Inequality in the UK its effect on the national economy - Essay Example

Inequality in the UK its effect on the national economy Introduction Several development agencies in international lending institutions have over the years emphasized on poverty eradication as a means of economic empowerment especially in middle income countries. This is well demonstrated by the components of the Millennium Development Goals (MDGs). Most policies on poverty reduction and economic empowerment have ignored or underplayed the importance of income distribution to economic growth. This paper explores the subject of inequality with an emphasis on the nature and scope of inequality in the UK. Why should economists care about inequality in the distribution of incomes? Poverty and economic inequality are intimately bound with one another both as a policy or an analytical issue. Economic well-being and income distribution are related as demonstrated in the societal understanding of justice and human rights, and, therefore, render economic equality an intrinsic value. High levels of economic equity are associated with desirable social outcomes especially in the realms of health and crime (Andrew and Meen2006). The EU defines poverty as living on less than half the average national income, as such, irrespective of the average income, the greater the income inequality, the higher levels of poverty in a country. The definition of the extent of poverty depends on both the level of a society’s income and the distribution of income. Therefore, societal standards or norms of essential needs in a society are determined by the middle class (Brueckner, Thisse and Zenou 1999). In the case of two societies where the bottom segments have the same level of income, poverty is more prevalent in the in the society where income is more unequally distributed. The bottom quintile of the unequal society will be more isolated from the middle quintile and will, therefore, be further from meeting the standards of that society. As a result, more members of this bottom quintile will be stuck in poverty (Beroube 2005). People’s poverty can be defined as a relation between people and possessions (possessions in this case represent the level of income). But, poverty is a social condition since people ‘become poor’ when they are incorporated into larger societies, and their possessions are valued in relation to societal standards of basic needs. Therefore, the condition of poverty becomes their social status and their relation to society places them in poverty. In this case, it can be argued that people’s relative position is related to their material possessions and that poverty cannot be eliminated when distribution of income is highly unequal (Beroube 2005). Material equality has an intrinsic value and can be termed as a human right; this is because basic needs are contingent to societal requirements, which are socially determined. Therefore, greater inequality in society renders a larger group of people unable to meet fundamental needs (Brueckner, Thisse and Zenou 1999). There is a correlation between level of income and health outcomes in a society in terms of both mortality and morbidity. The impact of income on health outcome tends to be at its strongest at the lower levels of income compared to high income earners. For those at low levels of income, a small increment in income is associated with a major improvement of health outcomes (Andrew and Meen2006). But at high levels of income, increment in income has little impact on health outcomes. In reference to societies, the correlation between income inequality and health outcomes is negative with more unequal societies having worse health outcomes. The reasons for poor health outcomes in unequal societies are attributed to less spending on social programs than in the case of more equal societies. Therefore, accessibility of public health facilities and provision of healthcare for the low income part of the population is smaller in unequal societies than in more equal societies. On the other hand, more equal societies have better health outcomes on average, but the health outcomes of those at the upper income levels are marginal compared to those of similar status in more unequal societies (Schelling 1971). More unequal societies tend to generate greater stress levels and this stress can contribute to poor health through psychosocial pathways. This is because income inequality pollutes the social environment, creating divisions, resentments and worries at all levels. The members of society in inferior positions tend to experience chronic tension as they are unable to achieve the material requirements of the society while the well endowed with material wealth tend to worry about sustaining their privileged position. Fear is a powerful generator of stress and stress is a factor in a great variety of negative health outcomes (Schelling 1971). Inequality motivates crime as in those societies with a high degree of inequality the people at the bottom quartile tend to see themselves as deprived and their position as unfair, such people are more likely to rationalize and engage in theft ,burglary or other crimes against other people’s property. The theory of crime is based on calculation of potential gains relative to potential costs; it postulates that a positive relationship exists between income inequality and crime based on wealth differences between the rich and the poor (Schelling 1971). How do changes in inequality over time in the UK compare with other countries? In 2011, the incomes of the senior executives of the top 100 companies in the UK increased by almost 50% while the average pay rise in the private sector increased by 2.7%. Prices increased by 5.2% in the same period implying that more private sector workers became poor while the public sector was even worse with pay freezes for most workers. This is not an isolated case as in the last 30 years the share of national income going to salaries and wages fell while the portion going to profits rose (Cutler, Glaeser and Vigdor 1999). Even when the share of income going to wages and salaries was reduced, there was even more discrepancy in the way it was shared with the highest paid 10% getting twelve times higher wages than the bottom 10% in 2008. Wilkinson and Pickett (2010) claim that income inequality in the UK has grown faster than anywhere else with the top 10% receiving 40% of the total UK income while the poorest 10% get only 1% (Wilkinson and Pickett 2010).  