Inequality in Earnings - Conventional Wisdom about How to Approach This Problem - Essay Example

Problem

Inequality in earnings can be defined as the economic imbalance in a society i.e. the variance of how the economic assets of a particular society are divided amongst its individuals. Some scholars put it as the wealth gap between the rich in the society and the poor in the same society. This situation of inequality in earnings has been there for a very long time but as of now it was recorded to be at its peak in some countries such as the OECD countries which records that the average earnings of the wealthy people, taking only a 10% of the population, is greater than that of the poor people in the same OECD countries by at least nine times which was not the case 25 years ago when it was just seven times more. Some countries however have managed to decrease this wealth gap but still they record a very high income of the rich as compared to the poor. Many countries now are trying to address this issues as their leaders make it a top priority in their governments. Countries with emerging economies have helped lift thousands of people from the poverty level to better level where they can sustain themselves but still this has not been reflected throughout this countries as the growth is not evenly spread thus some places still experience very high levels of inequality in earnings (Matthews, 2011).

Conventional wisdom about how to approach this problem

This issue of inequality in earnings has been a topic of discussion in the recent past making it not only a national conversation rather a global talk. Many debates have come up on ways of how to raise the minimum wage so as to address this issue. The convectional way of how to approach this problem is by first defining it then measuring it. The definition we have covered that. For the measuring of the inequality in earnings, several reports have been published on this matter. Most of these reports involve the income difference in various countries between the rich and the poor people. Taking one of the reports published by the U.S. Census Bureau on income inequality, one of the latest reports states that the top households which make up 5% receive a huge share of about 21% of the combined income as of 2014 while the majority households which makes up the bottom and is about 60% manage to receive only 27% of the combined income ("Income Inequality - People And Households - U.S. Census Bureau"). Gini index is a vital tool that is used to measure the inequality in earnings. It works on the principle of summarizing statistics by measuring the distribution of incomes on a scale of zero (whereby it treats every individual as if they all have the same income) to one (whereby it treats an individual as if he/she has all the income). U.S. Census Bureau has also used Gini index on some of its reports whereby it shows that the income Gini of US has been on the increase for the last few years ("Income Inequality: Data - U.S Census Bureau"). This fact is supported by other scholars and researchers like the worldly known Emmanuel Saez whose famous work (Income and Wealth Inequality: Evidence and Policy Implications) tends to support the results of the Gini index on US income inequality.

Other ways of measuring the inequality in earnings involve methods such as the Theil-index. This has been proven to have advantage over the Gini index in that it has the ability of been linear on different regions say of a country or subgroups of a society. The flaws of the Theil-index comes in that it fails to have a clear representation of the data it gives plus it is also a bit complex in terms of interpretation. This has been used by organizations such as the World Bank in their reports on inequality in income ("Poverty Analysis - Measuring Inequality"). In addition to this the World Bank also uses another method known as the Decline dispersion ratio. This works on the principle of highlighting the ratio of average income of the rich people in the society which is top 10% of the total population most of the times fractioned by the income of the bottom 10% of the same population. This ratio is easily understandable and reliable as seen in several cases where it is applied. For example the OECD has used this as part of their presentation on inequality in earnings covering the difference in low paid workers to that of high paid workers. In this case the low paid workers are the full time workers whose earnings fall below the two-thirds of gross median earnings while the high paid ones are the full time workers whose earnings are one and half times greater than the gross median earnings ("Decile Ratios Of Gross Earnings").

Criticisms

Critics in this contest comprises the scholars, economist and many other people who tend to disagree with the findings on the measure of inequality in earnings. A group of economists have suggested that the data from incomes has some flaws in it that render it unusable when it comes to determining the inequality in earnings. They argue that the measures on income inequality uses the income before any other factors comes in such as the taxes and other things like social security which were brought in to address this issue of inequality. Furthermore they argue that an individuals may change a given time but this may tend not to appear on the economic resources like the wealth the family has accumulated. To give an alternative to this they suggest considering consumption as an economic evaluation of an individual economic well-being.

