Wage Inequality Related to Wealth and Consumption - Essay Example

Wage Inequality Related to Wealth and Consumption (Name) (Course) (Lecturer) (Date) Wage Inequality Related to Wealth and Consumption Introduction The study of the wages structure has continued to be a concern of economists for a long time. This dates back to the era of Adam Smith. In the post war period, economists commented on the stability of wages structure. However, empirical studies have showed that wages inequality in various countries has risen drastically. In the United Kingdom, wage inequality has followed an upward trend in the last two decades. The same trends have continued to be observed in most OECD countries. The trend in the United State has been identifies since early 1960s and it is well connected to incidents of absolute declines in wages at the end of the wage distribution. In the United Kingdom, wages inequalities were fairly stable in the 1960s and 1970s (Dranton et al. 2002). However, since then the wage inequalities has increased sharply. Acccording to Dickey (2001) regional wage inequalities are said to have a contributing effect to the increase of wage inequalities. Nevertheless, its importance at the recent years is seen to be minor. However, economists argue that regional differences in the distribution of wages and wage inequalities within the regions, command attention (Dickey 2001). Various explanations have been given concerning the rise of wage inequalities internationally. The prominent factors that been proposed and investigated include at the macroeconomic level; increased participation of female labour in the market, progress of skilled biased technology, international trade and a shift from production to services globalization. Factors at the microeconomic level include; increased net demand of skills and education, and an increase in the return factors (Trapeznikova 2012). Other institutional factors include the factors that are related to the flexibility of the labour market, deregulation of the minimum wages, decline in densities of trade unions and deregulation of unemployment benefits. Implications to the economic in relation to increases in wage inequalities have also been explored. In the United Kingdom, the increase in wage inequalities has also contributed to the increase in consumption and wealth inequalities. The case in United Kingdom Wage inequalities in the UK started becoming visible in the early 1980s. In the early, 1990s the growth was moderate but it sharply increased in the late 1990s (Attanasio & Leicester 2006). It is important to that the growth was strongest among the men workers or employees as compared to the women counterparts. This is attributed to the fact wage inequality among the women is moderated by the fact their growth is strongest among those with medium education. This could be observed as a positive note towards the house earnings. However, this has not been so. The consumption inequality has indeed proven that as much as women wage inequality is lower than the women, basic requirements have continued to be on the increase (Fortin et al. 2000). It has been noted that inequalities in the household earnings have continued to grow slowly as compared to the head earnings. Partly, the reason to this lies with the fact that there is a growth within the female labour supply are the strongest within the medium education levels. It is obvious that the slow growth in income inequality highlights a role played by transfers and taxes (Attanasio & Leicester 2006). Consumption inequality in the UK rose sharply in the 1980s. The transmission from wages and wealth through to consumption is seen to be an interesting consideration while understanding the working of the country economy at the micro and macro levels. According to Atkinson & Piketty (2007) the disjuncture between income and consumption in the United Kingdom has been documented by different authors. Consumption inequality rose sharply in the beginning of 1980s and kept pace with the wage inequality. However, in the late 1980s, the two inequalities broke apart. The income inequalities had a strong growth in the late 1980s and early 1990s (Attanasion et al. 2002). On the other hand, consumption inequality experienced moderate growth the same period. Essentially, in an overall outlook it is clear that the increase in wage inequality in the country has effect on the consumption and wealth in the population. Numerous explanations have been raised as to the existence and persistence of wage inequalities in relation to consumption and wealth inequalities. Some of them are linked to economic origin while others as a result of social changes. These include; the differences in pay in different industries and jobs. Industries characterized with high growth are seen to enjoy above average increases in earnings and pay. These include information technology, business and financial services. Industries and jobs that are characterized by high labour demand and the skilled labour