consumption and as a result a rise in aggregate demand. This rise in aggregate demand will cause a shift right of AD1 to AD2, and as a result the price level rises further from PL2 to PL3.SThis increase in price level has an erosive effect on incomes, with the real spending power of employees being reduced by cost-push and demand-pull inflation together growing faster than wages are. This can be seen below, with real average weekly earnings falling from an index of 102.5 in April 2016, when the National Living Wage was introduced, to 101.7 currently. This decline in real earnings impacts the lowest earners the most, with higher earners having greater savings and spare income to make up for reduced spending power whilst lowest earners live pay-check to pay-check and so lower real incomes relates directly to a worse ability to buy products necessary for a suitable standard of living. This suggests a negative impact of the National Living Wage, as vertical relative poverty increases. Figure 2. Graph taken from having a potential positive or negative effect on relative poverty in the UK, the policies of National Living Wage and Personal Allowance are unlikely to have any effect on absolute poverty. The largest portion of people in the UK in absolute poverty are the elderly, disabled, unemployed and children. For this section of the population, the introduction of the National Living Wage will have no impact as they do not receive any income from a wage. In addition to this, the raised Personal Allowance can have no impact on the most impoverished members of society, as they are not in a situation to pay tax on the previous level and as a result see no increase in income. Further to these two potential impacts, data suggests that the Benefits Cap could increase the number of people in absolute poverty. The Department For Work & Pensions outlines that 51% of the households impacted by the Benefits Cap are those with four or more children. This means that there is potential for a large number of children to decline further into poverty as a result of lower welfare payments, and although considering what the average earnings from work are, this policy does not consider the expected expenditure of these families to support a large number of children. Furthermore, the implementation of the National Living Wage could result in greater regional inequality when comparing the northern and southern regions of the country to each other. If the increased legally required wage does result in the laying off of more low wage workers, this could have a greater impact on the north than the south, with the north having a greater proportion of low wage workers. This would cause greater regional disparities across the two areas, and can be seen in the graph below, with the North East seeing a 1% rise in unemployment in the last quarter, compared to -0.2 in London.Figure 3. Graph taken from Despite potentially causing some increases in unemployment in certain areas, the National Living Wage can also have strong benefits for the productive potential of the economy and its long run growth. This can occur through two main reasons: training and productivity. There can often be a notable increase in employee training when firms are forced to pay their workers a higher wage, and this is caused by the greater investment that firms must make in their employees, meaning they want to gain more from them in the long run through giving them greater skills. In addition to this, employees are often more productive as higher wages psychological incentivise more productive and harder work from employees. Despite these being indirect impacts and largely long term, increased levels of human capital and productivity are likely to cause greater growth in the future, which can allow the income of the lowest earners to rise and allow poverty and inequality to reduce.This indirect benefit can also be combined with an intentional aim of the government policies to create a long-term solution to income inequality in the UK. With the government reducing large amounts of unnecessary and unfair benefits payments to those who don’t deserve it, they can therefore use spare money available to invest in education and training schemes. By targeting this spending in lower income areas to increase the quality of education, and increase basic literacy and numeracy skills, the government can therefore create a long-term knock-on effect in which each generation can gain greater education levels and therefore higher paying jobs. This should therefore allow people to pull themselves out of poverty or low-income situations, as well as benefitting the hardest working members of society the most.However, these benefits often cannot be possible for smaller firms within the economy, and their employees. This can be the case because of two main issues, relating to affordability of wages and training. For smaller firms it is often the case that if the lowest cost employees must now be paid higher wages, then many employees must be laid off because firms struggling to survive can’t absorb any of the greater costs themselves and can’t compete well enough to raise their prices. In addition to this it is unlikely that small struggling firms will be able to afford the high costs relating to creating a skilled workforce, and as a result the productivity and education improvements may not be felt as well.One key supporting factor is that it should prevent the existence of pay discrimination in low paid jobs. This should be the case with the minimum pay level being legally set for these roles, and therefore all employees should receive the same pay regardless of sex, race or any other factor. This is a clear moral strength of the policy, as well as potentially improving income inequality across different social groups. However, data published by the government’s Low Pay Commission suggests that poor enforcement means that this strength of the policy is not being met. In a recent Guardian article it is outlined that 23% of people eligible for the National Living Wage are not receiving it, and that of this 23% females are significantly more likely to be victims of illegal underpay. This suggests that the policy is not working effectively to reduce discrimination, and there is additional evidence to suggest that the Benefits Cap will also have a negative impact. In the Department for Work and Pensions assessment they also outline how different groups will be impacted by the introduction of the Benefits Cap. Reflecting the societal situation of their being greater single female parents than male the assessment outlines that 60% of those impacted by the benefits cap will be single female parents, compared to only 10% being single male parents. This suggests that the income gap between the two genders could rise, and there is also evidence that ethnic differences will occur. This can be seen again in the same study, with the department outlining how 40% of households impacted will contain a member of an ethnic minority, despite only 17% of Job Seekers Allowance Claimants having this background. These potentially growing differences between genders and ethnicities means that relative horizontal inequality could grow as a result of certain governmental policies. However, despite their potential weaknesses, the implementation of a National Living Wage and Personal Allowance are both policies that appear to be morally strong, in supporting the poorest members of society. This makes it a strong political move, particularly for the current Conservative government who are often criticised for not doing so. In addition to this there are moral debates surrounding the Benefits Cap, which works to prevent people using benefits as a long term income in return for laziness but at the same time could damage the living standards of the elderly and young. However, when analysed more deeply it appears that there are just as many weaknesses as there are strengths of the policies, and therefore it is unfair and immoral to play political games with the livelihoods of our most vulnerable citizens. In addition to these moral and political arguments for supporting the poor, some argue that the state should not interfere hugely in labour markets or provide a welfare system. This is the case through the belief of some that you earn what you are worth in a labour market, and therefore certain skills that are more valuable to the economy will receive better pay as a result of the free market. Analysts arguing for this side of the debate also believe that there will always be government failure when intervening in markets. This could be most notably seen when setting certain limits or prices, with the setting of a National Living Wage being especially hard and the impact of either increasing living standards or increasing unemployment being heavily balanced on where the wage level is set. Therefore, it could be the case that in societies there will always be the poor and the rich, and as a result the government should not intervene but let the market allocate who ends up where. However, most would be of the view that this is an immoral approach to take and despite all government policies having their negatives it is better for the government to intervene in some way rather than not, especially when data quoted at the start suggests we are behind many developed countries.Overall, it is hard to create any policies that can effectively tackle income inequality without effecting other economic factors and measures in both negative and positive ways. It is clear from the points outlined above that the three government policies analysed do not fall into this desirable category, but have just as many negative as they have positives. Through the use of the benefits and taxation system, as the Personal Allowance and Benefits Cap do, the government can make attempts to correct some level of relative poverty. However, it is inevitable that these policies cannot impact the most vulnerable citizens living in absolute poverty, and there are also numerous unintended consequences that erode the benefits of the policy and potentially give it an overall negative impact. This trend of unintended consequences also passes over to the implementation of the National Living Wage, with the policy raising incomes for those who retain their jobs whilst also collapsing the incomes of those who could lose employment. These unintended consequences show the difficulties of intervention in solving the failures of a capitalist system, and lead to the growth in popularity for more extreme policies such as Universal Basic Income. However, with these policies likely to be impossible to introduce in the foreseeable future, it is inevitable that the costs of policies must be weighed up against the benefits, and that some intervention will help the people who need it most, even if it causes others to lose out.