Macro and Micro Economics: Inequality - Essay Example

ESSAY, MACRO & MICRO ECONOMICS: INEQUALITY by Inequality Essay one This is an analysis on the consumption and income inequality developments in Sweden and the United States through the era of 1988 to 2005. In Sweden, Consumption inequality has lessened from the year 1988 to 2003 and 2005; although income inequality has augmented. This expansion can be enlightened by increased consumption leveling over the years, thus is precisely among families that have higher incomes. Generally, the country has witnessed increased income inequality. The chief reason for the consumption inequality decrease in Sweden despite the substantial overall rise in income inequality is by an increase in saving and lifespan relocation in high-income families. Similar studies conducted in the US in the same period have suggested that there have been an increase in consumption inequality more than the increase has income inequality in previous decades. Researchers in US have studied how inequality tendencies vary dependent on the use of income or consumption information. The research basically shows that consumption inequality in the United States appears to have augmented significantly less than income inequality in the last decades, even though this has clearly displayed a positive trend. In the United States, in accordance to the United Nations Human Development Report, the proportion of the income received by the richest 10% Americans to that of the poorest 10% of the populace was 15.9 in the year 2007 (Aguiar & Bils, 2011, pg. 43). Income Inequality in India has doubled over the past twenty years, this is a serious decline, in fact, it is makes India one of the worst performers in the middle of developing economies. The Organization for Economic Cooperation and Development (OECD) states that the top rich 10% income earners pocket 12 times more than the poor 10%, this in comparison to the ;last date of to six times two decades ago. India has the uppermost total of poor in the world. An estimated 42% of its 1.21 billion persons survive on less than $1.25 a day; this implies that almost half of the Indians live below the poverty line. Of late, the Indian government was critiqued for stating that a personal income of 25 rupees (52 US cents) daily would be of assistance in providing for satisfactory "reserved expenses on food, education and health. In UK, the average income has augmented due to the growth of the economy. For the last 5 decades, the average family income has grown by an estimated 1.5% annually in inflation –controlled terms. Median family income in UK has grown every year by 1.3% for the last 5 years. However, the income growth has altered on various times; for instance, the years between 1995 and 1999 witnessed a very strong growth and a very weak one between the year 2002 and 2007. These fluctuations are typically linked with reduced family incomes (Bourguignon, Levin, & Rosenblatt, 2006, pg.145). Essay two Effects of inequalities and a new global policy proposal 1. Effects of inequalities on economic growth In accordance to the Organization for Economic Cooperation and Development (OECD), there is a strong link between the wealth divide and GDP development in member nations that mostly include countries from Europe and the United States. These countries were found to have developed more uneven economically from the years 1980 to 2012; this was done via the help of the economic extent referred to as the Gini coefficient. In this period, the U.S. economy was affected by an estimated 7% points whereas the United Kingdom lost 9 points. This persuasive confirmation demonstrates that addressing the increased and growing income inequality is critical to uphold strong and constant growth and thus it ought to be at the focus of the policy discussion. In fact, nations that endorse equal opportunity to all its citizens have higher chances of growing and prospering. Income inequality reduces GDP development by impeding accumulation of human resources. This has negative effects on the educational consequences and long-standing economic predictions for poor at the economic income ladder. Actually, an OECD review of individuals who suspended their education for a job opportunity found that in nations that have high income inequality, persons from underprivileged socio-economic families have less or no access to quality education, mainly higher education. Thus, these victims add less to the economic growth since they cannot entirely participate in their potential and progress their aptitudes and capacities. They rely on odd jobs to make ends meet. The most common economic problems that the United States and other developed economies face at the moment are the upsurge in the inequality of economic consequences. For instance, in the United States, the allocations of income, salaries, and wealth are further detached than in the past years, currently its worse, it is broadly approved that in the U.S. Economic inequality is at in history high stages. Therefore, decreasing income inequality is likely to boost economic growth. It is evident from current researches that nations where income inequality is declining are growing at a faster rate than those with increasing income inequality. The sole major impact on growth is the broadening breach between the lower middle class and poor families likened to the society. Increasing income inequality is projected to have taken 10% points of economic development in countries such as Mexico and New Zealand in the last 20 years until the period of the Great Recession. In the United Kingdom and the United States, the increasing growth rate to date would have probably reached 6 to 9% points higher if income differences had increased. On the other hand, bigger equality assisted an upsurge GDP per capita in countries such as Spain, Ireland, and France before the financial crisis. Inequality affects economic growth by destabilizing education prospects for youngsters from poor socio-economic families, depressing social flexibility and hindering growth in talents and skills among the citizens (Cooper, 1998, Pg. 14). High income inequality in any country leads to strategies that suppress economic growth. This is theory is mostly based on the political angle but very applicable economically. When income inequality rises, added resources are focused in the possession of the rich people. Therefore, the concept is that the richest are in a better position to drive strategies in a manner that safeguards income difference at the expense of economic growth. High income inequality also results to poorer rates of customer expenditure. Customer expenditure contributes an estimated 70% of the U.S. economy. People with lower income usually