Income Inequality and Corporations - Essay Example

Income Inequality and Corporations Many and commentators argue that income inequality is among the most pressing current problems of our era. The received wisdom is that inequality has significantly increased on both sides of the Atlantic in recent decades. In view of this trend, critically examine the role of large corporations in this process and show how price of output decisions by cartels has contributed to this problem. Income inequality is the extent of income concentration within a country or group (Ghanei, 2013 [class notes]). Income inequality has become the preferred measure in determining the quality of life in a country. At some point, per capita income was considered a preferable way, but further studies have indicated that this is not as clear in determining poverty levels. For instance, two countries may have a comparable per capita level, but the incidence of poverty in these countries may differ significantly. For this reason, income inequality is considered more precise in indicating the incidence of poverty which is a pointer to the quality of life in a country. To measure and compare income inequality among countries, economists use Lorenz curves and Gini indexes. However, leading institutions and organizations such as the World Bank and the OECD have shown a preference towards Gini indexes, which is considered more convenient when comparing inequality among many countries (Ghanei, 2013 [class notes]). One of the constant enquiries in the subject of income inequality is whether a less equal distribution of income is good for a country. In this regard, most studies advance different views about the best patterns of distribution they are split as to whether the Gini coefficient should be around 25 percent as in Sweden or around 40 percent as is the case in the United States. The most quoted arguments are detailed below (OECD 2012). The first argument cites that an excessively equal income distribution can be bad for economic efficiency. An example of this would be in a socialist country, where deliberately low inequality characterized by the absence of private profits and salaries and wages are harmonized depriving the citizens the incentives required for their active participation in economic activities. It is considered that socialist equalization of salaries and wages translates to poor discipline and lack of initiative among workers. Other effects include reduced quality and restricted variety of goods and services, marginal technical growth which eventually slows economic growth and compounds poverty. The alternate argument indicates that excessive inequality adversely affects people’s quality of life translating to widespread poverty, therefore, affecting progress in health and education. This leads to other social problems such as crime. Other effects of high income inequality include a threat on a country’s political stability and increases in business risks. A consideration of these effects explains why some international experts look at decreasing income inequality as the most effective way of accelerating economic and human development. Shigehiro, Kesebir and Diener highlight the development of this social problem in United States for the past four decades (2011). The scholars note that the growing income inequality is the most profound social change in the period considered. Using the Gini coefficient they indicate that, during the 1960s and 1970s, United States had a much lower coefficient than that of France and were at the same level with a host of other European nations (Oishi, Kesebir & Diener, 2011.p.1095). In contrast, by 2008, the Gini coefficient was much higher for United States as compared to most European nations and Canada (Oishi, Kesebir & Diener, 2011.p.1095). This trend is best indicated by a Gini coefficient graph covering the past six decades. This graph makes it so clear that income inequality in the United States has been on the rise over the past seven decades. A look at the European countries also indicates a similar trend only that the rate may not be as high (OECD 2011). An independent research by insight indicated that inequality has grown globally with the momentum being higher among the traditionally more egalitarian nations. These worrying trends call for a more exploratory question that seeks to understand the cause of the growing income inequality. This study is just one of the many imploring the subject. There is a common belief that if the cause is identified then it will be easier to deal with the effects and most importantly improve the situation. This study considers large corporations to be part of the problem it is not coincidental that the rapid growth of corporations, global conglomerates has coincided with increasing income inequality. One of the informing factors is that, in a resource rich world, it does not make sense that there is such a widespread gap in income among the people. This can only be the case in two situations the first situation is where people have been unable to exploit the economic resources the second is a situation where a few powers hold these economic resources and have found a way to consolidate their hold on the world riches (OECD 2011). The second scenario is the most likely and is representative of the power and efforts of corporations. This situation is better explained by a number of micro-economic concepts. The concept of diminishing returns holds that, in a situation where some factors are limited, such as land and machinery, the yield of a variable input such as work tends to reduce in terms of output per additional unit employed translating