Extreme disparities in the distribution of income and the concentration of it in a small section of the entire population causes Income Inequality. This disparity builds up to create an economic gap between the Haves and Havenots.

It can permeate deep enough to become social evils affecting individuals and even countries. On a global context it becomes an extreme with the wealthiest 1% hoarding as much as the rest of the population. The build up of this scenario over several decades has made Income Inequality to be the  greatest economic hurdle toady. What makes it even worse is the continuous flow of income to the already well off pockets alone, leading to the coinage of the term One Percent, referring to the tiny fraction of the wealthy.

Seven Factors of Income Inequality

Why and how this inequality came into being is still a baffling question among Economists but studies on demographic, economical and structural facades have shown that there are seven major factors at play.

  1. Tax Policy: A tax structure aimed at raising the economy is a short span while aiding increased earnings for the government in a long term is a variable that plays a dramatic role.
  2. Unemployment: This lowers the participation of the work force and raises the chances of Income Inequality.
  3. Globalization: With an aim of bringing down bottom-line expenses countries like the US paved way for outsourcing businesses. This lead to an elimination of the middle-class and working citizens. The boom in International trade also has a crucial role by favoring highly educated people by decimating lesser educated ones.
  4. Increase in Automation: This has created a downfall of a high income blue collar task force and eventually resulting in lay-offs. Recent advancements in technology have channeled the flow of money to the skilled workers from the other segment.
  5. Decimation of Unions: Almost 20% of high-pay union careers have been cut off since 2000. The rise of the ‘Right to Work’ movement also spread Income Inequality among the populace.
  6. Gender and Racial Disparities: People of color and women are the most affected segment of this disparity. In some countries the white wages are almost double and women earn 68% less than men.
  7. Salary Gaps: Wide variations in pay among the top rungs and skilled taskforce by almost ten folds results in a stagnation of increment for the unskilled and low rung workers. High earners almost have bigger savings than others and this leads to accumulation of wealth in this sector. This goes down the generations and makes it cyclic.

The Gini Coefficient

The Gini Coefficient is a major tool in analyzing Income Inequality, it is also refereed to as the Gini Index. Corrado Gini, an Italian sociologist came up with this system in 1912. This is proof that Income Inequality was a threat even at that time or was atleast being considered by the Economists. It works by assigning Zero for equality among the people and One for inequality. These numbers are assigned to countries. Among the OECD (Organization for Economic Cooperation and Development) countries United States ranks fourth. With 41.6 holdings of the global personal wealth, it has a Gini Index of 0.42 which is the worst among the OECD nations.

Effects of Income Inequality

The far reaching effects of Income Inequality are:

  1. Political Polarization: There has been a tremendous rise in this in tandem with inequality
  2. Stymied Growth in Economy: With most of the people making less money, the level of spending has also declined heavily.
  3. Decline Social Mobility: A study by OECD states that “The main mechanism through which inequality affects growth is by undermining education opportunities for children from poor socio-economic backgrounds, lowering social mobility and hampering skills development.”

Economic Crises-The impact of Inequality can be proven by the Great Recession in 2008. The stagnation of the middle-class and working people resulted in an increment of credit demand created an unstable credit umbrella especially in the US. Tangling up with bank deregulation, it nurtured the growth of the One Percent Economy. This ultimately created an avalanche effect in the economy and thus the Great Recession.

How to Overcome Income Inequality

This Socio-Economic disparity can be overcome by:

  1. More government intervention in the Free Market
  2. Assistance of nutritional and health-care policies on a global scale
  3. Policies that do not create fiscal gaps
  4. Increasing access to educate the people
  5. Strengthening trade and job unions

A holistic approach (Social, Educational, Political and Economic) should be practiced for years to come to counteract the imbalance and diverge the flow of income to just concentrated pockets.

 

Written By

Bob Sukesh

Student Experience and Engagement Manager

Athena Global Education