have a higher tendency of spending their revenue than rich persons do. Therefore, if extra country revenue is focused at the top level, this is likely reduce general demand and thus deteriorate economic growth of the specific country. Income Inequality can also result to financial catastrophes. Inequality generally leads to negative financial catastrophes such as the incidence of 2008. Whereby in the Revenues within the rich rise and income within the poor deteriorate. This situation generates increased and cheaper finances and poor people tend to borrow more in order to keep afloat, whereas the poor people end have a lot to lend to the poor. Similarly, income inequality starts to bend legislations. Economists argue that income inequality is essential condition for the growth of a developing country, this is benefits the country’s developing economies, but it is not healthy for the already developed country die to the factors that have been discussed above. The well-known Kuznets curve recommends that income inequality ought to upsurge suddenly at first, and thereby advantages of production turns out to be further mutual over duration of time. However, this only differs in the case of the United States since the early 1970s whereby Income inequality has increased, but the advantages of productivity development have not achieved a standard flow. In the recent years, some economists and financial groups such as the International Monetary Fund (IMF) have declared increased concerns on the high levels of inequality that might even be harmful to economic growth at the long run. Higher level of household income deteriorates the combined economy result. For instance, bigger income inequality can lower the normal life expectancy or normal contentment in a nation. In addition, higher income inequality can, for example, decrease the economic growth id of country’s or the average family income development (Lawrence, 2008, pg.12). Part 2. A new proposal to fight income inequalities A global minimum wage Minimum wage refers to the amount of money that is the least quantity of payment per hour that any workers need to be paid in accordance to the law. Minimum wage is thus a salary that is set by the legal specialists or by an agreement as the slightest that may be remunerated either to working individuals commonly or to a precise group of employed people. With these legal declarations, it is illegal for any person to pay a salary that is below the legal minimum wage. The minimum wage tries to defend employees from manipulation, letting them meet the expense of the simple human needs of life. The minimum wage rate varies in different countries, and occasionally differs between states or provinces. Below is a graph illustrating the minimum wages for several countries worldwide (Lawrence, 2008). The policy of Minimum wages has attracted strong critics from economists, thus is because this policy creates a price ground on salaries. These Price grounds can result to a dead decline in the economy, this implies that inadequacies exist. Minimum wage has effect on income inequality in a situation whereby in organizations are forced to hire less employees, therefore aggregating unemployment. In 2008, the U.S. national minimum wage proportion was at $6.55 per hour. Nevertheless, in states whereby their minimum wage is upper than the U.S. national minimum wage, employees should be paid the upper minimum wage as well. Thomas Palley maintains that countries ought to embrace a minimum wage that is on the grounds of a static percentage, (Palley recommends 50%) of every nation’s average wage, this proposal would best be applicable in reducing poverty. Income inequality in countries is habitually unseen, as external observers fixate on international tendencies. For instance, in Argentina, India and Indonesia, the top 1% experienced a rise in their revenue shares from the 1980 onwards; the following graph illustrates a gradual rising trend for India from the year 1980 to 1999 (Flinn, 2010). The graph below also shows that minimum wage regulations artificially fix salaries at above equilibrium levels. The source of labor will turn out to be greater than the demand for labor as illustrated in the graph below (Image from http://marketmonetarist.com/2013/02/23/bob-murphy-on-minimum-wages-and-a-textbook-graph-to-illustrate-it) Palley proposes that countries ought to set a minimum wage that is a static percent (he states that 50% would be best) of their average wage. There are five effects of Palleys’ proposal; first, the minimum wage is likely to spontaneously rise with the average wage, producing a true ground that moves hand in hand with the nation’s economy. If the average wage increases with production growth, the minimum wage is also likely to increase with production development. Secondly, as the minimum wage is fixed by the regional average wage, it is fixed in relation to the regional economic circumstances and replicates what a nation can endure. Third, when countries need a higher minimum wage, they can do that at their own will. The international minimum wage organization can only set a ground but cannot put limitations. Fourth, nations can also be allowed to fix local minimum wages is each country. Therefore, a nation like Germany that has advanced unemployment in the previous East Germany and poorer unemployment rates in the earlier West Germany can fix two minimum wages that area suitable for each country. The lone condition would be that the local minimum wage be bigger than or equivalent to fifty percent of the local average wage. Finally, a international minimum wage system can also confer noteworthy political advantages by strengthening understanding of the requirement for universal labor market guidelines and displaying that these guidelines are practical (Berlatsky, 2012, pg. 13). References List Aguiar, M., & Bils, M. (2011). Has consumption inequality mirrored income inequality? Cambridge, Mass, National Bureau of Economic Research Batten, P. (1976). Income & inequality. Milton Keynes, Open University Press. Berlatsky, N. (2012). The minimum wage. Detroit, Greenhaven Press. Bourguignon, F., Levin, V., & Rosenblatt, D. (2006). Global redistribution of income. [Washington, D.C.], World Bank, Development Economics, Office of the Senior Vice President and Chief Economist Cooper, M. H. (1998). Income Inequality. Washington, D.C., CQ Press. Firebaugh, G. (2003). The new geography of global income inequality. Cambridge, Mass, Harvard University Press Flinn, C. J. (2010). The minimum wage and labor market outcomes. Cambridge, Mass, MIT Press Hills, J. (1996). New inequalities: the changing distribution of income and wealth in the United Kingdom. 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