Economic Inequality in the UK - Case Study Example

Economic Inequality The literal meaning of inequality is the situation of being imbalanced or uneven also an occasionof being unequal (Merriam-Webster). However, the concern of this paper is economic inequality this refers to the disparity between a percentage of population and the percentage of resources gotten by that population. In this regard, an increase in disparity translates to heightening inequality. In a situation where one individual or a select few hold a particular resource, inequality is at its peak, if all of a population holds the same percentage of the resource inequality is at minimum. Therefore, looking or studying inequality entails identifying resource disparity and their practical as well as political implications (World Bank). A study on inequality is important as it provides an objective view on the effectiveness of policies aimed at affecting or reducing disparity within a population. Additionally, this also supplies adequate data which enables use of inequality as a variable when analyzing different policies. Critical to studying inequality is determining the most ideal way of measuring inequality. There are several measures of inequality with the most popular being; range, range ratio, The Coefficient of Variation and the Gini Coefficient. Each of these has its own set of pros and cons and none can be said to be exactly full proof, however, and with time, economists have tended to favor The Gini Coefficient (World Bank). In fact, it is referred to as the gold standard in the economic realms. Understanding the The Gini Coefficient requires one to first understand the Lorenz curve which maps all observations and then plots the cumulative percentage of the population against the cumulative percentage of the resource (World Bank). In a Gini Coefficient, represented by two measures as described shorty, there is equality diagonal that represents a situation of equality, the Lorenz curve is mapped from the start of the equality diagonal all the way to the apex of the equality diagonal forming a hump shape (World Bank). The area between the equality diagonal and the Lorenz curve, which is marked by the hump shape, represents the variance between equality and reality. Arithmetically, the Gini Coefficient represents twice the area marked by the Lorenz curve and the equality diagonal. In a situation where there is no disparity (perfect equality), the Lorenz curve is represented by the equality diagonal and in this case the Gini Coefficient is zero (World Bank). In a situation where all of a country’s resources are held by one person/entity the value of Gini Coefficient is one. Inequality in UK There is overwhelming data on inequality in United Kingdom most of which may not be astute to the level that it can be considered for this study. Noting the lack of credibility for some of the available data, this study seeks to rely only on data released by credible organizations such as the World Bank and the Organization for Economic Cooperation and Development. Notably, and as discussed earlier, the analysis and measurements must be based on the Gini Coefficient. One of the most recent releases of UK’s inequality was done by Organization for Economic Cooperation and Development (OECD). The release indicated that income inequality in United Kingdom has risen at a greater pace as compared to all other countries constituting the OECD. The OECD has a current membership of 34 countries mostly European countries the exceptions include; Australia, Austria, Canada, Chile Japan, Korea, New Zealand, Turkey and United States (OECD). Income inequality amongst the working-age in UK peaked in 2000 and began to fall, the trend once again reversed in 2005 and has been rising since, at the moment it lies above the OECD average of 3.16 Gini Coefficient. As at 2008, the annual average income for the upper 10% was £55,000; this was markedly close to 12 times higher than that of the lower 10% whose average was £4,700. This was a much higher ratio as compared to that of 1985 which was 8:1 (OECD). At the moment, UK is among the countries with the highest levels of inequality within the OECD, though not the highest, Chile is the most unequal with a Gini Coefficient of around 0.5, it is expected that with the current pace the current level, 0.35 Gini Coefficient, will soon be upset. The following graphs compare inequality among the OECD countries. Why should economists care about inequality in the distribution of incomes? The most publicized and commented studies are those looking at the economic growth of countries, indeed, most people have appreciated that the only measure that matters in determining the plight of a country’s population is the country’s economic growth. There is no disregarding that this is indeed a good determinant of a country’s development. However, the truth lies in the fact that it is not the only one, and in any case it is not the most elaborate in explaining the wellbeing of a county’s population in regard to income and income distribution (population and resources) (Deininger and Squire, 1998). It should be noted that economic growth that is accompanied by an equitable spread of the benefits is most appreciated; growth which is spread unequally requires evaluation both on the basis of overall change as well as on ground of equity (Lemel and Noll, 2002). There are two factors that inform interest on inequality of income and wealth distribution. The first of these factors is the presence of philosophical as well as ethical dictates which are opposed to inequality. These dictates require that people share equally what has been bestowed to them by nature no one should be limited to access lifetime economic resources. This forms what can be referred to as the intrinsic level. This level has little to do with the economic aspect of studying inequality and wealth distribution however, there is no denying that a number of economists may have been prompted to study the subject based on the feelings informed by such concern. The second reason and one which prompts most economic inquiries is the connection between inequality in income and wealth and overall growth. This inquiry constitutes the functional level. For instance, when Gravelle et al based in University of York stated that if the inequality levels of United Kingdom were halved the social life of every UK citizen would improve (Gravelle, Wildman and Sutton, 2000). The social aspects to be affected by such a move would include a reduction in murder rates, reduction of obesity cases by half, reduction of imprisonment cases by 80% and other social transformation. While most of these issues may appear