Studies have shown that in terms of consumption there is less inequality as compared to the income. The American Enterprise Institute is one of the organizations that are critics to the use of income data. In their study on consumption inequality they gathered data from Consumer Expenditure, which showed aggregated changes in the households’ consumption expenditure at different levels of income distribution. This in turn reflected that inequality in consumption has only increased by a small margin for the past twenty plus years. The organization also went further by constructing a Gini index based on the data from CEX and it showed that US has been stable in terms of consumption over the recent past. The second source of their data was from the Residential Energy Consumption Survey, which made it possible for them to analyze the inequality in consumption on durable goods. The company opted to use this second source as the CEX did not cover this topic well. The results from this study based on the second data showed that the gap separating the low income households and the high income households was decreasing depending on the commodity (Hassett and Mathur, 2012).

How society should address the original problem

There are variety of ways the society can address this problem of inequality in earnings. Lane Kentworthy a professor of sociology tries to cover some of the ways by highlighting the base of tackling this problem as wealth redistribution (Ferro, 2016).

Creation of good jobs. As of now the job market in many countries is skewed geographically to only some few urban places while the other paces are left behind. This is mainly because the high income jobs are isolated to fields like the IT, law and finance while the low income ones are in retail among many others. Banks should be able to lend money to small businesses so as to allow them to grow and also ensure that the business are able to provide well- paying jobs. Also the minimum wage should be raised for all so as to allow everyone to get a decent income and thus reduce the inequality in earnings.

The taxes should be fair to all citizens of a particular nation. The tax loopholes that are used by the rich to benefit themselves at the expense of the poor people. Taxes can also be raised on capital income to levels that are just below the labor ones (Matthews, 2014). Restrictions should be made on practices that tend to categorize earnings as income capital thus exempting it from taxation. The deductions that are usually aimed at benefiting the rich in society should be made into credits for the low income people thus reduce the inequality in earnings ("This Is How We Solve Economic Inequality").

Improving the child-care. This can be addressed in various ways: providing better counselling for students in college and universities on career opportunities and jobs. Providing a good childcare system it will ensure equal starting points for all children thus removing the instances of inequality as brought about by the system that fails to address child care. The state together with families should work hand in and in trying to provide the best child care possible as the state should cap the costs of the care. Through this parents and guardians can be able to manage time between that spent with their kids, work commitments and other commitments (John D. Sutter, 2016).

Problem within the economics of transition

This refers to the changing of an economy from one which is based on central planning to one that involves free markets. One of the problems that is associated with the economics of transition is the increase in equality in income.

How the problem arose in response to historical changes

In history some countries that have undergone transition of economy are like those that broke off the Soviet Union. Soviet Union used to practice communism and after its break some the satellite states opted to change from communism to market capitalism type of economy. This is where the problem in these countries can be traced to have started from.

 How well the sources grasp and respond to these changes

From a hypothesis by Kuznet (Ferreira, 1999): argues that economies first develop from the low levels leading to rise in unevenness then at much progressive stages of development the inequality tends to drop. Other studies however tend to oppose this relation of growth of GDP to that inequality in earnings. A good example is when a country transitions from the agriculture aspect of running the economy to that of the industrial. In this case many people will move from the agriculture to the industries for better pay but this will also increase the inequality in earnings but if controlled or the transition of people is stopped the distribution of income will be better. Another thing that can bring about increase in inequality in earnings during economy transition is the adoption of better technology. This can bring about the distribution of wages due to the factor of increased need of workers with a particular skill only while the rest are left behind. Taking an example of the Silicon Valley where its median income is about $94000 yet many jobs approximated at 31% still pay less minimum wage i.e. below what is required to sustain a family there. This is all due to the emphasis on people who can bring change in the technology world i.e. IT while those who can’t are left behind ("Technology And Inequality"). Inflation brought about by excessive government spending leading to increased debts, small foreign reserves etc. This consequently deepens the inequality in earnings among the members of that particular country as redistribution of resources from the poor to the rich takes place. Unemployment also widens the gap between rich and the poor in terms of earnings. Politics also play part in inequality in earnings in that politics can determine the privatization of some assets which make wealth to be concentrated at a particular level of society thus uneven distribution of income.

