The economic impacts of income disparity
Introduction
The world is almost winning the war against gender inequality. However, the fight against income inequality is still untapped. There is still visible income inequality where one gender or some social classes readily earns more than the other. This issue has persisted, and not so much effort has been put in place to curb the problem. The sole reason why there are not so many efforts in place to fight income inequality is that there is little understanding of the adverse effects of income inequality. This issue does not only affect one gender, Law (2018) found out that the impacts of pay inequity touch almost all dimensions of our society; social security, healthcare, the middle class, criminal justice, immigration, international trade, GDP, entrepreneurship, businesses and economic growth at large.
In this paper, the economic impacts of income disparity will be discussed in depth. In this regard, this paper is divided into sub-sections that accumulatively address the more significant issue of economic implications of income disparity and the world economy. The first section will discuss the general overview of income disparity; the next section will discuss the causes of inequality and the economic implication of income disparity. The third section will talk about mitigating the issue by giving recommendations, and then the last part will be the conclusion. It is essential to understand that this paper will use tables and graphs where necessary to explain the points adequately.
Income disparity; overview
Income disparity is an extreme disparity of income distribution where one group earns higher than the other; this can be observed in gender based-income where there is a noticeable income difference between men and women (Hardanto & Ismail, 2017). Income disparity at large encompasses the disparity of income distribution where high income is concentrated in the hands of the small percentage of the broader population. When there is income inequality, there is a visible gap between the wealth of one population in contrast with the other.
Income disparity is a major dimension of social stratification and social class, its impacts, as touches as mentioned above almost all parts of the society, including wealth distribution, political power, and social status, among many other economic impacts. It is crucial to understand that income is the primary determinant of the world economy, societal growth, and quality of life. Therefore income disparity transmits its effects to other sectors, including health and individual well being.
An essential indicator of income disparity is how the economy. The economy shows the extent to which income is distributed unevenly in a country. Among the countries that income inequality affects significantly include Canada and the United States. Income disparity in Canada is higher as compared to its peers; in as much as Canada’s wealth is distributed more equally than in the United States, Canada still suffers income disparity. Income disparity in Canada increased over the past 20 years. In the 1980s, Canada reduced its income disparity with a low coefficient of up to 0.281 in 1989. Later, income disparity rose in the 1990s but remained around a coefficient of 0.32 in the 2000s (Jenkins, 2017).
Figure 1.1: Income disparity in 2010-2019 (Gini coefficient)
The most commonly used measure of income disparity is the Gini coefficient. This is a measure on a scale of 0-1 named after Italian statistician Gini Corrado. This measure calculates the degree to which the distribution of income among individuals in a country deviates from an exactly equal distribution. Critically looking at table 1.1, Canada scores grade ‘C’ and ranks 12 out of the 17 listed countries where the United States tops as the nation experiencing the highest levels of income disparity. Canada falls in the same grade but different ranks with Japan, Australia, Italy, and the United Kingdom (Solt, 2016).
Rising income disparity is a widespread concern, as it can be depicted from Table 1.1. Inequality in advanced and developing markets is increasing each time. In essence, income inequality is the biggest challenge that the world is facing today, and it needs considerable attention. The issue is facing more than 60% of the world; education and working hard does do not define success; in contemporary society, knowing the right person and wealthy family is much important (Solt, 2016). This issue continues to widen economic inequality.
Income disparity is like unfairness. Irrespective of culture, ideology, and religion, people care much about the inequality of any way. Inequality is a sign of income mobility and opportunity; these show that a particular segment, gender, or group is persistently disadvantaged in society. Widening inequality, as seen in the case of the United Kingdom, the United States of America, and even Canada has significant implications for economic growth and macroeconomic stability. All these go a long way to affect political stability since the decision making falls in the hands of the few leading to suboptimal use of human resources, thus reducing investments and economic stability, thus raising crisis risk. The fact that income disparity can lead to economic and social fallout from the global financial crisis and the resultant adverse effects headwinds to global growth and employment makes the topic on income disparity and its economic implication weighty and worth a thorough discussion.