intrinsic it is their functional connection that informs the bulk of economic inquiries on the subject. The pioneer scholar in functional level studies is thought to have been Kuznets (1955) through his “inverted-U” hypothesis, in this study Kuznets indicated that a positive economic growth would translate to a rise and a later decline in income inequality with a country. Most of the subsequent economists have carried out studies with this as the base consequently overwhelming evidence has been gathered against the hypothesis. One of the diverging studies was conducted by Deininger and Squire (1996) who summary indicated a relationship between income inequality and subsequent economic growth. In this sense, they noted that the level of income inequality is a major determinant of economic growth where less inequality points to a strong likelihood of economic growth. Most of the empirical evidence between income inequality and economic growth has only peaked in the recent past this has largely resulted from an increase in household data which availed information and data that economists can work with. In any case, it is such data that has helped in disapproving the conventional wisdom that inequality enhances growth. The rationale to such thought was that the rich have a higher propensity to save as compared to the poor. Under such a premise, it was postulated that higher or increasing inequality would spell greater savings and thence increase available capital which would be used to boost economic growth. These findings have not been confounded by more recent findings as Schmidt-Hebbel and Serven (2000) who made use of both cross-section and panel data failed to come up with adequate data supporting the conventional idea. Perhaps the most telling study in this aspect was one that concluded that inequality only affects private saving rates in countries with low levels of financial market development. The idea is that when the poor are unable to borrow against their future earnings, initial income distribution hinders physical and human capital accumulation and thence affects growth (Thorbecke and Charumilind 2002.p. 1482). This section outlines an ongoing debate and enquiry on the role and importance of studying social inequality in the distribution of incomes. The ensuing discussion is of great importance to economists as they need to understand the causal effect relationship. This is because it provides a clear or clearer picture on the policies that need to be effected in order to inform economic growth or/and improve the livelihood of a country’s population (National Equality Panel 2010). In the recent past, these studies are likely to take an even greater importance given the widening gaps (disparity) resulting from economic cycles and more so the recent recession which has seen the situation worsen. It cannot also be ignored that economists are the brains behind political relevance political correctness must also be backed by economic “correctness”. Unlike in the past, the proliferation of firms dealing in economic data as well as the increased publication and discussion of such data has informed much greater interest. This has meant that the political positions are now more than ever being judged not only on how well a country has grown economically but the effect the ensuing policies have helped in bridging the gap between the poor and the rich which is basically studies on inequality. Such relations and results are of great importance to socio economists who not only look at economic policies in terms of economic growth but also look at the social-impact of these policies. It is in judging the social wellness that inequality studies also interests economists. 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. Based on your conclusions, what do you consider the most appropriate methods for reducing inequality? Income inequality in UK was in the rise in the late 1970s up to mid 1980s, it slowed for several years but later on in the late 1980s it became of concern across many of the OECD countries. This has been the case till now as is informed by the recent data which has showed a widening gap between the countries’ rich and the poor. Looking at most other countries, the trend has affected even those countries which traditionally showed a good balance such as Germany and Denmark (OECD). Such trends point to an underlying problem in the countries. At the moment, our prime concern is the UK. One of the most elaborate explanations to the worsening trend of income inequality is changes in the distribution of wages and salaries, wages and salaries contribute to 75% of most households. In the past, there has been adequate evidence that the income levels of the top 10% have risen while this has not been the case with the bottom 10% (OECD). This has come about due to a decline in the shares of the best earners and declining share of the bottom earners. Top earners have their incomes increase at a much greater pace as compared to the rate with which the lowest earners are catching up with the middle earners (Banerjee and Duflo, 2000). A look at the UK wage movements shows that there was a definite strong growth in wages in the 1980s and then the trend slowed a bit in the 1990s before it assumed a further growth in the late 1990s. These movements are visible in the following graph which is based on wages of the prime group (ages 30-59). Inequality in wages A close look and a comparison with the Gini coefficient especially in the 1980s indicate a very close relation. This is important in drawing the fact that one of the most influential movements that have informed income inequality has been wage changes. It has been repeated numerous times in this text that in the past three decade the middle and lower income households have slipped lower and that there is a growing differential between them and the high income earners. One of the better explanations for this has been the long-term trend in the cycles of earnings (Thorbecke and Charumilind, 2002. In the last three decades when the income gap has widened it is clear that the amount of national income going to wages has reduced. This difference has informed an increase in profits. The other critical trend in this discussion is that of a consistent decline starting from the mid 1970s. The wage share remained at the same level in the 1950s, 60s and 70s, at around the level of 58-60 it later increased to 64.5 in mid 1970s. Starting mid 1970s it started to decline until it got to the lowest level in 1996, at 51.7%. There was a slight recovery to 55.2 percent in early 2000s before a decline started once again in 2008 to a level of 53.2% ((National Equality Panel 