Economic Inequality Issues - Example

ECONOMIC INEQUALITY Student’s name Code & Course Professor’s Name University City Date Contents Introduction 2 Causes of inequality 3 Demand and supply of labor 3 Level of education 4 Technological advances 5 Gender 5 Personal factors 6 Consequences of inequality 7 Effect on growth drivers 7 Financial crises 7 Global imbalances 8 Conflicts 8 Poverty reduction is hampered 8 Why is inequality a concern to governments? 9 Conclusion 10 Introduction In an economic perspective, inequality refers to an imbalance in distribution of income and wealth. Salaries and wages are the main market incomes for most developed countries. Additionally, rents and shares contribute considerable returns on capital. Once the people have earned their salaries and wages, the governments either increases or reduces the income through government transfers and taxations respectively. The income is further equated to the number of persons in a household it has to support. Equality often takes into account comparison of high-income earners in an economy with respect to low-income earners in the same economy1. There is therefore a close relationship between wealth, poverty and inequality. However, an economy deemed rich might have relative inequality while a poorer economy may tend more towards equality. The global economy needs to foster growth and productivity as well as curtailing financial instability2. Inequality has a significant input in lessening such productivity and growth which results to economic instabilities. It is therefore valid to ask whether governments should be concerned with inequality in their economies. To answer this question, this paper looks into the causes and consequences of income inequality in depth. Causes of inequality Demand and supply of labor The levels of salaries and wages earned are determined by the demand for the market skills in the labor market. In a freely and perfectly competitive market, the resulting demand and supply forces of the skills determine the market price of such skills3. Jobs while are highly supplied while their demand is low lead to lower wages while those that are highly demanded but are low in supply lead to higher wages and salaries. Any government has therefore to be concerned with the industries or sectors that are saturated in terms of demand for labor in comparison to those that require skills that are unavailable or short in supply. Some developed countries are facing challenges of labor supply and have to import labor from other countries. Level of education It is undeniably true that variance in the level of education leads to a directly proportionate variance in income among laborers. Arguably, a person with a high education level possesses more advanced skills in comparison with another who has a comparatively lower education level. There is therefore a trace of educational influence on economic inequality even in developed countries.4 This happens amidst of free education policies in those countries. The variation cannot therefore be weighted on financial capacities to receive education, but on other determining personal attributes such as ability, drive and intelligence. It is therefore true that even though governments have made all efforts necessary to eliminate financial difficulties in getting education, there are still other challenges that are widening the inequality gap in their economies. Governments should therefore launch supplementary policies to ensure that the education offered is inclined to equality. Technological advances Since the introduction of computers in labor markets, employees, notably unskilled ones have faced massive retrenchments. Skilled employees are not entirely safe from such retrenchments based on the dynamic nature of technology. In the near future, artificial intelligence may lead to development of applications that will perform knowledge-based tasks5. Workers who are laid off because their skills are no longer economically feasible face the problem of joblessness for the rest of their lives unless they update their educational levels or become entrepreneurs. When people’s salaries become stagnant or decreased due to adoption of technology in the labor market, there is a correspondingly wider gap of inequality. Governments cannot overlook the impact of technology on unemployment. They should be in a position to forecast technological advances to prepare their labor markets for change. Gender Most countries experience a wage gap driven by gender. For instance, in the US, the comparative fulltime wages for women stand at 77% in comparison to that of men in the same economy. Men undertaking part-time jobs earn relatively less that women on part-time. Similarly, gender comparisons of people who are never married nor have children disclosed that women earn more than men do6. However, more research has to be conducted as to the reason for existence of this wage gap. The available explanations have proven inadequate though women are associated with being discriminated and consideration for reinforcing factors when seeking jobs. Though the research is necessary, it is undeniably true that there exists a gender-based wage gap in various economies, which has a significant input in economic inequality. The governments are therefore faced with the concern of reducing the wage gap resulting from gender. Personal factors An individual’s level of income can be significantly influenced by certain innate capabilities. Different individuals possessing varied sets of abilities may therefore create economic inequality. A person who is more determined to accumulate wealth will arguably be wealthier in comparison to another less determined person7. People who are known to possess high levels of intelligence have higher incomes and eventual wealth. Additionally, people have diverse preferences in terms of having fun, working harder and saving. People who work harder and make more savings while having less fun eventually become wealthier than others do. This creates an economic inequality. Though these are personal attributes, they should not be subjected to dismissal by governments that