Causes of Income Inequality - Essay Example

Income inequality In any given population, there is a difference between what people within the population earn. The unevendistribution of income in any given population is income inequality. In order for there to be income, there has to be several sources of income. These sources of income may be combinational or independent per person receiving the income. Income may result from wages, rent, bank account interests, salaries or even profits made in business transactions ( Stiglitz, 2012). In his hypothesis, Karl Marx foresaw income inequality in a capitalistic as a major problem that would lead to an economic evolution. The main reason he foresaw an evolution was due to the recurrent nature of income inequality. In an income inequality situation, the richer keep getting richer due to a better income, while the poor keep getting poorer. The gap between the top earners and the low-income earners keeps widening in an income inequality situation. In America, almost 95% of the national wealth is under 5% ownership; this situation leaves 95% of the population to scrounge for the limited 5% wealth (DeNavas et. Al, 2005). Introduction For economic inequality study, a family makes the ideal study unit. In the study, the family’s income is under analysis, and then the family members ranked from the lowest income earner to the highest income earner. After the ranking, the incomes aid in establishing a Lorenz curve that is important in analysis of income. In order for a Lorenz curve to be correct, the incomes of the family members have to be divided into fifths (Lorenz, 1905). A Lorenz curve enables analysis of data by adding the percentage value of the lowest fifth to the next higher fifth, which becomes the first point of the curve. The second point in the curve comes about through adding the first point to the middle fifth of the derived incomes. The process of plotting continues until exhaustion of all cumulative values of member incomes (Lorenz, 1905). For a perfect Lorenz curve, all members in a family would earn the same amount and the Lorenz curve would be a diagonal with the lowest point being the lower left hand corner moving progressively towards the higher right hand corner. This diagonal shows an ideal situation and it is the baseline in determining income inequality. Since not all family members receive an equal income, the Lorenz curve turns out as a curve instead of a diagonal. The area between the curve and the diagonal dictates the measure of inequality from one member of a given family to the next member (Lorenz, 1905). Income inequality is a broad topic with numerous key issues to discuss. In this research, income inequality will be under analysis in terms of the cause, the advantages of income inequality, and ways of reducing income inequality in a society. Understanding the several key factors mentioned above enables one to understand income inequality. Understanding income inequality is important since it has been a major issue in predicting economic growth and development globally. Income inequality has always been an area of contention between capitalists and communists whether it is good or bad (Pikketty, 2014). Understanding how income inequality affect the society gives one the tools necessary in making an ethical standpoint on whether it is a good thing or vice versa (Pikketty, 2014). Causes of income inequality Since it is consensual that there is an income gap between different people in the society, it is important to discuss what causes the different levels of income between people of the same society or between people of the same social class in different societies. According to Rousseau’s statement, income inequality emerged in the duration when societies began moving from the ‘primitive state’ to ‘conform state’ where private ownership of property predominated the mental state of the society (Rousseau, 1992). In development of the private ownership of property, each person had a specific role to carry out in the society, which led to inequality depending on the importance of each role. Classification of what causes inequality lies in two different classes in a broader sense, which are; individual causes, or external conditions leading to income inequality ( Rousseau, 1992). In simpler wording, the causes of inequality lie within endogenous causes and exogenous conditions. Endogenous causes of income inequality Endogenous causes are those causes that are unique and attached to an individual’s characteristic. These characteristics lie in the ability of an individual to produce more than other individuals hence earning more than other individuals in the same market. These characteristics include better qualifications in carrying out a given job or other uncommon attributes that make the individual more valuable in the market place. The most common individualistic abilities sought after in the market include intelligence, charisma, personality and physical agility. An example of an individualistic attribute in use is intelligence, in the modern market, IQ tests used in measuring a person’s intelligence directly reflects on the earning capability of that person. A person with a very high intelligence quotient is likely to end up making more money in the job market as opposed to a person with a poor intelligence quotient. Another endogenous cause for income inequality is individualistic preferences. If a person prefers to exploit some of his or her personal attributes, while another person decides to exploit different attribute, there will be a discrepancy in the income by the two people. In choosing a certain preference, a person shows his or her ability to deal with varying challenges as dictated by their culture and their geography. A person may decide to pursue medicine while another decides to pursue economic, due to the different nature of these two preferences, the two people will end up earning different amounts. Most of the preferences an individual picks have a great influence from their cultural background. It does not mean people who come from similar cultural backgrounds make similar preferential choices; some make their own choices