Causes of income disparity
It is worthwhile to understand the causes of income disparity. The causes fall under two broad categories; market force and institutional force. On market forces, the market is in high demand for highly skilled labor. People who are well educated in particular areas of specialization like engineering, medicine, and other technical fields are highly needed in the job market. However, the demand is high then the available labor, therefore to win this competition, hiring institutions continuously raises salaries to retain and attract the scarce labor, thus creating income inequality (Aghion & Akcigit, 2019). In essence, technological advancement, education, and the need for excellent skills and brains to solve contemporary issues have pushed up the demand for the brainy and well-educated people. Income disparity based on gender where female workers receive less pay than male workers on the same task arises from the fact that gender discrimination does not allow the female gender to receive better training, better training, and equal employment opportunities.
Globalization is another cause of income disparity (Marsh, 2016). The contemporary world is highly interconnected, and people can work from home or work anywhere in the world due to fast and improved means of communication. With these effects of globalization, countries can easily outsource cheap labor and pay them below standard. With easy access to cheap labor, manual laborers are paid very less as compared to those working in technical fields. This considerable income difference contributes to overall economic inequality.
Women earn less than men after completing the same task or while working in the same position. The explanation here is that women do not have top officials to fight for their rights and better pay (Yang & Shen, 2016). Men head various institutions; in essence, there is gender inequality in everything, and these lead men to top positions in every institution; leadership, CEO positions, and corporate leadership. While men are at the top, they set rules, including wages that favor men. Gender egocentricity is among the reasons why income disparity is witnessed in many institutions. Women are limited from taking top positions to fight for their rights, including equal pay rights. Therefore, gender inequality leads to income inequality; there are several ways this can be explained in a multidimensional manner.
An alternative explanation focuses on institutional forces. There is increased income disparity since unions and bodies that should fight for equality have declined. The decline in unionization, stagnating minimum wage rates, deregulation, and weak national policies that favor the rich in Canada and throughout the world are some of the possible causes of widespread and increasing levels of income disparity.
How Income Disparity Affects the World Economy
Income disparity affects growth drivers (Besarria & Araujo, 2018). Widening income disparity matters a lot since it touches on economic growth. High-income disparity separates the world population into two groups; top earners who make up to 10% of the world’s population and low earners who make up the remaining 90%. Low-income earners are many, and they do not have the ability to stay healthy, afford basic needs, and accumulate physical and human capital. Lower-income households do not have the capacity to invest in education, as poor children are likely not to attend college.
Consequently, when the majority does not have the ability to attend colleges and get skills that will enable them to be useful in the economy, we end up having the largest population unskilled thus, labor productivity is significantly lowered than it would have been in a more equitable world. In essence, income disparity is depriving the world of better skills, more skilled workers who can work, and drive the economy ahead. In the same vein, countries like the United States and the United Kingdom, where there are high levels of income inequality, they tend to have lower levels of mobility between generations.
Income inequality favors a small fraction of the people in society and the country at large. In essence, this inequality, as earlier mentioned, favors like 10% of the population while more or close to 90% is disadvantaged. This means that money is in the hands of the few in the country while the larger population is suffering. The wealthy spend a lower fraction of their income than the middle-and lower-income group. The larger population can be able to spark faster economic growth as compared to the wealthy people who can make little or no difference in the economy since they are comprised of a small fraction of the entire population.
Kim (2016) argues that income disparity dampens investment, thus slowing economic growth by fueling economic, financial, and political instability. Rising levels of income disparity have a causal effect on financial crises. This directly hurts short and long term economic growth. Prolonged periods of income disparity can potentially cause a financial disaster by intensifying leverage, overextension of credit, and relaxation in mortgage-underwriting standards. On the same note, the financial crisis as a result of income disparity cal allow lobbyists to push for financial deregulation; all these have a terrible and adverse economic implication. Income inequality, on the other hand, can compel workers to take loans and enable investors to increase their holding of financial assets backed by loans to workers; this will result in a high debt-to-income ratio, thus financial fragility. Financial fragility can eventually lead to a financial crisis. Income disparity all over the world can lead to global imbalances. Global inequality is very challenging for macroeconomic and financial stability and economic growth.