are concerned with their economic growth. Consequences of inequality Effect on growth drivers High inequality hampers the ability of low and middle-income earners to find their health. These households are also subjected to inability of accumulating human and physical capital. These are growth-delimiting factors. For example, in an economy with high inequality, poor children have access to poor quality education as the children of the high-income earners get quality education. This lessens labor productivity in that economy in comparison to a situation where there is relative economic equity. High inequality also leads to low generational mobility since the earnings of parents have meaningful influence on the wages of their children. In this sense, the poor get poorer as the rich get richer. This happens as a result of wealth concentration8. Wealthy people are always in a capacity to invest more or leverage their wealth accumulations. This is because they have adequate capital to seize opportunities and create more wealth for themselves. As this happens, their children, upon growing up are exposed to a pool of capital for investment hence wealth concentration. This undermines aggregate demand and growth since the rich consume insignificant fractions of their wages compared to middle and low-income earners. Financial crises As the rich increasingly gain influence while middle and low-income earners stagnate, crises are developed. The result of such crises is hampered growth, both in the long-term and short-term. The recent financial crisis has been heavily attached to global economic inequalities9. It is argued that lobbyists pushed for financial deregulations, credits were overextended while leverage was intensified in the advanced economies which created a long term economic inequality period that gave birth to the crisis. Global imbalances Financial liberalization and high top incomes shares have borne high external deficits. This delimits growth by challenging financial and macro-economic stabilities. Conflicts Conflicts hamper investments. They are created when economic inequalities disrupt an existing sense of social cohesion and trust among members of a society (Kumhof et.al 2013). Managing common resources becomes difficult in economies dominated by inequality. Where certain economic conflicts exist, it becomes difficult to settle them without certain groups feeling unjustified. Poverty reduction is hampered An economic growth is the main tool for poverty eradication in a country. When this growth is slowed down or disrupted by barriers such as economic inequality, then poverty eradication is immensely challenged10. This especially happens when the growth projects are directed more towards the rich and wealthy as opposed to the poor, which is generally the case in most countries. Why is inequality a concern to governments? Interestingly, it is estimated that an isolated 1 percent of the total global population owns half the globe’s wealth. This wealth amounts to about 110 trillion, which is 65 times the cumulative wealth of the rest of the population. This is also the case in most countries. The wealth of that 1 percent is increasingly rising at the expense of the remaining 90 percent. Governments have failed to check financial deepening in their economies. Technological advances have left them behind while they have not regulated their labor markets accordingly. Correspondingly, it is the duty of these governments to mitigate economic inequality. It is only governments that can take the right measures in this tug of war. The poor, who are the bottom 10 percent of the population as well as the middle class, are important factors of economic growth. The governments have to ensure that wealth is redistributed to them for the sake of their economies. This can be done by narrowing the educational gap existing between the rich and the poor in their economies. Improved health outcomes are also significant in narrowing this gap. The governments have to ensure that growth projects in their countries are concentrated more on the poor areas as opposed to the rich populations11. Concerning technology, governments should ensure that changes in labor markets are not entirely directed to the poor. Governments should also ensure that they set up minimum wage policies as well as installing retrenchment restrictions in the labor markets. Other measures that can be useful in alleviating inequality include fiscal policy, creating more inclusive labor markets and fostering safe financial inclusions. No individual, group or class of people can undertake all these measures. It is therefore the work of the governments to eradicate economic inequalities in their economies. This therefore answers the question of whether governments should be concerned with the issue of inequality. Failure of concern by the governments may lead to a worse financial crisis than the recently experienced one. Conclusion Having examined the causes and consequences of inequality, this paper concludes that governments should be concerned with the issue. Policy makers should be employed in tackling inequality. While raising the share income of the bottom 1 percent of their populations, the governments should not leave out the middle class population. However, the drivers of inequality are varied among various countries globally. The policies used would therefore be specific to different governments with respect to implementation constraints, institutional settings and policy. The governments should take up the role of curtailing this inequality. They should also collaborate with each other since not all causes are internal. This inequity has been a result of long-term negligence of the poor by failing to offer them platforms for better incomes and opportunities. This paper does not however entirely dismiss economic inequality. To a considerable degree, it can be helpful when amidst its presence, people are allowed to invest, compete, save excel in life. Reference list Autor, D. H., Katz, L. F., & Kearney, M. S. Trends in US wage inequality: Revising the revisionists. 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