Effects on Inequalities on Economic Growth - Essay Example

Effects of inequalities and a new global policy proposal and Effects on inequalities on economic growth The economy in the U.K and any other parts of the world has been gradually settling into a malaise. Economists and scholars have tirelessly tried to study the reasons and factors responsible for the decrease in demand, which, as has been suggested has led to a slow recovery of the economy (Stewart, 2004). A stable and growing economy is an assurance of a better future for the generations to come, but economists are worried that the current growth of the economy is not reassuring, and the recession has not made it easier. Scholars have forwarded arguments that the inequalities experienced in the nation have a dire impact, weakening the demand and as a result, the recovery process of the nation has been compromised. The inequality is not just on the incomes in the working class but also on the opportunities (Lemos, 2007; Carlson, 1996). Since the depression hit, many economists have forwarded their thoughts and beliefs that inequality is directly intertwined with slow recovery, and hence the two should not be taken and addressed as different phenomena. Inequality in the nation greatly slows and restrains the level of economic growth and hence, there is need for it to be addressed (Citro and Robert, 1995; Felipe and Lustig, 2010). There are different reasons as to why inequalities can be said to squelch any nation’s rate and level of recovery. One of the main reason, and which will be much dwelt on here is the dwindling income of the middle income class and earners (Stiglitz, 2012; Cynamon, 2014). The middle class is slowly vanishing, yet this group has always been regarded as the major job creators and the drivers for growth and change in the economy. The middle class income earners, with the current rate of growth, are now using the bigger percentage of their incomes in attending to their basic requirements, saving very little for investment. The members of this class, other than being unable to invest and reinvest have minimal chances of advancing their education, educating their children or even setting up their own businesses. This further slows down the rate of economic growth and the rate of recovery (Faux, 2012). The fact that the middle class is slowly vanishing has translated to low tax receipts. This is because the middle class families now hold back their receipts, further reducing the available funds for disposal in development of infrastructure, promotion of healthcare and even education provisions. The situation of the high inequality is contrary to what is expected of a meritocratic nation (Kurtz, 2014; Demandamerica, 2014). In any country, the middle class forms the largest percentage of the total population, especially theose in employment and hence their income share is the largest. The USA class stratification is as shown below. Figure 1: America’s social class stratification This slow recovery can further be explained by the fact that when parents (mostly in the middle and bottom class) have limited means of providing to their children, the children in return, are most likely to have lives similar to their parents. The situation is contrary to parents and children of the rich, who are a small percentage in the nation, but they have the power to access high levels of education, have minimal debts and hence in the long run, the children comfortably secure high positioned jobs (Schwartz, 2014, Stiglitz, 2014). Inequality of chances, even in unemployment further slows down the rate of recovery as the number of dependants grows with each passing day. Demand is therefore affected by the inequalities. When the youth are jobless, skills desired in the industries atrophy (Ranciere and Kumholf, 2010). Some economists blame globalization for the enormous inequalities. Others also suggest that the wave of technological revolutions that has hit the globe is also responsible for the inequalities as it has rendered a lot of people jobless. There is no equilibrium in which the countries have pursued globalization and hence, the level of demand has greatly reduced. When consumption is reduced, the rate of growth also significantly reduces (Julie, 1993; Hickel, 2013). Economists suggest that a revision on the wage bill, consequently affecting changes in the inequalities in income will definitely lead to an increase in demand. As a result, the rate of recovery for the U.K and other nations whose economy is in a crisis will definitely scale upwards (Lucchino and Morelli, 2012). However, it is important that some other scholars argue that equalities do not affect demand and the rate of recovery; rather it is the weak recovery that has led to high inequalities. If the recovery of the economy happened at a higher rate, the middle class would have better incomes available for disposal and as a result, the level of inequalities would reduce (Taylor, 2013). A rising toll of unemployment has resulted from the above and from other related and unrelated factors. The diagram below is an illustration of the rate of unemployment in different countries. Figure 2: Rate of unemployment in different countries 2: A global minimum wage The issues and proposals for global minimum wage have attracted much debate and opinioned views. The high unemployment rates, the large differences in outputs and the huge over-reliance on the developed countries by the developing and underdeveloped country are a few indicators and reflectors on the shortage of demand that the economy, globally is going through (Lackoviello, 2008). These are all evident of the financial crisis and the immense downturn in the U.K. Different countries; all depending on the median wages or their economic growth have different minimum wages as seen from the diagram