is low, they tend to offer generous wage packages for the employees (Attanasion et al. 2002). On the other hand, in the public sector jobs, there has been a decline in the pay level as the pay levels in the private sector have out-stripped earning growth. It is obvious that most of the worst paid jobs are found within the low-skill service sector industries. Job insecurity or little or inactive trade unions’ protection may be some of the contributing factor of low wages in this sector. Wage inequality tends to increase in periods of rapid wage growth as the poorest households have a high likelihood that they contain non working people. As a result, inequality in wealth and consumption increases. Change in the workforce structure has also contributed to the rise of wage inequality which has affected wealth and consumption. In UK, the numbers of jobs in the manufacturing sectors have fallen since 1978. Actually, the fall is said to be at 3.5 % per year between the 1978 and 2008 before the start of the recession. The industrial shift and shift in important jobs have been parallel. It has been observed that there has been a rise in the number of individual working in managerial and well paid professional jobs; decrease in the number of the middle skills jobs resulting to moderate level of skills and education and paying reasonable salaries; an increase in the number of the low paid class. As seen in 1997 and 2009, the number of the working population in the professional and managerial occupations rose from 35 per cent to 44 per cent of the total employed population (Oded & Omer 2000). The proportion of those working in the machine and plant operatives declined from 10 percent to 7 per cent. Indeed, this led to a stable polarization of the market job with an surfacing of what most economists refer to as ‘hollowing out of the middle’ that led to loss of jobs associated with the middle class earners (Oded & Omer 2000). An increase in the earnings relatives between jobs is another factor that as contributed to the increase in wage inequality in UK. Notably, wages in the higher paying jobs are creeping up over time as compared to the middle and low paying ones. For instance, the last three decades have been characterized by a sharp increase in remuneration level among company executives, bankers and financiers. It is important to note that most economist explain this change of job pattern as a reflection of professionalization of the society. It is obvious that this process is beneficial and progressive as different ways as it has broadened opportunities and improved working conditions (Krueger et al. 2006). However, it has continued to widen the wage, wealth and consumption inequality in the society. Apparently, the middle income earners are losing work in the chase for professional jobs. Indeed, this is an evidence that in the near future, wealthy will be mainly be concentrated amongst the managerial staff and professional in this country. The other factor is the fall of incomes of individual that depend on state benefits (Atkinson 2003). In most cases, the state welfare benefits raise parallel with the prices rather than wages or earnings. Thus, households that continually depend on the welfare for assistance perceive their wages fall over time. Indeed, this is a specific problem for many of pensioner households. It is not a surprise that the issues surrounding the pension poverty have continued to be a major political challenge for most government officials. Unemployment has indeed played a major role in increase wage, wealth and consumption inequalities in the country. It is obvious that employment is a key reason for poverty too. For instance, a solemn problem is in the rise of the number of households where no individual or persons is in paid employment and where a household rely on the state welfare aid. Indeed, this increases the level of consumption and wage inequality in the country (Krueger et al. 2006). Changes to benefit and tax systems have also played a role in increase of wage inequality and relative poverty in the United Kingdom. The income tax rates, for the last two decade, have fallen. The highest marginal rate in 1979 fell from 83 % to 40 % in 1989 where it has stagnated. The basic rate came down from 32% in 1979 to the present 22 % (Blundell et al. 2008). The above tax reductions allow individual in work to maintain a higher proportion of their earned wages. The reimbursements from lower taxes have run disproportionately to citizens on above-average wages as a result of the fall of the nature of the direct tax system in the United Kingdom in the past years. In recent years, there has been a switch towards indirect taxes. This includes higher rates of the value added taxes and excise duties on cigarettes, alcohol and petro. It is obvious that the direct taxes that have been changed have had a regressive effect on the distribution of wages among individuals. Consequences of wage inequality Wage inequalities have had significance