IB DP Economics - Unit 3 - Causes of economic inequality and poverty-Study Notes - New Syllabus

Causes of Economic Inequality and Poverty

Economic inequality and poverty arise because income, wealth, opportunities, and resources are distributed unevenly within an economy.

Different individuals and groups may have unequal access to:

• Education
• Employment opportunities
• Assets and wealth
• Political influence
• Healthcare and public services

Several important factors contribute to economic inequality and poverty.

1. Inequality of Opportunity

Inequality of opportunity occurs when individuals do not have equal access to opportunities that allow them to improve their economic situation.

Opportunities may differ because of:

• Family background
• Education quality
• Healthcare access
• Location
• Social class

How Inequality of Opportunity Causes Inequality and Poverty

If some individuals receive better opportunities than others:

• They may gain higher education and skills.
• They may access better jobs and higher incomes.
• Others may remain trapped in low-income employment or unemployment.

This widens income and wealth differences over time.

Intergenerational Poverty

Inequality of opportunity may create intergenerational poverty.

This means poverty passes from one generation to another.

Example:

• Children from poor households may receive weaker education and fewer opportunities.
• As adults, they may also experience low incomes and poverty.

Examples of Inequality of Opportunity

• Unequal access to quality schools
• Limited healthcare in poor regions
• Rural populations having fewer employment opportunities

Effects of Inequality of Opportunity

• Persistent poverty
• Reduced social mobility
• Wider income inequality
• Lower economic efficiency because talent may be underutilized

2. Different Levels of Resource Ownership

Resource ownership refers to ownership of factors of production and assets such as:

• Land
• Property
• Businesses
• Shares and investments
• Natural resources

How Resource Ownership Causes Inequality

Individuals who own more resources often receive more income and wealth.

Resource ownership generates income through:

• Rent
• Interest
• Dividends
• Profits

More assets → More income generation → Greater wealth accumulation

Wealth Concentration

Wealth often becomes concentrated among a small group of people.

This may increase both:

• Wealth inequality
• Income inequality

Inheritance and Resource Ownership

Assets may be passed through inheritance.

This allows wealthy families to maintain economic advantages across generations.

Result:

• Persistent inequality over time

Examples of Unequal Resource Ownership

• A small percentage of the population owning most land in a country.
• Large corporations owned by wealthy shareholders.

Effects of Unequal Resource Ownership

• Large differences in wealth and income
• Concentration of economic power
• Reduced equality of opportunity
• Greater poverty among those without assets

3. Different Levels of Human Capital

Human capital refers to the skills, education, training, experience, and health possessed by workers.

Human capital increases worker productivity and earning potential.

How Human Capital Causes Inequality

Workers with higher levels of human capital usually:

• Earn higher wages
• Access better jobs
• Experience lower unemployment

Workers with lower levels of human capital may:

• Receive low wages
• Work in unstable jobs
• Face unemployment

Role of Education and Training

Education and training improve human capital.

However, access to education may be unequal.

This reinforces income inequality.

Technological Change and Human Capital

Modern economies increasingly reward highly skilled labour.

Technological change often increases demand for:

• Highly educated workers
• Technical and digital skills

Low-skilled workers may experience:

• Lower wages
• Job insecurity
• Structural unemployment

Examples of Human Capital Differences

• Doctors and engineers earning more than unskilled labourers.
• Workers with advanced digital skills receiving higher salaries.

Effects of Human Capital Differences

• Income inequality
• Unequal employment opportunities
• Persistent poverty among low-skilled workers
• Differences in living standards

Comparison of the Causes

Key Ideas:

• Inequality of opportunity limits social mobility and economic advancement.
• Ownership of assets generates wealth and income advantages.
• Human capital strongly influences wages and employment opportunities.
• These factors may reinforce poverty and economic inequality across generations.