deviating from the norms, which also cause an income inequality in the income of the individuals. The basic idea governing the point under discussion is that an individual despite their personal inborn abilities may make different preferential choices that in turn affect the future income of that individual. In terms of innate traits in an individual, gender and race have the most effect on income inequality within any given society. In the modern economic setting, the wage gap is extremely evident when it comes to comparing women against men. In the 2004 census in America, (the most developed economy in the world), a survey conducted showed that the average earning of full time workers was 31,223 dollars for females and 40,798 dollars for males. The latter indicates a gap of 23.5% between the female income and the male income ((DeNavas et. Al, 2005) ). As alarming as the gap looks, it has been progressively reducing from the 1950s where the gap then was an alarming 42% wage difference. After 1950, there was a 2% drop in the gap in the subsequent decade as indicated by Fuchs in 1971(Fuchs, 1971 pg. 9-15). Studies trying to come up with causes for the wage gap between men women concluded that there are several causes. The causes include the difference in the maternity leave, differences in the educational achievements between men and women, occupational choices, motherhood, and other discriminatory reasons within the marketplace. It is thus clear from the research stated above that gender is a major cause of income inequality in any given society globally (Becker, 1957). The inequality due to gender combined with racial segregation shows a wider gap in economic inequality. According to the 2004 American census survey, the average earnings for the white (non-Hispanic) population averaged $48,977 USD, while the average for the Hispanic population was of $34,241 USD and for the Afro-American population of $30,134 USD, a difference of over 30% for Hispanics and of 38.5% for Afro-Americans (DeNavas et. Al, 2005). This clearly shows that race is a factor contributing to income inequality within any given society. Racial prejudice and preference in the market place dictates the likelihood of a better income in future. Poor income in the Hispanic and Afro-American societies results to a higher poverty level, which leads to poor exploitation of innate abilities hence leading to a poor income. Other factors that could lead to such a high gap between the races is the difference in the population levels of the races in question (Becker, 1957). Exogenous causes The most common and adverse cause of income inequality since medieval times is land allocation. In the medieval period, feudalism practiced in Western Europe led to income inequality in the society. Feudalism is a practice that involves lords owning large chunks of land, they would allow people to settle and cultivate on this land on condition they paid with almost all their production. Giving away the farm production to the lords ensured that they had the highest income while the farmers had poor income hence leading to income inequality. Presently, most societies no longer depend on agricultural production for their income; hence, land ownership affects income by substituting it with its monetary equivalence. Since the industrial revolution, land has become one of the most prestigious assets a person can own. In the present society, land ownerships means that one can carry out a lot projects without using a lot of capital. Initiating multiple projects in ones land means there is an automatic increase in their income hence widening the inequality gap. Another external condition that causes income inequality is education. Education is an important requirement for anybody wishing to have a good earning job in the future. People with better qualifications earn more in a working environment. Good qualifications in the workplace are directly dependent on the level and quality of education one receives. Different societies vary in the level of income due to varying curriculums in their education systems. The job market has specific needs when hiring, therefore, the person with the best education has the best qualification in the field and he or she gets the job. Education enables an individual to acquire skills that one did not previously posses and it enables one to sharpen their innate abilities. Better education means better skills and abilities hence possibilities of a higher income, which in turn translates to a higher income inequality. Wage distribution is the final and most important cause of income inequality. The method in which wealth is distributed in any labor market determines the income inequality of that society. Although wage distribution is dependent on other causes for uneven distribution, it plays an important intermediary role in determining the level of income inequality. Wage distribution leads to other factors that affect the income in a given society. Due to wage distribution, there is an increase in immigration from some societies into other societies. Immigration from a given society increases the income inequality due to reduced labor; hence, the qualified labor gets an increase in the projected income while the poor lose a source of income due to a diminishing market. In a market with a good wage distribution, immigration leads to an increase in the poverty class, which further increases income inequality due to unemployment. Advantages and disadvantages of income inequality Advantages There are several advantages associated with in inequality in any given society. Despite the large gap between the high earning individuals and the low-income earners, the income inequality has had a positive effect in some societal aspects. Economists argue that since no two people are the same, there is bound to be a difference in the amount each person makes in the society. Having different abilities within a community or a family completes the family; for example, a kid who is very intelligent but he or she is not physically agile, while another kid could be physically gifted but not as intelligent. In the latter example, it does not mean that one kid is