consequences on the economy. Firstly, it has increased the concentration of wealth and income. Wages and wealth are unevenly distributed in the country. It has resulted to the rich to continue prospering by taking the greater concentration of income and wealth at the top. The emergence of these new wealthy elite has resulted to what the economists refer to as “favourable treatment by market friendly governments” (Brewer et al. 2007) . It is obvious that over the last decades, financial and economic elite has continued to use their political muscles to ensure that there is a weak financial regulation and lower taxes on the wealthy by the state (Meghir & Pistaferri 2004). Wage and wealthy inequalities have also contributed to the rise of personal debts. The falling wage share in the country has led to a sharp increase of private debt in the past decades. In order to maintain the purchasing power, wage-earners in turn increase credit. Not only the lower and middle class earners have resulted to borrowing, the wealthy have been encouraged to borrow more not to finance consumption but to have speculative bets on the financial assets. Low wages among the lower earners has driven them to borrow beyond their means in order to take care of their consumption. This has added to a further rise on the rising of asset bubble and individual debts which in result has triggered the current crunch and ensuing credit crunch. Another consequence is the rise of the level of poverty and the expansion of the social welfare aid function of the state. In the United Kingdom, approximately half of the children living in poverty got at least one guardian working but earning peanuts to help the family get to the above the poverty line. This has led to an increase in the families that are living in poverty over time. Due t low wages, the rise in the level of poverty is said to continue unless the issue of falling wage share is dealt with. As such, the UK government has continued to establish and review policies that are aimed at reducing the level of poverty and check the wage inequality (Brewer et al. 2007). This has led to an increase in the money spent on supporting poor family to rise annually. As resulting of this spending, the benefit system has become expensive and complex to administer. In addition, it has become hard for the recipients to understand the issues facing the social welfare. Brewer et al. (2007) asserts that the redistribution of income in order to prevent the poverty level from getting to an unacceptable level has led to an extension of various means of evaluating issues affecting both lower and middle class earners and the intensifiers of the poverty trap. Indeed, the low wage economy refers to the fact that the individuals on benefit may be better off financially if they start working (Leicester & Oldfield 2004). Conclusion It is undeniable that the United Kingdom has experienced wage inequality growth for the last three decades. The growth rose sharply in the early 1980s and progressed in the 1990s up to present times. Indeed, as discussed there are various factors that have contributed to the rise of wage inequality which has had effect on wealth and consumption. These include unemployment, change in the workforce structure, an increase on the earning relatives between jobs, different individual incomes, changes in the tax systems and inequality in labour supply. Implications have been observed as a result of wage inequalities in the country. There has been an increase in poverty, a rise in the social welfare kits, increase in individual debts, a rise of a wealthy elite and an increase in the concentration of wage and income. Indeed, there is a need for the government to tackle this issue in order to increase financial reforms in the country. In addition it will try to re-stabilize the trouble global economy. References Atkinson, A. 2003, Top income in the United Kingdom over the Twentieth Century. Nuffiled : Oxford University. Atkinson, A., & Piketty, T. 2007, Top incomes over the Twentieth Century. Oxford: OUP. Attanasio, O., & Leicester, B. 2006, Consumption, income, and the well-being and children. London: IFS. Attanasio, O., Berloffa, G., Blundell, R., & Preston, I. 2002, From earning inequality to consumption inequality. Economic Journal , 112(478); 52-59. Blundell, R., Bozio, A., & Laroque, G. 2008, Taxation and the pattern of lifecycle hours and employment' mimeo. London: IFS. Brewer, M., Goodman, A., Muriel, A., & Sibieta, L. (2007). Poverty and inequlaity in Britain. London: IFS. Brewer, M., Myck, A., Shae, M., & Shepherd, A. (2004). Poverty and inequality in Britain, 2004. London : Institute of Fiscal studies . Dickey, H. 2001, Regional earnings inequality in Great Britain: a decompositionanalysis. Regional Studies , 35 (7) 605-612. Dranton, G., & Monastiriotis, V. 2002, Mind the gaps: the evolution of regional inequalities in the UK, 1982-1997. Journal of Regional Science , 42 (2): 219-256. 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