to decreased production and increasing costs. To achieve equilibrium inputs must be optimized (Areppim 2012). Beyond this point, the result can only be inefficiency and decay. This was the scenario prior to the 20th century following this new environment emerged with the capacity of exhibiting behaviors of increasing returns. Unit costs tend to reduce, moving towards zero allowing the big companies to grow bigger, and the strong ones to get stronger which is a system that breeds inequality. The other factor contributing to the growth of income inequality is the growth and acceptance of a “winner takes all” economy. In accordance to the supply-and-demand model, the market is expected to self regulate adjusting the price of goods and services where a high demand leads to a higher price and a lower demand leads to low prices. In this situation, there was room for a variety of economic participants with variant profiles, each participant responding to an alternate demand specification as represented by capacity, quality and price changes (Areppim 2012). The “winner takes it all” economy only rewards relative performance, this is a situation where the market leader represented by the largest of corporations command a high price and a growing market share by virtue of their position, irrespective of the performance margin to the number 2 (follower). There are few market opportunities for the followers and inequality becomes the rule. Closely linked to these concepts is the tendency of corporations to engage in monopolistic and oligopolistic tendencies and their ability to enforce price discrimination. Monopolies and organized oligopolies are participants in a wide and multi-dimensional market. The most highlighted and most likely consequence of monopolies and oligopolies is charging different pieces for the same product which is economically identified as price discrimination (Ghanei, 2013 [class notes]). It should be noted that corporations come together to increase their market power and in cases where competitors merge they create a monopoly which is not strange in modern day business. Once corporations achieve market power they are able to increase the price beyond marginal cost as this guarantees them a larger margin which is the overriding goal of all corporations. This situation is represented by the following graph. In the graph, price discrimination is existent when the company charges different prices for every unit of good. This firm is in a position to increase its profit by converting consumer surplus into economic profit (Ghanei, 2013 [class notes]). At the end of the day, this form of price discrimination, which is synonymous with monopolies, ends up being abusive to the consumer and this translates to inequality (Ghanei, 2013 [class notes]). By charging consumers more, the corporations drain their disposable income which creates inequality. On the other hand, the profits raise the incomes of the corporation’s shareholders. In defense of these contributions to income inequality most corporations argue that through employment and tax payment they favorably contribute to the reduction of income inequality. In this case, OECD has shown that indeed public cash transfers, income taxes and social security contributions have a fundamental role in reducing market-income inequality (Sharpe & Capeluck, 2012). Jointly, they are considered to reduce inequality among the working-age population by close to a quarter on average in a bulk of OECD countries. The effect is larger in the Nordic countries, Belgium and Germany; it has a lesser effect in other countries such as Chile, Korea and United States (OECD 2012). Therefore, tax-benefit policies have helped curb the huge rise in market-income inequality, however, the effect has continually declined in the past 10-15 years. The study by OECD indicates that tax-benefit systems were effective in the mid 1990s where they countered close to half of the increment in market-income inequality (OECD 2012). However, since then, and marking a period where market-income inequality has escalated, the stabilizing effect of taxes and benefits has declined. In summary, the concept of diminishing returns, which has in contemporary business world been offset by behavior of increasing returns coupled with the growth of “winner takes it all” economy as well as the growth and dominance of cartels which have effectuated price discrimination explains the role of corporations in contributing to income inequality. Further, these factors have jointly ensured that income is channeled to a few beneficiaries who are at the helm or are owners of these giant corporations. This situation has been compounded by the fact that the tax-benefit system that helps redistribute income is no longer effective explaining the widening/increase in income inequality. Bibliography Areppim. (2012). Income inequality worldwide Gini coefficient since 1960. New York: Insight. OECD. (2011). Growing Income Inequality in OECD Countries:What Drives it and How Can Policy Tackle it ? Paris: OECD FORUM ON TACKLING INEQUALITY. OECD (2012).Income inequality and growth: The role of taxes and transfers”, OECD Economics Department Policy Notes, No.9.January 2012 Oishi, S., Kesebir, S., & Diener, E. (2011). Income Inequality and Happiness. Psychological Science 22 (9) , 1095-1100. Sharpe, A., & Capeluck, E. (2012). Impact of Redistribution on Income Inequality in Canada and the provinces, 1981-2010. Ontario: Centre for the Study of Living Standards. Ghanei, M. (2013). Income distribution and Industrial organization: Price discrimination and product differentiation (Class notes).The University of Greenwich. Read More