Economic inequality: Encyclopedia II - Economic inequality - Causes Of Inequality

Economic inequality - Causes Of Inequality

There are many reasons for economic inequality within societies. These causes are often inter-related and complex. For example, race differences and wealth condensation are different causes but can be highly correlated within a population. The relationship between cause and effect can also be non-linear and complex. For example, economic inequality decreases the amount of social cohesion within society, leading to greater inequality. Among the acknowledged factors that impact economic inequality in some part are the labour market, innate ability, education, race, gender, culture, wealth condensation, and development patterns.

Economic inequality - The Labour Market

One of the major reasons there is economic inequality within modern market economies is because wages are determined by a market, and are hence influenced by supply and demand. In this view, inequality is caused by the differences in the supply and demand for different types of work.

A job where there are many willing workers (high supply) but only a small number of positions (low demand) will result in a low wage for that job. This is because competition between workers drives down the wage. An example of this would be low-skill jobs such as dish-washing or customer service. Because of the persistence of unemployment in market economies and the fact that these jobs require very little skill results in a very high supply of willing workers. Contrary wise, there is a limited number of jobs available. Competition amongst workers tend to drive down the wage since if any one worker demands a higher wage the employer can simply hire another employee at an equally low wage.

A job where there are few willing workers (low supply) but a large demand for the skills these workers have will results in high wages for that job. This is because competition between employers will drive up the wage. An example of this would be high-skill jobs such as engineers or capable CEOs. Competition amongst employers tend to drive up wages since if any one employer demands a low wage, the worker can simply quit and easily find a new job at a higher wage.

While the above examples tend to identify skill with high demand and wages, this is not necessarily the case. For example, highly skilled computer programmers in western countries have seen their wages suppressed by competition from equally skilled workers in India who are willing to accept a lower wage.

The final results amongst these supply and demand interactions is a gradation of different wages representing income inequality within society.

Many people believe that there is a connection between differences in innate ability, such as intelligence, strength, or charisma, and between an individuals level of wealth. Relating these innate abilities back to the labour market suggests that such innate abilities are in high demand relative to their supply and hence play a large role in increasing the wage of those who have them. Contrary wise, such innate abilities might also affect an individuals ability to operate within society in general, regardless of the labour market.

Various studies have been conducted on the correlation between IQ scores and wealth/income. The book titled "IQ and the Wealth of Nations", written by Dr. Richard Lynn, examines this relationship with limited success, while other peer-reviewed research papers have also come across harsh criticisms on their findings. Without further research on the topic, incorporating statistical models that are universally accepted, it is fairly difficult to come towards an objective conclusion on whether or not there is a relationship between intelligence and wealth/income.

One important factor in the creation inequality is the variable ability of individuals to get an education. Education, especially education in an area where there is a high demand for workers, creates high wages for those with this education. Contrary wise, those who are unable to afford an education generally receive much lower wages. Many economists believe that a major reason the world has experienced increasing levels of inequality since the 1980s is because of an increase in the demand for highly skilled workers in high-tech industries. They believe that this has resulted in an increase in wages for those with an education, but has not increased the wages of those without an education, leading to greater inequality.

Economic inequality - Gender Race and Culture

The existence of different genders, races and cultures within a society is also thought to contribute to economic inequality. The idea of the gender gap tries to explain the reasons there are different levels of income for different genders. Culture and religion are thought to play a role in creating inequality by either encouraging or discouraging wealth-acquiring behavior and providing a basis for discrimination. It is felt that in many countries individuals belonging to certain racial and ethnic minorities are found more often among the poor than others. For those countries where this can be established, among the proposed causes for this discrepancy we find cultural differences amongst different races, an educational achievement gap, and racism.

Economic inequality - Development patterns

main article: kuznets curve Image:Kuznets curve.jpg Simon Kuznets argued that levels of economic inequality are in large part the result of stages of development. Kuznets saw a curve-like relationship between level of income and inequality. This relationship is now known as Kuznets curve. Supposedly, countries with low levels of development have relatively equal distributions of wealth. As a country develops, it acquires more capital, which leads to the owners of this capital having more wealth and income and introducing inequality. Eventually, through a variety of possible redistribution mechanisms such as trickle down effects and social welfare programs, more developed countries move back to lower levels of inequality. Kuznets showed this relationship as empirically strong using cross-sectional data. However, more recent testing of this theory with superior panel data has shown it to be very weak.

Economic inequality - Wealth Condensation

Main article: Wealth condensation

Wealth condensation is a theoretical process by which, in certain conditions, newly-created wealth tends to become concentrated in the possession of already-wealthy individuals or entities. This is reflected in the common saying 'the rich get richer and the poor get poorer' . According to this theory, those who already hold wealth have the means to invest in new sources of creating wealth or to otherwise leverage the accumulation of wealth, thus are the beneficiaries of the new wealth. Over time, wealth condensation can significantly contribute to the persistence inequality within society.

As an example of wealth condensation, truck drivers who own their own trucks consistently make more money than those who do not since the owner of a truck can escape the rent charged to drivers by owners (Even taking into account maintenance and other costs). Hence, a truck driver who has wealth to begin with can afford to buy his own truck in order to make more money. A truck driver who does not own his own truck makes a lesser wage and is therefore stuck in a Catch-22, unable to buy his own truck to increase his income.

Related to wealth condensation are the effects of inter generational inequality. It has been noted that the rich tend to provide their offspring with a better education, increasing their chances of achieving a high amount of income. Furthermore, the wealthy often leave their offspring with a hefty inheritance, jump starting the process of wealth condensation for the next generation.

Economic inequality - Mitigating Factors

There are many factors that tend to constrain the amount of economic inequality within society. Progressive taxation, where the rich are taxed more than poor, is effective at reducing the amount of income inequality in society. The Nationalization or subsidization of essential goods and services such as food, healthcare, education, and housing is also thought to reduce the amount of inequality in society. By providing goods and services that everyone needs for cheap or free, governments can effectively increase the disposable income of the poorer members of society.

Some have suggested that the rich do not value a dollar as much as the poor because of the decreasing marginal utility of wealth. They argue that this causes a redistribution of income towards the poor. This is popularly known as the "trickle down effect", and its effects are thought to be strongest in a booming "heated" economy.

It has also been suggested that any economic disparity will generate pressure for its own removal. Workers will be encouraged to unionize and will elect progressive politicians. This is often accomplished through the democratic system. However this can constrained by the ability of the wealthy to influence political power. Because of this, it is often thought that democracies tend to be more effective at countering inequality than dictatorships.

Adapted from the Wikipedia article "Causes Of Inequality", under the G.N U Free Docmentation License. Please also see http://en.wikipedia.org/wiki