Revising the solutions to make them more adequate

When it comes to addressing the problem that arises from economics of transition we start by first viewing how we can grasp the sources and respond to them accordingly so that in turn it changes the inequality in earnings. The technology aspect can be addressed by proving proper adjustments to the education policy. This entails making the education provided in schools able to equip the students with the necessary skills needed when it comes to dealing with technological changes (Cornia and Kiiski, 2001). Furthermore in equalizing the quality of education provided narrows the gap of inequality and ensures equal distribution of income. In addressing the inflation and unemployment the regime that rules should makes it policy to be based on democratic ideologies such that they tend to cater for the public well-being rather than the well-being of the few rich people in the society. The government should create jobs for its citizens and try to cut off its expenditure and thus cub cases of inflation thereby reducing the inequality in earnings among the public. Also politics like the government should be based on democratic ideologies as it is evident in countries where inequality in earnings level are low are governed by strong democratic rules and law (Cornia and Kiiski, 2001).

Work cited

Matthews, Stephen. "Trends In Top Incomes And Their Tax Policy Implications". OECD Taxation Working Papers (2011): n. pag. Web. 9 May 2016.

"Income Inequality - People And Households - U.S. Census Bureau". Census.gov. N.p., 2016. Web. 9 May 2016.

"Income Inequality: Data - U.S Census Bureau". Census.gov. N.p., 2016. Web. 9 May 2016.

"Poverty Analysis - Measuring Inequality". Web.worldbank.org. N.p., 2016. Web. 9 May 2016.

"Decile Ratios Of Gross Earnings". Stats.oecd.org. N.p., 2016. Web. 9 May 2016.

Hassett, Kevin and Aparna Mathur. "A New Measure Of Consumption Inequality". AEI. N.p., 2012. Web. 9 May 2016.

Matthews, Stephen. "Trends In Top Incomes And Their Tax Policy Implications". OECD Taxation Working Papers (2011): n. pag.. Web. 9 May 2016.

"Income Inequality - People And Households - U.S. Census Bureau". Census.gov. N.p., 2016. Web. 9 May 2016.

"Income Inequality: Data - U.S Census Bureau". Census.gov. N.p., 2016. Web. 9 May 2016.

"Poverty Analysis - Measuring Inequality". Web.worldbank.org. N.p., 2016. "Decile Ratios Of Gross Earnings". Stats.oecd.org. N.p., 2016. Web. 9 May 2016.

Ferro, Shane. "9 Steps For Solving Income Inequality — And Why We Need To Be Talking About Them". Business Insider. N.p., 2016. Web. 9 May 2016.

John D. Sutter, CNN. "7 Ways To Narrow The Rich-Poor Gap". CNN. N.p., 2016. Web. 9 May 2016.

"This Is How We Solve Economic Inequality". Neweconomics.org. N.p., 2016. Web. 9 May 2016.

Matthews, Chris. "Bill Gates’ Solution To Income Inequality". Fortune. N.p., 2014. Web. 9 May 2016.

"Technology And Inequality". MIT Technology Review. N.p., 2016. Web. 9 May 2016.

Ferreira, F. H. G. ‘Inequality an Economic Performance. A Brief Overview to Theories of Growth and Distribution.’ — World Bank, June 1999, [http://www.worldbank.org/poverty/inequal/econ/]. Web. 9 May 2016.

Cornia, G. A., Kiiski, S. ‘Trends in Income Distribution in the PostWorld War II Period.’ — UNU/WIDER Discussion Paper No. 2001/89, Sept. 2001. Web. 9 May 2016.