4. Discrimination (Gender, Race and Others)

Discrimination occurs when individuals or groups are treated unfairly because of characteristics such as:

• Gender
• Race or ethnicity
• Religion
• Age
• Disability
• Social background

Discrimination can limit access to employment, education, promotions, and income opportunities.

How Discrimination Causes Economic Inequality and Poverty

When discrimination exists:

• Some groups may receive lower wages.
• Employment opportunities may be restricted.
• Access to education and training may be limited.
• Career advancement may become more difficult.

This creates unequal economic outcomes between groups.

Gender Discrimination

Gender discrimination may result in:

• Women receiving lower wages than men for similar work.
• Lower female labour force participation.
• Limited access to leadership positions.

This contributes to income inequality and higher poverty rates among women.

Racial and Ethnic Discrimination

Racial or ethnic discrimination may limit:

• Employment opportunities
• Educational access
• Housing opportunities
• Access to credit and finance

Disadvantaged groups may therefore experience lower incomes and persistent poverty.

Occupational Segregation

Discrimination may also create occupational segregation.

This means certain groups become concentrated in lower-paying jobs.

Result:

• Long-term wage inequality

Effects of Discrimination

• Higher poverty rates among disadvantaged groups
• Reduced social mobility
• Lower economic efficiency because talent is underutilized
• Social tensions and inequality

5. Unequal Status and Power

Status and power refer to the ability of individuals or groups to influence economic and political decisions.

Some groups possess greater:

• Political influence
• Economic power
• Social status
• Access to decision-making

How Unequal Status and Power Cause Inequality

Groups with greater power may influence policies and markets in ways that benefit themselves.

Examples:

• Large corporations influencing government policies.
• Powerful groups receiving favourable regulations or tax benefits.

Labour Market Power Differences

Some workers possess stronger bargaining power than others.

Highly skilled or unionized workers may negotiate:

• Higher wages
• Better working conditions
• Greater job security

Low-skilled workers may have weaker bargaining power and lower incomes.

Political and Social Influence

Wealthy individuals or groups may have greater influence over:

• Government decisions
• Access to quality education
• Financial opportunities

This may reinforce inequality over time.

Cycle of Power and Wealth

More wealth → More influence and power → Greater economic advantages

This cycle may increase inequality further.

Effects of Unequal Status and Power

• Persistent inequality
• Unequal access to opportunities
• Reduced social mobility
• Concentration of economic and political influence

6. Government Tax and Benefits Policies

Government policies strongly influence income distribution and poverty levels.

Taxation and welfare policies may either:

• Reduce inequality
• Increase inequality

Tax Policies

Governments collect taxes to finance public spending.

The structure of the tax system affects income distribution.

Progressive Taxes

Under a progressive tax system:

• Higher-income earners pay a larger percentage of income in taxes.

Progressive taxation may reduce inequality by redistributing income.

Regressive Taxes

Some taxes, such as indirect taxes, may be regressive.

Low-income households spend a larger proportion of income on consumption.

Result:

• Regressive taxes may increase inequality and poverty.

Benefits and Transfer Payments

Governments may provide:

• Unemployment benefits
• Pensions
• Housing support
• Food assistance
• Healthcare support

These transfer payments may reduce poverty and inequality.

Public Services

Government spending on:

• Education
• Healthcare
• Infrastructure

may improve equality of opportunity and reduce long-term poverty.

How Government Policies May Increase Inequality

If governments:

• Reduce welfare spending
• Lower taxes mainly for wealthy groups
• Cut public services

income inequality and poverty may increase.

Effects of Government Policies

• Can reduce poverty through redistribution.
• May improve equality of opportunity.
• May also widen inequality depending on policy choices.

Comparison of the Causes

Key Ideas:

• Discrimination restricts economic opportunities and income.
• Unequal status and power reinforce economic advantages for some groups.
• Government taxation and welfare policies strongly influence income distribution.
• Policy choices may either reduce or worsen poverty and inequality.

