Essay on Inequality of Incomes in an Economy
The widely reported U-turn in inequality in the United States is an artifact of inappropriate use of family income as a measure of welfare. Dirk Krueger and Fabrizio Perri say :. First, consistent with basic economic theory, consumption inequality is substantially lower than income inequality.
Even if we let income hog the spotlight in our story about inequality, a good deal of evidence suggests that income inequality has been overestimated. What happened in the top one percent? The bulk of the evidence seems to point in the direction of changes in executive compensation. A number of other recent studies indicate that measured income inequality has been overstated due to inadequacies in traditional methods for constructing price indices and estimating real income.
Many popular narratives about inequality are grounded on the alleged fact that wages and incomes at the middle and bottom of the distribution have been stagnant for decades. It appears that this, too, may be an artifact of insufficiently sophisticated methods for constructing the price indices used to calculate rates of inflation. But taken together they are impressive. Suppose we accept their upshot. Suppose economic inequality has actually increased very little lately. Suppose that the American lower and middle classes have over the last few decades enjoyed gains from economic growth equal to those enjoyed by the bulk of the upper class.
Would you conclude that Krugman raised a false alarm?
I hope you would. This kind of pop liberal egalitarianism would suggest that the results laid out above should put our minds at ease. But I think the inequality-as-justice-barometer view is based on a mistake and is bound to confuse and distract us. The level of inequality within a country can be influenced by a variety of factors.
Some good things tend to make inequality rise. Some bad things tend to make inequality fall. The same level of inequality can have better or worse underlying causes. For example, the United States and Ghana have approximately the same level of income inequality, as measured by the Gini coefficient, but on any sensible account of justice or goodness, American institutions are a lot better.
If income inequality in the United States is symptomatic of injustice, the problem is unlikely to be the level of inequality as such, but the institutional mechanisms or social norms — such as predation by political elites or the systematic exclusion of ethnic minorities from economic opportunities — that tend to generate income inequality. If the level of inequality is a knock-on effect of a more fundamental injustice, we should focus our attention on the original site of wrongdoing.
So, some innovations in technology increase the productivity of some groups of workers more than of other groups of workers. And new technology can make some workers more productive while doing little or nothing for others. So what are we to make of this? I think it does. But universal access to indisputably satisfactory schooling will by no means erase all the inequalities in skill that skill-biased technical change parlays into wage inequality.
The mere possibility of this kind of morally neutral process widening the income gap should leave us skeptical of barometer-of-justice approaches to inequality. Wages reflect productivity, but they also reflect supply and demand. The American educational system, the story goes, has not been producing skilled workers at a rate sufficient to keep up with the demand for them. Is the low supply of skilled labor relative to demand also a neutral inequality-influencing factor?
Unlike the fact that much new technology does not affect productivity uniformly, a shortage of skilled workers can be more or less directly alleviated by government policy. It reflects a real problem.
Income Inequality in the United States Essay
Additionally, the United States could easily admit many more skilled foreign workers, but does not. Now, I would contend that the effect of the quota on visas for skilled foreign workers on the level of American income inequality is neither good nor bad. The point is that locating the real problems, whatever they are, is incredibly important.
Changes in executive compensation are almost certainly behind the dramatically disproportionate income gains in the top one percent of the distribution. So why did those changes occur? Was the change in the tax code wrong? A solution to some other problem with unforeseen consequences? Did the old norms of remunerative moderation collapse under the weight of Ayn Rand novels? Or what? But theft is an injustice whether or not it moves the Gini coefficient.
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My point is, So what? There may be differences in people having the same qualifications. Some may be more intelligent, hardworking, daring, and resourceful.
Thus they may be in a higher scale of social values and earn more in the same occupation. The existence of non-competing groups in every society is another cause of inequalities of incomes. There are vast income differences in these groups and also within each group. But they are more pronounced in the last group. Occupations differ in risk, uncertainty and safety. These differences are reflected in earnings. People prefer government jobs due to greater security. On the other hand, jobs in private organisations carry risk and uncertainty.
Employees in government jobs generally earn less than their counterparts in private industries. People who are born, brought up, and educated in well-to-do environment and have better opportunities, generally receive high incomes. On the other hand, children born of poor parents, living in slums, getting bad food, having poor health, and little educational facilities get low income when they grow up. The vicious circles of such children begin at birth but continue throughout their life.
They do not get a fair chance. Poverty breeds a special environment and environment breeds further poverty. Poverty, in turn, erodes income-earning capacities.
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Thus income inequalities occur because of inequalities of opportunities of education and environment. Immobility of factors is another cause of income inequalities. A person with the requisite qualifications may not like to move to a high-salaried job in some other part of the country. But a person who possesses some initiative can earn more. This is possible in the case of horizontal mobility.
An unskilled worker can become semi-skilled, and the semi-skilled can become skilled by acquiring some education and training. The vast income differences to be found between the rich and the poor are due to the fact that relatively very few persons belonging to the poorer sections of the society possess the ability and the opportunity to rise on the social ladder and become rich. In this, luck or chance also plays its part. Income inequalities are also caused by regional disparities. Some regions are backward because of the lack of natural resources or adverse topography and thus fail to provide sufficient employment opportunities to their residents whose incomes remain low compared with persons living in developed regions.
Such regional disparities are to be found in all countries, whether they are developed or developing. For instance, people living in the northern territory of Australia have the lowest per capita income as compared with people living in other states of Australia. In India, Punjab and Haryana are the richest in terms of per capita income because of their rapid agricultural development, while Madhya Pradesh, Rajasthan, Jammu and Kashmir, Himachal Pradesh have low per capita incomes due to adverse topography. The systems of inheritance are found in capitalist societies.
It perpetuates rather than causes inequalities of income and wealth. The well-to-do pass on their movable and immovable wealth to their descendants before and after their death. The institution of private property also perpetuates income inequalities in capitalist countries. It is the highly paid who are in a position to save and buy land, property, start some business, or run a factory, or invest in securities, or indulge in speculation.
All such investments give rise to further incomes in the form of rent, profit, or interest. Inequalities of incomes and wealth lead to more harmful effects. According to some western thinkers, inequalities of income and wealth lead to rapid economic growth, the urge to become rich motivates people to work hard and earn large incomes and accumulate wealth. More so on account of the harmful effects of income and wealth inequalities which are discussed below. Inequalities of income and wealth lead to mal-allocation of resources within the economy.
The purchasing power of the well-to-do being large, it influences the effective demand of the community. Goods are produced to satisfy the wants and preferences of the upper-income groups. Thus larger resources are diverted towards the production of articles of comfort and luxury while necessities needed by the masses are neglected.
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Consequently, there is abundance of the former goods and scarcity of the latter goods. This is a social waste and loss of economic welfare. Inequalities lead to wastage of resources within the economy. The new rich who own mines, plantations, factories, and business firms earn huge profits. They roll in wealth and spend extravagantly on conspicuous consumption, gold jewellery, palatial buildings, speculation, etc. On the other hand, the masses live in abject poverty, in extremely insanitary conditions, without any proper medical care.
They do not have the means to educate their children. Being ill-fed, ill- clothed, ill-housed and ill-educated, their standard of living is extremely low.
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