Inequality in the UK ranks fourth highest among the developed countries. In developed countries, equality means a healthier, happier and more successful population, but the UK is among the most unequal countries which include Portugal, the US and Singapore. Countries with high levels of inequality have much worse social problems than countries with less inequality like Sweden and Japan. Wilkinson and Pickett (2010) argue that the UK would half murder rates and obesity if inequality was reduced by a half (Wilkinson and Pickett 2010). They further assert that mental illness would reduce by a third, birth to teenage mothers and imprisonment rates would decrease by a fifth, while social mobility and levels of trust would greatly improve (Cutler, Glaeser and Vigdor 1999). Out of the 23 most developed countries, the UK has the fourth lowest life expectancy with countries below the UK, such as the US and Portugal having even lower life expectancy. Infant mortality and low birth weight per thousand are less than 4 in Japan and Sweden while the rate per thousand in the USA is seven. Life expectancy in the UK for men in the lowest quintile is on average 7.3 years lesser than those in the best group. Obesity induces the release of stress hormones, which can seriously affect the health. Obesity affects 30% of the population in the US and only 3% in Japan while 20% of the population in the UK is obese; this is twice the level in the Netherlands. In developed countries poorer people are more likely to develop obesity especially the type that accumulates extra weight around the waist and is associated with inducing stress hormones (Cutler, Glaeser and Vigdor 1999). Mental health problems are most prevalent in unequal societies. For example, the world health organisation showed that over 25% of people in the US have had mental health problems at one time compared to less than 10% in Germany and Spain. The portion of mentally ill people in the UK is 20% with the difference compared to Germany, and Spain attributed to inequality. Health in a country is more related to equality than health expenditure. For example, the USA spends over 15% of its national income on health compared to the European average of less than 10% but has highest rates of ill health compared to most European countries. This is because greater equality prevents illness and acts a preventive measure for public health (Schelling 1971). Which measures of inequality do you think are most appropriate in order to conduct such comparisons? (20%) The measures of inequality used to conduct comparisons are income differences, access to health facilities and welfare services and access to personal development opportunities. What do you consider to be the most important factors in explaining income inequality in the UK? You should consider the empirical evidence relating to the respective roles of family background and the area in which people live. (50%) One of the drivers of economic inequality in the UK is changes in the distribution of wages and salaries which account for 75% of household incomes of working age adults. The wages of the top 10% best paid workers have risen relative to those of the 10% least paid workers. Apart from the growing earnings shares of the top earners and declining shares at the bottom, top earners saw their incomes rising sharply. This is demonstrated by the increased rate at which the gap between the highest 10% earners and the middle earners is increasing compared to the gap between the middle earners and the lowest earners (Muth and Goodman 1989). The income of middle and lower households in the UK has consistently slipped behind that of higher income earners over the last three decades. This has partly been caused by a reduction in the part of national income going to wage earners while the portion going to profits has risen. The wage share sustained its post-war level of around 59% up to the mid 1970s before drifting downwards to a post war low of 51.7 % in 1996. This fall was attributed to rise in unemployment and it recovered to 55.2% in 2001 before slipping back to 53.25 in 2008 (Muth and Goodman 1989). The decline in the wage share, in the post millennium years, has been caused by the introduction of flexible and diverse labour markets, economic liberalization, increase in constraints on collective bargaining, reduced demand for unskilled labour and global transfer of jobs triggered by globalization. The factors highlighted above have greatly favoured the bargaining power of employers and the share of GDP going to profits. Naturally, profits tend to be less evenly distributed than wages. Though some profits are channeled into higher investments, most of the beneficiaries of the profit pool are high income earners and the rich (Muth and Goodman 1989). Higher profits have promoted the explosion of corporate and executive financial remuneration. Some private companies have shared record dividend payments after making high profits. The rising profits have allowed the rich to prosper through greater accumulation of wealth and income by the top earners. Some analysts claim that the new wealthy elite get favorable treatment by market friendly governments. These financial and economic elites have used their growing political muscle to influence financial regulation by the state and to lower taxes on the wealthy (DiPasquale and Glaeser 1999). At least 50% of children living in poverty in the UK have one working parent, who, however, earns too little lift the household out of poverty. The rise in working related poverty is in part a result of the falling wage share. The government expenditure on income support for families has increased from £18.3bn in 1996/7 to £30.6bn in 2006/7. While the benefit system has checked against inequality