Relationship between Income and Saving among the Low-Income Workers in the Netherlands - Research Paper Example

Relationship Between Income And Saving Among The Low Income Workers In Netherlands Chapter One 0 Introduction 1 Background Information The issueof saving has been a problem since dark ages. During the 1930 depression and the 2nd world war, many economies were characterized by high levels of unemployment and inflation. Investments were inevitable to revive such economies. This was only made possible by changing the levels of consumption and saving. The fact is that investments and savings are core for the growth of the economy (Miller (1988). Most nations across the world appreciate the importance of saving in the economy. Regardless whether they are developed or they are developing, saving is taking place in all the economies in the world. But the developed nations tend to save more compared to their counterparts that are developing. As a matter of facts, the general trend in the world is that people who earn less (low income earners), consume more and they save less. On the other hand the individuals who earn more (high income earners), tend to save more. Netherlands as a nation is not exceptional since the country is exposed of those who earn more and those who earn less. Majority of those who earn less appear to save less and consume more, while those who earn high levels of income tend to save more. This trend of saving can be associated with the levels of inflation that affects the purchasing power of the individuals. An increase in the levels of inflation in a country implies that, the purchasing power of an individual will also increase. This state forces the individual to spend more money to buy goods, and what one is left with is so little which explains the low saving levels (Taylor,and Woodford, 2001). This research study is based on the consumption theory. The theory of consumption is used because of the relationship existing between saving and consumption. Saving can thus be described as the part of income that is not consumed. Different economists contributed to this theory. Keynes said that consumption depends on absolute current income. Ando-Modigliani argued that consumption depends on an individual’s lifetime income. Friedman argued that consumption depends on permanent income and introduced an aspect of present value of income. Deussenberry argued that consumption depends on relative income. Keynes theory was adopted since the study was aimed at the relationship between saving and the current disposable income. Saving is defined as the conservation of money. It includes money set aside in a bank or pension plan as well as the reducing of expenditures. In economics, personal saving is described as the disposable income minus personal consumption i.e. income not spent immediately for buying goods and services is saved. However, not all types of expenditures are included as consumption expenditure. If an individual spends a part of his income on providing irrigation facilities or on buying tools and machinery, then it is not consumption expenditures but investment expenditure (Inder , Xiumin , and Pereira, 2006). Keynes defined saving as part of income not consumed because disposable income is either consumed or saved (Y = C + S). Income is what is earned after providing services. In the study, income was taken less taxes thus it was disposable income. It included basic pay plus earnings from other sources like business, rent interest and dividends plus other miscellaneous earnings. Low income earners included housekeepers, janitors, cooks, cleaners, drivers, grounds men, electricians etc 1.2 Statement of The Problem Saving is part of income not consumed. It plays a significant role to the economy and the households as a whole. Most people who earn less struggle to make ends meet. They consume almost all of their income implying that saving is less among the low income earners in Netherlands. The Average propensity to consume (APC) is higher among the low income earners compared to the high income earners. The study intends to investigate the linear function that shows how saving depends on income, where savings if any are kept and why the low income workers save no matter how little it may be. 1.3 Research Objectives 1.3.1 General Objective The purpose of this study was to determine and describe the nature of relationship between disposable income and saving among the low income earners in Netherlands. Disposable income included basic pay plus incomes from other sources while saving was taken to be what remained after buying goods and services. 1.3.2 Specific Objectives a) Establish what savings are and how they depend on income. b) Establish the degree of saving by low income earners in Netherlands. c) Evaluate the propensity to save d) Find out whether low income earners appreciate the available instruments for saving. e) Give policy recommendations. 1.4 Research Questions The study aims at answering the following research questions. a) What is the relationship between saving and disposable income by low income earners? b) To what extent do low income earners tend to save out of their available incomes? c) What motivates low income earners to save? d) Where do low income earners keep their saving? 1.5 Significance Of The Study It is hoped that this study will provide detailed information that will be of great help to workers and administrators in Netherlands. It will create awareness on the importance of saving to the workers which will help them change their consumption and saving habits given their low levels of incomes. The administration can use the data to review the salary brackets for workers to provide higher incomes to induce saving. Trade Unions in Netherlands can use the data obtained to bargain for better and improved payments for their workers. Economic planners can use the information when making investment decisions and therefore be able to decide on the level of saving required for such investments. Chapter Two Literature Review 2.1 Saving-Income Relationship (Saving Function) Saving function is a counterpart of a consumption function. Therefore, given a consumption function, we can derive the corresponding saving function. Using Keynesian consumption function C= a + cY…………………………… 1 Saving function can be derived as S = Y – C………………………………….. 2 Saving function can be described as a mathematical relation between income and saving by the household. It can be said to a simple line equation or a diagram designated as the saving line. The saving captures the income-saving relation, the flip side of the consumption –income relation that forms one of the key building blocks for Keynesian economics. The two key parameters of the saving function, the intercept term, which indicates autonomous saving and the slope, which is the Marginal Propensity to Save (MPS), indicates induced saving (Michael and Wang, 2006). The Injections-Leakages model used in Keynesian economics is based on the saving function. Saving function captures the relation between saving by household and income. And since income is used either for consumption or saving, the saving function is a complement of the consumption function. Both reflect the fundamental psychological law put forth by Keynes that consumption expenditures (and saving) by household sector depend on income and only a portion of additional income is used for consumption, the rest being saved. This saving function is presented either as a mathematical equation, most often as a linear equation or as the graphical saving line. In either form, income is measured as disposable income, national income or occasionally GDP. The saving function makes it easy to divide the saving into two basic types: Autonomous saving (the intercept term). And the induced saving (the slope, also the MPS). Mathematically, Saving function in general form is S = f(Y) ……………………………….. 3 For linear relationship, S = c + dY ………………………………………… 4 Where, slope d is assumed to be between 1 and 2 i.e. (0 Read More