7. Globalisation and Technological Change

Globalisation refers to the increasing integration of economies through:

• International trade
• Foreign investment
• Movement of capital
• Technology transfer
• Global production networks

Technological change refers to improvements in production methods, machinery, digital systems, and innovation.

Both globalisation and technological change can increase economic growth, but they may also increase inequality and poverty for some groups.

How Globalisation Causes Economic Inequality

Globalisation may benefit some workers and industries more than others.

Workers and firms that are internationally competitive may experience:

• Higher incomes
• Greater profits
• More employment opportunities

However, less competitive industries and workers may face economic difficulties.

Wage Differences

Globalisation often increases demand for:

• Highly skilled labour
• Professional and technical workers

At the same time, low-skilled workers may experience:

• Lower wages
• Job insecurity
• Unemployment

Result:

• Income inequality may increase.

Outsourcing and Job Losses

Firms may move production to countries with lower labour costs.

This process is called outsourcing.

Outsourcing may reduce costs and increase profits, but it can also:

• Cause unemployment in higher-cost countries.
• Reduce incomes for low-skilled workers.

Technological Change and Inequality

Technological progress often increases productivity and economic growth.

However, technology may replace some forms of labour.

Automation and Structural Unemployment

Machines, robots, and artificial intelligence may replace routine jobs.

Low-skilled workers may experience:

• Structural unemployment
• Lower wages
• Reduced job opportunities

Skill-Biased Technological Change

Modern technology often rewards workers with advanced education and digital skills.

This is called skill-biased technological change.

Result:

• Wage gaps between skilled and unskilled workers widen.

Examples of Globalisation and Technological Change

• Factory workers losing jobs because production moves overseas.
• Automation replacing routine manufacturing jobs.
• Technology firms paying high salaries to highly skilled workers.

Positive Effects of Globalisation and Technology

Although inequality may increase, globalisation and technology may also:

• Reduce global poverty through economic growth.
• Create new industries and jobs.
• Increase productivity and efficiency.
• Improve living standards.

Effects on Economic Inequality and Poverty

• May widen wage inequality.
• Can create structural unemployment.
• May increase regional inequality.
• Benefits may be distributed unevenly.

8. Market-Based Supply Side Policies

Market-based supply side policies are government policies designed to increase economic efficiency and improve market performance by reducing government intervention.

These policies aim to encourage:

• Competition
• Investment
• Labour market flexibility
• Entrepreneurship

Examples of Market-Based Supply Side Policies

• Privatisation
• Deregulation
• Reduction in trade union power
• Lower taxes on businesses and high-income earners
• Labour market liberalisation

How Market-Based Policies May Increase Inequality

These policies often increase rewards for productive and highly skilled individuals.

However, benefits may not be distributed equally.

Labour Market Flexibility

Policies that increase labour market flexibility may:

• Reduce job protection
• Lower minimum wages
• Reduce trade union influence

While firms may become more efficient, low-skilled workers may experience:

• Lower wages
• Less job security
• Greater income inequality

Lower Taxes on High Incomes

Governments may reduce taxes on businesses and wealthy individuals to encourage:

• Investment
• Entrepreneurship
• Economic growth

However:

• High-income groups may benefit more than low-income groups.
• Income inequality may widen.

Privatisation

Privatisation transfers ownership of industries from the public sector to the private sector.

Private firms may become more efficient and profitable.

However:

• Some workers may lose jobs.
• Income differences may increase.

Potential Benefits of Market-Based Supply Side Policies

• Higher economic growth
• Greater efficiency
• Higher productivity
• More business investment

Potential Negative Effects

• Greater wage inequality
• Reduced job security
• Higher poverty for some groups
• Weaker income redistribution

Comparison of the Causes

Key Ideas:

• Globalisation and technology may increase inequality by rewarding skilled workers more heavily.
• Automation may create structural unemployment for low-skilled workers.
• Market-based supply side policies may improve efficiency but also widen income inequality.
• Economic growth benefits are not always distributed equally across society.