inferior to the other, and the same case applies to the inequalities involved in wage distribution. The first advantage is improvement in the educational system. In a society such as the USA, since the most educated people end up becoming the richest, the society adopts a better curriculum in order for more people to start earning a better income. Since the market demands good education, the society has no choice but to adapt and start supplying the required quality (Bertola et. Al, 2006). Since there is a higher income for people who work harder and for longer hours, the labor force is motivated to work harder and for longer hours. This is advantageous for economic growth since it boosts the overall production of a society. In situations that require labor mobility, an increase in income in the intended area ensures that labor moves towards the target areas. Ability to dedicate labor in targeted areas means there is mobility of labor, which in turn leads to efficient allocation of resources in a given area. In the entrepreneurial front, entrepreneurs realize that the bigger the risks the higher the returns. Due to income inequality, entrepreneurs get the motivation they need to carry out big risks without the luxury of erroneous miscalculations. In a society with unequal income distribution, entrepreneurs realize that the investments they take part in have to be under careful analysis in order to anticipate the return from the risk. The higher the number of risks that pay off in the entrepreneurial sense, the higher the rate of production for a society. The last advantage that arises from unequal income distribution is the increase of high-income earners in a given society. An increase in the number of high earners translates to a decline in the poverty level of an economy. An increase in the number of high-income earners also leads to more savings in a given country or society. If there is a high number of savings in a country, there is less dependence on foreign loans and grants (Bertola et. Al, 2006). Disadvantages In the present society, low-income earners outnumber high-income earners by a higher percentage. The first disadvantage arises from the latter point. In society where most of the population is in the middle class and below, there is a low possibility of people saving. Low savings in an economy lead to a higher foreign debt, which translates to slow development and poor working conditions. Poor conditions aid in widening the gap between the rich and the poor because poor conditions in lower social classes do not affect the rich, who keep getting better wages while the rest suffer. Another disadvantage of income inequality is slow economic growth. Since the high-income earners prefer to save up their wealth in form of assets, there is low or no contribution towards economic growth. High-income earners that affect economic growth do so through a small percentage of their wealth invested in other businesses. It would be more advantageous for an economy if there were even wage distribution systems (Bertola et. Al, 2006). In some cases, income inequality leads to undermining of some people’s ability. In some cases, people have better mastery of physical abilities as opposed to intellectual abilities. Since intellectual abilities have a higher wage as opposed to intellectual abilities, unequal distribution of labor undermines people with abilities that do not earn a lot in the job market. Conclusion From the issues tackled in this research, it is important to note that income inequality has been around since the medieval ages. Having tackled the disadvantages and advantages in the research, one can deduce their standing on whether income inequality is a bad or a good thing. In my case, income inequality is more advantageous than equal income distribution. Income inequality ensures that slackers are not dependent on others in earning what is not rightfully theirs. Although I support income inequality in a society, some causes such as gender and racial discrimination in the market are uncivil and primitive. All people should have equal opportunities to prove their abilities as far they have the necessary qualifications. In cases where the market is gender or racially biased, litigation is necessary in intervention (Bertola et. Al, 2006). It is important to note that in a society with equal income distribution, there would be no motivation to set higher goals or even to achieve goals set by others. It is evident that despite a widening gap between the poor and the rich, there is also an increasing number of the middle class. It means that there is motivation to work towards a better life through higher returns. In the recent past, the small percentage of high-income earners is also increasing due to increased entrepreneurial creativity and increased labor output. References Becker, G., S. (1957). The Economics of discrimination, Chicago: University of Chicago Press. Bentzel, R. (1970). The Social Significance of Income Distribution Statistics. Review of Income and Wealth, 16(3), 253-264. Bertola, G., Foellmi, R. and J. Zweimüller (2006) Income Distribution in Macroeconomic Models, Princeton: Princeton University Press DeNavas-Walt, C., Proctor B., D., and Lee C., H. (2005), U.S. Census Bureau, Current Population Reports, P60-229, Income, Poverty, and Health Insurance Coverage in the United States: 2004, U.S. Government Printing Office, Washington, DC Fuchs, V., R. (1971). Differences in Hourly Earnings Between Men and Women, Monthly Labor Review, 44, 9-15. Giovannoni, O. (2014) What Do we Know About the Labor Share and the Profit Share? Part III: Measures and Structural Factors, The Levy Economics Institute of Bard College, Working Paper No. 805. Lorenz, M. O. (1905). Methods of measuring the concentration of wealth. Publications of the American Statistical Association. Vol. 9 (70) 209-219. Piketty, T. (2014) Capital in the 21st Century, Cambridge: Belknap Press of Harvard University Press Rousseau J.J. (1992). Discourse on the origin of inequality (Cress D.A.). Indianapolis/Cambridge (Original work published 1754). Stiglitz, J. (2012) The Price of Inequality, New York: W. W. Norton & Company Read More