Poverty, Income Distribution

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Poverty, Income Distribution Unemployment
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Lets look at the Income Distribution in
South Africa

• After this section you should be able to
• Describe the distribution of Income in SA
• Understand the use of the Lorenz curve and the
  Gini coefficient as measures of income inequality
• Analyse the causes of income inequality
• Define poverty and indicate the incidence of
  poverty in SA
• Describe unemployment and how it applies in SA

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Introduction

• SA is a middle income country with social
  indicators suggesting SA is a lower-middle or
  low-income country
• High levels of material inequality
• Cause lies mainly in history of segregation

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Distribution of Income in SA

• First need to define Family Households
• Family group of 2 or more people who live in the
  same dwelling related by birth, marriage,
  adoption
• Household (HH) all persons, related or not, who
  occupy the same housing unit
• Distribution of Income refers to the way income
  is divided amongst households

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Lorenz Curve

• Graph used to illustrate distribution of income
• A Lorenz curve traces the percentage relationship
  btwn the portion of total income received the
  portion of all HHs or families in the economy
• A perfectly equal distribution of income is
  represented by a diagonal line
• When income not distributed equally, Lorenz curve
  diverges from 45 line of perfect equality
• The greater the difference btwn the 45 line
  the Lorenz curve, the greater the inequality of
  the income distribution

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Lorenz Curve
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Gini Coefficient

• Summarises the inequality revealed by the Lorenz
  Curve
• Gini takes a value btwn 0 1
• 0 (Perfect equality)
• 1 (Perfect Inequality)
• How do we calculate it?
• Gini A/(AB)
• Where A area btwn 45 line Lorenz Curve
• And B area below Lorenz Curve

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Gini Contd

• If income is distributed equally, then Lorenz
  curve would lie exactly on the diagonal
• If income is distributed unequally (assume 1 HH
  gets all income),
• then Gini1 area under Lorenz curve0

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Causes of Income Inequality

• Variation in income exists in all countries
• What has the greatest impact on earnings
  inequality?
• EDUCATION
• Gutter education provided to large parts of SA
  population for a log period of time
• People with university degrees can expect to earn
  much more than people with only a matric
  qualification
• As structure of economy has changed (shift from
  agriculture to manufacturing to services), so
  have earnings inequality increased btwn
  agricultural workers, manufacturing workers and
  service sector workers.

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Causes of Income Inequality

• TECHNOLOGY
• Shift in demand for educated/highly skilled
  workers within same industries
• Why??
• Industries have become more capital intensive
• Wages in such industries increase relative to non
  technologically advanced jobs
• UNIONS
• Use collective bargaining to gain a wage
  advantage for members
• Non-union workers can expect a lesser increase in
  wages relative to union members (widening of wage
  gap)

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Contd

• ABILITIES
• Do you have the talent to become the next Tiger
  Woods or Zinedine Zidane? Can you act (or look)
  like Brad Pitt and Angelina Jolie?
• Some people have inherent mental qualities
  allowing them to enter high-paying jobs
• But controversy surrounds the extremely high
  incomes they earn
• WEALTH
• Defined as HHs total assets total liabilities
• In SA, wealth distribution is very skewed
• Can also evaluate HHs asset wealth
• In SA, asset wealth of poorest people non-existent

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Contd

• DISCRIMINATION
• Labour market discrimination occurs if hiring,
  firing, wage payment are biased
• Get discrimination based on age, race, sex
• Could be responsible for largest share of income
  inequality
• You also get occupations dominated by men/women
• MEN fighter pilots, CEOs, doctors, college
  professors
• WOMEN nurses, secretaries, school teachers
• After examining income inequality, we can see
  that at the lowest ends of the income
  distribution, POVERTY exists.

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Poverty

• Not easily defined
• RELATIVE POVERTY Poverty based on average annual
  income earned by other HHs
• ABSOLUTE POVERTY Poverty based on annual income
  below a specific level for a given HH size
• POVERTY THRESHOLD LINE Established annual income
  level that separates poor from non-poor

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Poverty

• Incidence of Poverty
• of people classified as having income below the
  poverty threshold line
• In SA, get a disproportionate number of Africans
  below the poverty line
• Major Shortcoming Only pretax income is included
• Does not take remittances into account
• Poverty line can be set very arbitrarily

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Profile of Household Poverty
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Unemployment

• One of SAs biggest problems!!!!!!
• Can lead to other socio-economic problems
• Cannot be solved immediately, will take time
• Affects everyone in South Africa

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Defining Unemployment

• LABOUR FORCE Economically active population
  (EAP), including all workers in formal informal
  sector, self-employed people and ALL unemployed
  people.
• When is a person unemployed?
• Btwn 15 years and 65 years
• Not currently employed
• Available for employment
• Have taken specific steps in last 4 weeks to find
  employement
• People not included Full-time students,
  housewives, retired people, etc

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Unemployment in SA

• Unreliable and inaccurate data (and therefore
  figures) make estimating unemployment rates very
  difficult
• Also must take account of discouraged workers
• More young people entering the job market
• Unemployment highest amongst the youth
• Labour Force participation rates very low in SA
• Unemployment highest amongst African people

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Unemployment in 1999 in SA
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Causes of Unemployment in SA

• 4 major types of Unemployment
• FRICTIONAL UNEMPLOYMENT
• Leave one job do not enter another immediately
• SEASONAL UNEMPLOYMENT
• Certain jobs offered only at certain times of the
  year
• CYCLICAL UNEMPLOYMENT
• Based on the business cycle
• If Economy is in recession, then Low Labour
  Demand
• If Economy is booming, then High Labour Demand

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Causes Contd

• STRUCTURAL UNEMPLOYMENT
• Significant gap between skills required for a job
  the availability of workers to fill that post
• i.e. SKILLS MISMATCH
• This is the main problem in South Africa

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Structure of SA Economy
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Education, Skills Training in SA

• SA population inadequately educated
• Many people have no education at all
• 25 of population have some primary school
  education
• 45 of population have completed Std. 5
• 16.5 of population have completed Matric (Std.
  10)
• Not enough qualified people to fill vacant posts
• Changing structure of SA economy

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Discrimination

• Labour Market always been characterised by
  discrimination
• In current economic situation, labour market
  going to discriminate against people with no
  education
• Increasing substitution of Capital for Labour
• Economic processes becoming more capital
  intensive (less labour-intensive)

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Solutions

• Long term Solutions
• Education
• Need to close the skill gap so educate more
• Economic Growth
• Higher growth rates lead to prosperity
• In good times, more labour is hired
• Develop and promote SMMEs informal sector
• Encourage self-employment/entrepreneurship
• Training
• Use legislation to make on the job training
  compulsory