2010). Additionally, the level of production has increased since the 1970s however such an increase has also not informed an increase in wage levels with an exception of the 1980s. the 1990s and 2000s have seen an increase in productivity without a corresponding increase in the level of wages (National Equality Panel 2010). Further, the gap between wages and productivity has widened since late 1980s, on average real wages have risen by 1.6% while productivity has risen by 1.9%. In 200s, the situation has become much more acute with the wages rising by a mere 0.9% while productivity has risen by 1.6% (OECD). Part of this problem has been as a result of introduction of flexible labor markets which started in the late 1980s, economic liberalization the rise of collective bargaining and globalization which has seen some of the traditional UK jobs transferred to other countries, through the process of outsourcing. In totality, these factors have amalgamated employers’ powers and have also informed the imbalance in earnings distribution with the largest share going to profits. Wages lagging ctivity The most pronounced effect of these changes has been an increase in the concentration of income and wealth. It should be noted that an increase in the share of profits paves way for promoting inequality. This is mainly because profits are more unevenly distributed as compared to wages. Profits will go to the select few who own the majority of the production units. These are largely those at the top of the income and wealth distribution (Banerjee and Duflo, 2000). Therefore, the economic shifts inform an increase in wealth for those at the top whereas the regular wage earners continue to suffer from disproportionate movement in the profits resulting from increasing productivity. Such movements have in overall been the main reason as to the widening income inequality. Reducing inequality There are several ways through which inequality can be tackled. However, inequalities depicted in different countries cannot be addressed by the same measures. There is need to develop homegrown solutions in view of the exact factors that have informed the growing disparity. In some countries, especially in the developing world, ensuring education and easing availability to financial capital would work because in these countries there is a very big population which has no access to education (Bastagli, Coady and Gupta, 2012). This means the largest pool of the available workers is unqualified and thus little chance of competing with the high income earners who are largely educated. A policy ensuring access to education is double edged in that it promotes the capacity of the human capital a factor that also ensures economic growth (Banerjee and Duflo, 2000). In the UK, the situation is slightly different, as discussed in this text the major cause of inequality is a disproportionate distribution of wages. Such a situation requires a complete new set of policies to address the situation. This argument is based on the fact that a majority of UK citizens even in the lower percentile have adequate job skills and have basic education. This means that the greatest challenge for them is accessing paying jobs. Paying jobs would guarantee them a basic pay, even though this does not put them at par with the high income earners it lifts them from the current dire situation. For the rest, meaning those who have jobs they must be accorded opportunities to better jobs, this deviates from the earlier need for more jobs. Better jobs mean greater pay which also represents a situation where they are closer to the next grouping. Besides, this would allow those with low or no incomes to compete for their current jobs. Creating these successive jobs would be a fundamental aspect in closing the inequality gap (Bastagli, Coady and Gupta, 2012). It is while looking at the capacity of the existent population to compete for higher paying jobs that we realize the immediate need to invest in human capital. Improving human capital entails providing additional skills to people so that they are able to handle jobs in a better way or handle jobs that require a higher capacity. These two factors, better handling of jobs and increased responsibilities are anonymous with a pay rise and hopefully this can be a starting point. Unfortunately, the capitalistic nature of our economy and the current extent of market liberalization cannot be reversed. This paves way for exploitation in the form of unequal movements in productivity and wages. Otherwise, if it were possible to regulate the current and widening disparity between wages and productivity it would be possible to cap the current high trend amongst high earners and this would allow the wagers (as opposed to profit earner) to improve their situation. Bibliography Banerjee, A. V., & Duflo, E. (2000). Inequality and growth: What can the data say? National Bureau of Economic Research, Working Paper 7793. NBER, Cambridge, MA. Bastagli, F., Coady, D., & Gupta, S. (2012). Income inequality and fiscal policy . Retrieved February 7, 2013, from IMF: http://www.imf.org/external/pubs/ft/sdn/2012/sdn1208.pdf CHAMPERNOWNE, D. G., & CONWELL, F. A. (1997). Economic inequality and income distribution. New York, Cambridge University Press. Deininger, K., & Squire, L. (1998). New ways of looking at old issues: inequality and growth. Journal of Development Economics, 57, 259–287 Gravelle, H., Wildman, J., & Sutton, M. (2000). Income, income inequality and health: what can we learn from aggregate data? Discussion Papers in Economics, No. 2000/26. The University of York. Kuznets, S. (1955). Economic growth and income inequality. The American Economic Review, 45(1), 1–28 THORBECKE, E., & CHARUMILIND, C. (2002). Economic Inequality and Its Socioeconomic Impact. World Development Vol. 30 No 9, 1477–1495. LEMEL, Y., & NOLL, H.-H. (2002). Changing structures of inequality: a comparative perspective. Montreal, McGill-Queens University Press. Schmidt-Hebbel, K., & Serven, L. (2000). Does income inequality raise aggregate saving? Journal of Development Economics, 61, 417–446. National Equality Panel (2010). An anatomy of economic inequality in the UK. Retrieved February 7, 2013, from http://eprints.lse.ac.uk/28344/1/CASEreport60.pdf OECD. (2011). Growing income inequality in OECD countries: What drives it and how can policy tackle it? Retrieved February 7, 2013, from http://www.oecd.org/els/socialpoliciesanddata/47723414.pdf World Bank. (2010). Measuring inequality Retrieved February 7, 2013, from http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPOVERTY/EXTPA/0,,contentMDK:20238991~menuPK:492138~pagePK:148956~piPK:216618~theSitePK:430367,00.html) Read More