Income inequality is directly attributed to conflicts that hinder investments. Prolonged high levels of income inequality can lead to trust and social cohesion damaged, thus leading to conflicts that discourage investment (Kennedy & Smyth, 2017). For instance, conflicts can hinder resource management; conflicts make resolving disputes hard. Income disparity brings inequality. Inequality affects the economics of disputes; it intensifies the grievances felt by the minority group or reduces the opportunity costs of initiating and joining a violent conflict. Income disparity potentially leads to the introduction of policies that hurt economic growth. Besides affecting the economic growth drivers, income inequality can lead to poor public policy choices that can further damage the economy. For instance, income imbalances can lead to a backlash against economic growth and liberalization and encourage protectionist pressure against globalization and market-oriented reforms. Furthermore, enhanced power by the elite can pass policies that limit the provision of public goods that can boost productivity and growth that disproportionately benefit the poor.
Income inequality propagates poverty and hampers poverty reduction (Kramer & Myhra, 2016). It is essential first to understand the economic relationship between poverty and economic growth. When the economy grows, many people invest, thus creating more job opportunities for low and middle-class people. When the economy is at stake, economic growth that in turn enables poverty reduction is hampered. Countries with high levels of income inequality find it hard to lower poverty or fight poverty levels where the distributional pattern of growth favors the non-poor. Moreover, economic growth always faces challenges and periodic shocks of various kinds that may hinder growth. When such economic shocks occur, the poor always suffer the most; higher inequality makes a more significant proportion of the population vulnerable to poverty.
The government gets money from tax collection to build infrastructure and enhance development that accumulatively enables a country to develop economically. There is a strong relationship between the amount of tax collected and income disparity. In a country where people earn almost equally, there is a considerable number of potential consumers who can take part in buying and selling goods. In essence, more money is in circulation to facilitate businesses in a country where there is no income disparity (Brueckner & Lederman, 2018). In such a state, the government collects much more tax from many people who potentially take part in businesses. The colossal tax collected goes back to develop infrastructure, improve education, health care, and ensure a better environment where the economy can thrive. Income equality is, therefore, essential in determining what the government can put aside for economic development. Besides, the unequal distribution of wages makes the larger population needy and dependent. This increases levels of poverty, reduce the purchasing power of the people, hinders business, and stagnate development in various ways, thus economic disintegration.
Health is another critical dimension from which to look at income disparity. High rates of health and social problems like obesity, homicides, mental illness, high rates of teenage births, high incarceration, drug abuse and lower social goods like high life expectancy, better educational performance, better women’s status, and social mobility are recorded in countries with high levels of income inequality. This is to say; income inequality brings no social good. Social health problems are lower in countries like Japan and Finland, where there are high-income equality levels. People need to eat well, access clean water and warmth; these lead to a better life and health, resulting in longer lives. Per capita income is, therefore, significant in increasing general wellness and improved health. Countries that experience high inequality levels face various social issues like health issues and low life expectancy. Due to increased social problems, governments in such countries put all the efforts in fighting social issues like health at the expense of economic growth. In the end, the economy will worsen or scramble since much of the money is put aside to fight social problems, including health, illiteracy, and parenting problems.
Crime and drug abuse also correlate with inequality in society. Homicides, crime, drug abuse, and other sorts of social injustices are more rampant in societies where income disparity is more substantial. For instance, many cases of homicide in the United States and Canadian provinces are related to inequality. Income inequality that escalates to economic inequality is closely associated with significant rates of homicides despite an extensive list of conceptually relevant controls. Drug abuse renders productive people unproductive; it makes the young, energetic youths that the economy depends on unproductive. Besides rendering people unproductive, drug abuse escalates crime. A society cannot prosper with high rates of crime, homicide, and drug abuse. In several ways, drug abuse and crime drag economic prosperity back.