rising to unacceptable levels, the system has been criticized for sustaining the status quo (DiPasquale and Glaeser 1999). The relationship between inequality and family background is based on equality of opportunity. In the UK income inequality has risen since late 1970s, while the incomes of households with children have progressively fallen relative to those of households without children. In fact, the poorest households with children have not had a rise in living standards for 20 years. The increase in inequality of family incomes translates into childrens educational outcomes. Blanden, Gregg and Machin (2002) build up an empirical model to establish the links between education (a tenet of equality of opportunity) and family income (Blanden, Gregg and Machin 2002). They estimated education-income data by looking at data from the Family Expenditure Survey and found significant positive link between education and income (Blanden, Gregg and Machin 2002). More specifically, children from families with a lower income than the average dropped out of school earlier by 4% compared to those from families with higher income. They also considered education-income relationship using data from two British birth cohorts covering births between 1958 and 1970 and found a big increase in educational attainment across the cohorts as income inequality rose. Blanden, Gregg and Machin (2002) found that the principal beneficiaries of education expansion were children from richer families. Through the use of tax cuts as an instrument of the survey, they found that richer families benefited more from tax cuts increasing educational inequality (Cheshire 1995; (Blanden, Gregg and Machin 2002)). In terms of regions, data available in 2011 for the UK indicate that overall poverty based on incomes measured is highest in the West Midlands at 22.2% and is lowest in South East England at 12.5%. Child poverty is highest in the west midlands at 28% and in London at 26.7% and is lowest in Scotland (17.4%), the East (17.2) and the South East at 16.9%. Child poverty has fallen most in London, Scotland and in the northern regions over the last 10 years while it has changed least in south east England, the East Midlands and West Midlands over the same period (Cheshire 1995). Weich, Lewis and Jenkins (2002) researched on the effect of income inequality on well-being among groups in different parts of England, Wales and Scotland (Weich, Lewis and Jenkins 2002). Using the Gini index to calculate income inequality, they found that residents in regions of Britain with high income inequality had higher rates of poor health than those living in regions with the lower income inequality (Weich, Lewis and Jenkins 2002). Their findings confirmed that the size of association between income inequality, self-rated health and cardiovascular risk factors like obesity increased with lower income. They, therefore, concluded that places where people live may affect their health independent of individual characteristics, although the size of the resultant effect is smaller than that of individual income level. Weich, Lewis and Jenkins (2002), argue that interventions to alleviate the effects of poverty on health are likely to be of greatest value if targeted at those with lowest incomes (Weich, Lewis and Jenkins 2002). Based on your conclusions, what do you consider the most appropriate methods for reducing inequality? One method of reducing inequality is lowering the wage gap. This can be achieved by ensuring that public bodies such as the government and local authorities keep a low pay ratio. Government and local authorities can also contractually oblige firms paid through their system to keep a low pay ratio. Shareholders of public and private firms can be empowered to prevent exorbitant top pay rates for senior executives. Extending industrial democracy through worker representation and other measures can help mitigate against workplace inequality (Dorling and Rees 2003). In the last 30 years, the portion of national income going to the workforce has been reducing constantly, and this can be reversed by effective unions with the benefits of a larger portion of the national income going to workers felt by the entire society (Muth and Goodman 1989). The tax system can be reformed to yield greater equality through the introduction of more progressive tax policies and reducing tax relief on pension contribution for the highest earners. It is estimated that the UK lost 25 billion pounds to tax evasion in 2008, and, therefore, the government should reduce tax avoidance and eliminate tax evasion by pursuing those operating through tax havens (Galster 2002). Another measure that can reduce inequality is improving the public service system. For example, reducing the cost of university education for the less privileged and provision of affordable housing can have a great impact on inequality. It is particularly important to improve the quality of life of poorer children as child well being in the UK is lowest among leading developed countries (Galster 2002). Conclusion Inequality has been on the rise in the UK over the last 30 years with the top 10% earners making more than the other groups by a wide margin. Despite the UK being a developed country, it lags behind other countries in the same class in terms of child mortality; this is attributed to high levels of inequality. Inequality motivates social ills and contributes to the decline in health across all the social classes of a society. Several measures can be taken to curb inequality; such measures include ensuring more of the national income is accessible to workers through better remuneration and increasing taxes for the highest earners. Bibliography: Andrew, M. and Meen, G. (2006). “Population Structure and Location Choice: A Study of London and South East England”. Papers in Regional Science, 85(3): 401-419. Beroube, A., (2005). Mixed Communities in England: A US Perspective on Evidence and Policy Prospects. York: Joseph Rowntree Foundation. Blanden, J., Gregg, P. and Machin, S., (2002). Education and Family Income. 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