Consequences of Economic Inequality - Essay Example

Problems of Inequality - Work and Unemployment

Adam Smith famously stated that a nation’s wealth is underscored not by the possessions of an affluent few but rather, in the wages paid to the laboring poor. In many nations, the problem of economic inequality has resulted to conflict and wars as people struggle to make ends meet. Therefore, economic inequality is lauded as among the greatest challenges facing contemporary societies. In a sense, economic inequality is best highlighted by work and unemployment rates in a nation.

Consequences of Economic Inequality

Most economists concentrate on economic disparities using consumption, income and wealth metrics. The disparities vary across systems, economic structures, historical periods and societies. Inequality in every sense is unfavorable. On one hand, inequality can be a stumbling block to long term growth (Stiglitz, 2009). On the other hand, excessive inequality hinders the creation of wealth as it diminishes incentives to take on risks as well as productivity.

Income inequality and poverty leads to stresses in the family. Moreover, drug abuse, divorce, child neglect are all consequences of poverty and economic equality. Regarding child neglect, the situation more likely happens with poor families than with wealthy families (Mooney, Knox, & Schacht, 2016). Poor parents cannot afford house helps and so most likely leave the children without adequate supervision. On the other hand, the poor parents are also more likely to physically punish their children than wealthy families.

Causes of Employment and Work Inequality

Capitalism and Socialism

Capitalism and socialism are two terms that relate to equality in terms of resource distribution in a society. According to Mooney, Knox and Schacht (2016), capitalism is an economy characterized by the motivation for profit and no government control while socialism is where the means of production are state-owned. In the latter, distribution of goods and services is done equitably according to the needs of individuals in the society. Essentially, pure capitalist or socialist economies do not exist. Most nations have a blend of both socialism and capitalism.

Both capitalist and socialist systems are not without criticisms. In the latter, critics have often argued that excessive control by the government is instrumental in diminishing work incentives (Mooney, Knox, & Schacht, 2016). Additionally, socialism is also blamed for the lowering of the standard of living as well as technological advancement. On the other hand, businesses in capitalist societies have also been subject to criticism. It is often argued that they are too big and profitable to effectively serve the needs of the majority.

Capitalism has been blamed for some of the social ills affecting nations such as high levels of inequality and instability. The corporate dominance of culture and politics has exacerbated the problem of inequality. In particular, large corporations can make decisions that affect the public without any thought of the effect such an action can have on the community. Mooney, Knox and Schacht (2016) contend that organizations can make decisions where the workers have no say. For example, board members can decide the goods to be produced, where they are to be produced and distributed as well as the technologies that would be utilized. These decisions have a profound effect on the workers and hence violating the democratic principle where individuals have the right to be involved in decisions that have an impact on their lives.

The Changing Nature of Work

Apart from capitalism, the changing nature of work is also to blame for increasing inequality regarding work and employment. The 19th century industrialization significantly altered the nature of work. More importantly, machines replaced human and animal power and hence, increased unemployment and inequality in work.

Likewise, the term post-industrialization is used to define a change from manufacturing jobs-based economy to the one that is dominated by information technology and other service jobs (Mooney, Knox, & Schacht, 2016). In contemporary society, post-industrialization is the main focus where approximately three-quarters of jobs are in services. In a sense, the shift to service based jobs makes outsourcing easier which is among the primary sources of work and employment inequality. Similarly, service industry relies on skilled workforce with adequate knowledge on information technology. These skills require higher learning which in most cases is only accessible to the middle and higher classes in the society. Ultimately, the lower classes continue to be unemployed and the cycle continues. As a matter of fact, the increasing service jobs orientation is instrumental in the increasing employment and work inequality among different societies.

As mentioned, education is a key factor in post-industrialization. In a sense, the variation in an individual’s access to education is a major factor in itself contributing to inequality. Becker and Murphy (2007) contend that education is key to earning high wages especially in those places where there are surplus jobs. In that context, those that are unable to acquire good education are forced to settle for lower wage jobs. The argument behind that is lack of education is directly associated to lower income which hinders their growth through investment and savings. On the contrary, education is significantly instrumental in the promotion of personal growth. Therefore, it would be right to argue education can help unleash the production potential and growth of the poor in the society.

Trade Agreements

Trade agreements between countries also contribute to inequality in work and employment. For example, the Free Trade Agreement between Korea and US is said to have contributed the increased trade deficit in the United States and loss of jobs (Mooney, Knox, & Schacht, 2016). On the other hand, the NAFTA agreement contributed to significant loss of jobs in Mexico’s corn industry. In a sense, the agreement meant that cheap US corn was imported into the country and it put many growers out of business. They could not compete with cheap imported corn. According to Mooney, Knox and Schacht (2016), offshoring is necessitated by trade agreements between nations. In actual fact, offshoring is where companies are able to move their operations across countries so that they can maximize their profits through cheap labor. Offshoring takes way jobs from citizens in a country and moves them elsewhere thus increasing inequality in employment.

On the other hand, when wealthy nations trade with developing nations, workers with low skills in rich countries experience diminished wages. On the other hand, low skilled workers would benefit from the trade as they would get improved wages. Some economists like Paul Krugman are of the opinion that globalization has contributed to rising inequality in the US.

Transnational Corporations

Multinational corporations have also contributed employment and work inequality in particular nation. These corporations can move their headquarters to other countries considered as tax havens thereby reducing tax liabilities. However, the benefits accrued by these corporations do not trickle down to the consumers but increases inequality. Essentially, governments are forced to find alternative ways to make up for the lost income when the organizations move their branches. Additionally, there are other social ills associated with multinationals such as urban decline and poverty.