Prolonged income inequality can lead to monopolization of the labor force. Once the labor force is monopolized, employees will require fewer workers to finish their tasks. The remaining and more significant percentage of employees can consolidate and take advantage of the relative lack of competition; this leads to less consumer choice, market abuse, and higher product prices that can stagnate the economy. There is also a positive correlation between income inequality and increased levels of political instability. Interregional disparities, for instance, gives room for increased rivalry and terrorism. Inequality between social classes can spur coups that can lead to coups and civil wars. When there is prolonged and distinctive income disparity in the society, the gap between the poor and the rich continues to widen. However, this gap widens more towards the poor, which makes up the most significant percentage of the people in the society. It reaches a point where the poor outweighs the rich in number, and this can prompt wars, terrorism, and coups. All these affect a country due to political instability. Movements like fighting for human rights, fighting for the poor, and other majority group movements are likely to start a war where there are distinctive social class gaps. Political instability hijacks the government’s development agendas, thus focusing on leveling the war and attaining normalcy. There is little development in countries that experience political instability like Syria, Afghanistan, and Somalia.
Recommendations
There are a few recommendations on how stakeholders can fight the issue of income disparity. First, increasing the minimum wage can help in fighting income disparity. Ensuring that workers earn high for the lowest-paid workers can help millions of people and fight poverty, thus adding billions of money to the nation’s overall real income. Increasing the minimum wage for workers does not in any way retard economic growth, nor does it hurt employment, it only increases the levels of money in circulation. When there is much money in circulation, people can spend on buying, thus improving local businesses where the government gets its revenue. Besides, when there is more money in circulation, people can invest, thus creating more jobs for the jobless people and increasing the government’s revenue collection. Work unions, bodies that fight for human rights, and the government should work unanimously to review laws and policies that govern workmanship. Laws and policies that protect the minority should be reviewed so that the low-social class people can be protected and their rights as far as income is concerned to be protected.
Additionally, investing in education is the most crucial route to economic freedom. Children from all social classes should be equally supported to access quality education. Investing in education from early childhood increase economic mobility, contribute to increased productivity, and decreased inequality. Besides investing in education, the tax code should be made progressive. It is worrying that tax rates at the top continuously decline even when the share of income and wealth dramatically increases. Capital tax gain rates must be adjusted in the sense that people at the grassroots get more tax to relieve than those at the top.
Combating discrimination, racial segregation, and investing in women is another solution for income disparity. Women are almost the same in terms of population with men. The world population has nearly 50% of women and 50% men. This means, if one gender is discriminated against, we potentially ruin half of the world economy. Women should be empowered, they should be paid equal to men for the same task, and they should be allowed to take top positions at all capacities. A family that is headed by women comprise of the highest percentage in poverty. Investing in women, therefore, is an essential way of increasing economic mobility and strengthening families.
Expanding access to capital, loans, and microcredit to encourage entrepreneurship among the low-social class groups is one of the surest ways of fighting economic inequality, thus income equality. Help poor people start their own business by giving capital and loans. After these investments, the government will collect more revenue for infrastructural expansion and economic development. When economic stability is achieved, the government is able to acquit the poor of the tax burden, set high minimum wages for workers, thus improving income equality and economic growth at large.
Conclusion
Income disparity is the biggest challenge the contemporary world is facing. The world is losing a lot of money that could otherwise be meant for development due to income disparity. It is important to note that economic prosperity is not evenly distributed due to income disparity where one gender or one social group earns less than the other group, thus creating substantial income gaps. Various factors contribute to income disparity, including lack of robust policies and laws to govern income rates, gender discrimination, and poverty, and education inequality.
Income disparity has various economic implications, as discussed in this paper. Income disparity hinders economic development by hindering growth drivers, reducing investments, stagnating education, escalating health problems, and increased poverty. All these and many other factors contribute to economic shambling. It is good to fight income disparity to help the world economy to grow. Investing in education improves production skills and makes more people productive, thus reducing income disparity. Empowering women also improve the economy and tries to level income inequality, given that women are almost half of the world’s population. Supporting the poor class with loans and capital for investment also contributes to reducing income disparity in various ways.