One of the characteristics of our era is the issue of inequality of incomes or the unequal distribution of income among a population, which determines the economic stability of states, their social unity, and the political situation. Although a certain level of inequality is a natural result of a market economy, an unreasonable expansion of the income gap over the last few decades is a menace to both an inclusive and sustainable growth. It is important to understand the causes of this inequality and possible policy solutions so as to create a more fair future.
Increasing income inequality cannot be linked to one single particular thing but is a complicated mix of global, technological, and policy driven factors.
Among the most important forces is the skill-biased technological change (SBTC). The automation and emergence of digitized technology have put pressure on and raised the wages of highly skilled and educated workers who can use and become innovators in new technologies, and at the same time, the wages and job opportunities of less-skilled workers are reduced. Globalization has led to the automation or offshoring of many middle-skill jobs or routine jobs. The augmented global commerce and openness have enhanced rivalry and results in corporations offshoring manufacturing and other less-skilled labour to nations possessing inferior labour, which has applied downward pressure on income in developed economies and given rise to a winner-take-all game where the leading earners grab excessive returns.
The policy and institutional reforms in labour markets have increased inequality by the market. Weaknesses in collective bargaining and the strength of trade unions combined with the fall in the real value of the minimum wage in most countries have diminished the bargaining strength of workers with low and middle-level incomes. In addition, the tax policies, including the declining top marginal income tax rates and favorable taxation of capital gains, tend to favor the highest earners more, diminishing the redistributive power of the state.
The inequality in the access to quality education is a key factor in the continuation of inequality between generations. People with high-income backgrounds will have more chances to get better schooling and higher education that subsequently gain access to higher paying job opportunities, resulting in a cycle of benefit. On the other hand, the lack of equal opportunities to develop human capital results in an ongoing disparity in the earning capacity.
The effects of large income inequality are far-reaching than economic measurements as it impacts on the society itself.
Great inequality may become an obstacle to economic development in the long term. It causes a decreased aggregate demand, since the rich are concentrated in the hands of the rich, which has low marginal propensity to consume compared to the low and middle-income earners. Such concentration may also create financial instability, either through the promotion of high levels of debt accumulation by the poor and middle, to continue spending, or through the encouragement of a speculative investment by the rich. The issue of high inequality also leads to underutilization of human capital because due to unequal opportunities the talent but poor people are unable to achieve their full productive potential.
Income inequality destroys trust and social cohesion socially. Increased inequality in society is associated with increased levels of health and social issues including increased levels of crime, lower life expectancy and social mobility. The perceived sense of injustice can contribute to political polarization and the emergence of populist tendencies, thus making it harder to have positive policy discussion and consensus.
The solution to the level of income inequality is a complex approach to both pre-distribution (modifying market income prior to taxes and transfers) and redistribution (modifying final income through taxes and transfers).
One long-term solution is widespread investment in universal and high-quality publicly funded education and training to get a job. This strategy encourages pre-distributional equality by providing more workers with the skills required in a modern technologically-driven economy. The economic implication is that its overall productivity may be greater and tax base expanded in the long run, but at a high short-term cost of public spending.
Policies such as the increase of the minimum wage to a living wage rate and the empowerment of workers to organize can increase the income of the low-wage workers. The redistributive capacity of the government is enhanced by fiscal policies that redistribute the tax burden in favour of the capital over labour or use more progressive income and wealth taxes. Although some have claimed that an increase in taxes on the rich or corporations will discourage investment, those who advocate the view have cited the positive economic effects of an addition of demand by the working population and also improved utilization of government funds in development of growth generating sectors.
Narrowing and enhancing the social safety nets, including unemployment benefits, universal healthcare, and high-target cash transfers (e.g. the Earned Income Tax Credit or child allowances), leads directly to a lower post-tax and transfer inequality. The programs provide an insulation against economic shocks and have led to more stability and has given the low-income families an opportunity to invest towards the future of their children and that is what will break the cycle of intergenerational poverty.
To sum it up, forces contributing to income inequality are very powerful; however, they are not too strong. By formulating strategic policy interventions that will focus on provision of equal opportunity, equitable labour remuneration, and sound redistribution, societies are able to create an atmosphere of inclusive growth, which will not only guarantee increased economic efficiency, but more effective democratic and social bases.
Author – Sargun Kaur
Hopetown School, Dehradun