Free Market Capitalism

According to Thomas Piketty, free market capitalism is responsible for the broadening inequality. In actual sense, when the capital rate of return outpaces the growth rate of the economy, then inequality occurs (Piketty & Goldhammer, 2014).

Labor Market

Another argument made by scholars is that market determination of wages leads to inequality. Failure of the market is caused by the situation where there are unequal opportunities to get skills and education, distribution of information is uneven and there is an imperfect competition. In every market, such imperfect conditions exist. That means there is always a significant potential by the government to correct such anomalies (Stiglitz, 2012).

Where there exists a wholly capitalist mode of production, wages of the workers would be ascertained by market and not the organizations. In that context, wage rate would behave the same way that other commodities act in the market. Wages would be viewed as function of the skills price (Stiglitz, 2012). Therefore, the level of inequality is determined by this price.

Theories on Income Inequality

Neoclassical Economics

According to the theory, income distribution inequality is as a result of variances in value added by land, capital and labor. In the context of labor income, inequality is as a result of value added differences in different worker classifications (Hunt and Lautzenheiser, 2011). Therefore, inequality mirrors the gap in productivity between the highest and the lowest paid professions.

Marxian Economics

The Marxian economics contend that in rising inequalities are as a result of capital deepening and job automation in capitalist economy. According to the theory, firms prefer capital equipment rather than human labor so they can maximize profits and ensure costs are kept at a minimum. In the end, less and less workers are needed in comparison to capital equipment and that results to unemployment. Meanwhile, the pressure holds down wage rate. According to Wood (1996), mechanization and automation lifts productivity leading to a situation where wages remain stagnant.

Inequality, Unemployment and Policy Solutions

Some economists have in the past examined the link between inequality and unemployment with some arguing they are one and the same. However, it is a common argument that inequality is caused by unemployment. It is expected then that as people get hired, those in the bottom half are the greatest beneficiaries. The people at the bottom of income distribution are the more likely to land jobs while those already in employment are get the opportunity to work longer hours and improve their incomes. More importantly, a tighter labor market will institute conditions where laborers at the bottom would have a significant bargaining potential. In that regard, policies should aimed at increasing spending to achieve full employment in the economy.

Education as mentioned earlier is important and determines whether an individual lands a well-paying job or not. Additionally, education can reduce unemployment to an extent as educated and skilled workforce would fit and work well in a post-industrialization economy. Therefore, spending enormously in education would help reduce inequality in the society.

Conclusion

Work and unemployment rates in particular society best underscore economic inequality. The consequences of inequality include stunted long term growth and creation of wealth. In the context of family unit, child neglect, drug abuse and divorce are some of the consequences of poverty and income inequality. There are various believed causes of income inequality and they include capitalism and socialism and the changing nature of work. Globalization and market liberalization in the form of trade agreements, transnational corporations and free market capitalism are other factors that have caused income inequality. To tackle the challenge of inequality, significant investment to attain full employment is important.

Likewise, the term post-industrialization is used to define a change from manufacturing jobs-based economy to the one that is dominated by information technology and other service jobs (Mooney, Knox, & Schacht, 2016). In contemporary society, post-industrialization is the main focus where approximately three-quarters of jobs are in services. In a sense, the shift to service based jobs makes outsourcing easier which is among the primary sources of work and employment inequality. Similarly, service industry relies on skilled workforce with adequate knowledge on information technology. These skills require higher learning which in most cases is only accessible to the middle and higher classes in the society. Ultimately, the lower classes continue to be unemployed and the cycle continues. As a matter of fact, the increasing service jobs orientation is instrumental in the increasing employment and work inequality among different societies.

As mentioned, education is a key factor in post-industrialization. In a sense, the variation in an individual’s access to education is a major factor in itself contributing to inequality. Becker and Murphy (2007) contend that education is key to earning high wages especially in those places where there are surplus jobs. In that context, those that are unable to acquire good education are forced to settle for lower wage jobs. The argument behind that is lack of education is directly associated to lower income which hinders their growth through investment and savings. On the contrary, education is significantly instrumental in the promotion of personal growth. Therefore, it would be right to argue education can help unleash the production potential and growth of the poor in the society.

Trade Agreements

Trade agreements between countries also contribute to inequality in work and employment. For example, the Free Trade Agreement between Korea and US is said to have contributed the increased trade deficit in the United States and loss of jobs (Mooney, Knox, & Schacht, 2016). On the other hand, the NAFTA agreement contributed to significant loss of jobs in Mexico’s corn industry. In a sense, the agreement meant that cheap US corn was imported into the country and it put many growers out of business. They could not compete with cheap imported corn. According to Mooney, Knox and Schacht (2016), offshoring is necessitated by trade agreements between nations. In actual fact, offshoring is where companies are able to move their operations across countries so that they can maximize their profits through cheap labor. Offshoring takes way jobs from citizens in a country and moves them elsewhere thus increasing inequality in employment.

On the other hand, when wealthy nations trade with developing nations, workers with low skills in rich countries experience diminished wages. On the other hand, low skilled workers would benefit from the trade as they would get improved wages. Some economists like Paul Krugman are of the opinion that globalization has contributed to rising inequality in the US.

Transnational Corporations

Multinational corporations have also contributed employment and work inequality in particular nation. These corporations can move their headquarters to other countries considered as tax havens thereby reducing tax liabilities. However, the benefits accrued by these corporations do not trickle down to the consumers but increases inequality. Essentially, governments are forced to find alternative ways to make up for the lost income when the organizations move their branches. Additionally, there are other social ills associated with multinationals such as urban decline and poverty.

Free Market Capitalism

According to Thomas Piketty, free market capitalism is responsible for the broadening inequality. In actual sense, when the capital rate of return outpaces the growth rate of the economy, then inequality occurs (Piketty & Goldhammer, 2014). Read More