below. Figure 3: Minimum wages in different countries The global minimum wage has been proposed in a bid to provide an un-fluctuating base upon which wages can be built. As a matter of fact, it has been forwarded as a measure to reduce and bridge the gap of inequality (Palley, 2013). The global minimum wage bill can be defined in this context (and any other related context) as an international standard that depicts the smallest value of wage that any worker or laborer in whatever country is entitled to. The global minimum wage bill, if adopted can help in achieving equilibrium, albeit by a small margin, between the highest paid workers and the lowest paid workers (Palley, 2013; Drussila, 2001). The wage bill can be important in mitigating the effects of downward demands on the wages. Secondly, the global wage bill is pertinent in compressing the wages which are usually at the bottom of the scale in a percentage of two deciles. Another effect of the global wage bill is creating a bounce back effect which shall give a raise of the wages, especially those at the bottom (Pasley, 2013; Wusl, 2014). Lastly, the global wage bill would help reconnect the wages earned and the level of growth and productivity, which is pertinent and undeniably important for boosting and supporting the demand process. All these come together to address the inequality between the different people in the society. The global wage system, though it has not been adopted all over the world, has brought massive changes in the economy and in individual lives. The minimum wage system was traditionally operated differently from how it is in the global minimum wages. Traditionally, minimal wages were fixed and were usually adjusted by the system or the government to accommodate inflation or any other change in circumstances (Boushe et al, 2001; Bazen and Martin, 1991). This meant that the wage would be fluctuated on the increase or the decrease. Often times, the wages would fluctuate to at the disadvantage of the bottom and middle earners, but the top earners would be affected at a minimal rate. This system was way too flawed as Palley (2011) notes. In addition, there were and still are difficulties in achieving a general and standard value across the different countries. The traditional greatly contributed to an increase in the rate of employment (Kimberley and Richard, 2003). It is seen that the minimum wage to be paid was determined by a company or by employers, as opposed to a better option where the minimum wage is determined by the interaction between the demand and supply factors. The advantage of the global minimum wage bill over the traditional wage bill is the fact that despite the forces and circumstances in the market, the minimum wage bill remains the same (Palley, 2013; Michie, 2011). Even when the conditions change, the wage, say 40 or 50 % of the median wage in a country remains constant. The rate of unemployment would therefore reduce, and this further reduces the inequality. The traditional minimum wage bill is as illustrated below. Figure 4: Minimum wage illustration Palley (2013) proposes the minimum wage bill whose advantages have been discussed in the first part of the second part of this work. He suggests a global minimum wage that can be set at 50% of the median wage in the country. This means that though all countries have different wages and economic growth rates, the median wage will be different and hence the value of what the workers earn will be different. The advantage of this model is that since the fixed percentage will be based on the different economic conditions of the country, the minimum wages that an individual earns will not change (Palley, 2013; Flanagan, 2006). There are five effects of this design. To begin with, the minimum wage for any country is set to increase whenever the median wage increases. When the rate of growth is high, the median wage rises and so does the minimum wage (Goldin and Katz, 2007, Palley, 2013). Secondly, different countries can have a higher minimum wage compared to that which is stipulated. The global minimum wage only stipulates the point past which a country can’t go below, but it can set a minimum wage to be as higher as they please. The other effect is that a country has the freedom to set different minimum wages for different regions, as long as it does not go below the stipulated global minimum wage. The minimum wage for every region might be determined by the growth and productivity of the different regions (Lavoie and Stockhammer, 2013). The fourth effect as palley notes is that the different minimum wages set for each country determined by the value of the economic growth. This means that a country cannot be overburdened. The employees on the other hand shall be paid what they are due, and their minimum wages are safeguarded. The last effect of this design is that it will promote political benefits and enhance the respect for the rules governing market and labor laws. With the ever growing globalization, countries will come together and come up with even more suitable rules, and as a result, bridge the gap of inequality (Kramp, 2009; Palley, 2013). References Bazen, S., and Martin, J., 1991. The Impact of the Minimum Wage on Earnings and employment in France, OECD Economic Studies, 16 91), pp 199-221. Boushey, H., Chauna, B., Bethney, G., and Jared, B., 2001. Hardship in America: the real story of working families. New York: Economic Policy Institute. Carlson, A., 1996. Gender, children and social labor: Transcending the family wage dilemma. Journal of Social Issues, 52(3), pp 43-53. Citro, C., and Robert T., 1995. Measuring Poverty: A New Approach. London: National Academy Press. Cynamon, B., 2014. Inequality and the great recession: A slow recovery process. Iineteconomics.org. 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