Evaluate policies set by the government that could be used to promote a more equal

distribution of income.

The way the income is distributed in an economy is an important thing in an economy. Large
inequalities can be the reason for low standard of living for a huge share of the population
and thus social discontent. Low-income people can feel excluded from society which could
result in their inability to improve their economic well-being and thus unlock their true
potential as workers or entrepreneurs. Moreover, if they are unable to fulfil their basic needs,
their performance in work will be lower and thus the quality of the “labour” factor of
production.

The first example of such a policy can be minimum wage. Most developed countries,
especially those with low levels of inequalities, set it pretty high. Such a move forces the
companies to pay livable wages to all workers, even those whose work does not require
much qualification. As the amount of workers on the market is limited, due to the scarcity of
labour, in most cases the companies will pay the set minimum wage to these workers. The
effect of this is that the economic well-being of the poor parts of society will be secured by
forcing the flow of income from the rich to the poor. Minimum wage can be treated as a price
floor on the labour market with all its consequences.

Graph. 1 Effect of minimum wage on labour market

As it can be seen on the graph, the price floor is set above the free market equilibrium, it
means that the quantity of low-qualification workers demanded will be lower than the
quantity supplied. As the graph shows the employers will be willing to hire only Qd amount of
workers, leaving (Qs-Qd) amount of low-qualification workers jobless. A great example of
such a case is France, the country’s unemployment rate is above EU average and strict
minimum wage laws are considered one of key factors of such situation, especially in less
developed regions of the country, where businesses’ profits are not as huge as in e.g. Paris.
A counter-example can be Germany where minimum wage is not as high compared to GDP
per capita which makes German unemployment the third lowest in EU and provides the
country with huge international competitiveness, resulting in positive net export.

Next way to reduce inequality is to provide the poor with financial benefits funded by
progressive tax imposed on the rich. This is income redistribution that reduces inequalities
by transferring money income from the upper class to lower class. As the rich usually use
their money to invest in order to multiply their assets, the poor are most likely to consume
the money they are given.

Graph.2 Increase in AD due to increased consumption by lower classes.

As the graph shows, an increase in AD, shown by the rightward shift of the AD curve, leads
to increase in real GDP from Y1 to Y2, and in consequence demand-pull inflation. However,
the long-term growth will be lower, as there is opportunity cost due to the fact that the rich
will have less money to invest, thus the quantity or quality of resources will increase by
smaller amounts, and the technology improvement will be smaller as well. Countries with
huge social welfare system have big internal markets and thus are less affected by global
crises.Finally, the welfare benefits are a huge strain on a country;s budget, thus they often
are funded through debt which can stack up throughout the years and turn into a problem,
due to high value of interest. Example of a country that has a huge welfare system is France,
the country has very quickly recovered from the pandemic crisis but the country’s debt to
GDP ratio is not appealing, as it exceeds 100%.
Summarising, most of the reducing inequalities policies are based on government’s
intervention in the economy. These policies often include increased taxation on the rich,
money from which is transferred to lower classes. The results are increased consumption,
especially of merit goods as the low-income earners are most likely to spend it on stuff like
food, improved housing or medications. The cost ,however, is increased investment, as the
businesses and the rich have less spare money to do so. As the inequality is somehow
“natural” for the free market, intervention can set the market off the equilibrium. Finally, in
extreme cases, where welfare is significant and provides the poor with all the necessities, it
can reduce the incentive to work, which leads to decreased economic output.