There are many researches made on the
relationship between the income inequality and the growth by economics.
Inequality can be considered from many perspectives: economic, social and
political perspective. In resolving this problem distinguish economics used
empirical and theoretical overview as well.
Lack of regulations and insufficient funds are just some of the reasons
that do affect almost all. Many economic
authors clams that it is difficult to analyze the impact of income inequality
on grow when other factors that do influence that are not taken under
consideration. The purpose of this research is to examine the impact of income
inequality on the economic grow and if it can be reduced. The theoretical structure of this research
analyzes such concepts as economic growth, income inequality and the
relationship between these two.
Key words:inequality, economic growth,
income, finance, innovation, instability, financial crisis, economic recovery, labor
force, unemployment, gender wage gap, budget
LIST OF FIGURES
Figure 1. Figure 1. GINI Index……………………………………9
Figure 2 Figure 2. UK GDP increase in
1 STATEMENT OF THEPROBLEM
On global level, especially after the World War II, income
inequality is most frequent global debate topic. Negative long term influence
on the economic growth is caused by increasing income inequality. Therefore,
causes and cure channels in resolving this are critical for the financial
stability and development.
PURPOSE OF THE RESEARCH
To find out and explore how unequal income
impact the economic growth and to examine the factors that can lead to the
increase the economic growth,
considering social values as well.
Researches made and available
literature do not provide the clear answer about how significant channels
affect income inequality (there are many issues that are hard to be measured)
and this is still far from resolved issue in the U.S., Europe and even countries
Researchers do not find
solution to remove the inequity and seek total income equality instead it is
increasing by time.
Poverty is mostly increasing
and the situation is getting worse instead of getting better and many authors mention
government corruption as a main reason
What is economic inequality and
what are the causes of it?
Can society do something in
order to significantly decrease income inequality?
To what extend are insufficient
revenue and income affected by equal opportunities, free educational system and
skilled labor force itself?
Does different individual
income cause unequal representation in society to which individual belongs to?
Can the balance be obtained by
higher taxation system and what are the key factors in obtaining it?
The study can be categorized as having a
deductive approach; secondary sources of books, peer-reviewed articles,
journals and websites were used.
STRUCTURE OF THE Research
This research is literature research and it
answers research questions based on theory and empirical researches made.
LITERATURE FINDINGS: CRITICAL
Inequality as a
term is used a long ago and has it has roots in history. Individuals often
relates it to the diverse opportunities that they have. Furthermore,
opportunities can be important concept and it does affect many areas, but
causes of income inequality goes much deeper. Taking under consideration that
on the global image there are more individuals who are poor then rich it shows
that inequality do affect most of the people. When it comes to U.S. since 1970
income inequality was growing up and many researches mention the gender wage
gap as an important issue. It’s important to mention that difference between
periods recalling the history, differences in countries and individual incomes
help in examining the determinants of the inequality itself.
The US gained
stable level household income in 1950s-1960s, while from 1965- 1979 UK reduced
earnings depression. However, the US trend until the 1970s is explained by
Kuznets’ theory calming that US was one of the highest industrialized countries
in the world. Nowadays, Kuznets’ theory is less relevant because there is focus
more on service industry more than on agriculture and manufacture.
Smith in his book Wealth of Nations states that: “A man educated at the
expense of much labor and time to any of those employments which require
extraordinary dexterity and skill…”. This statement shows the importance
in investing in education and human capacity because higher educated individual
with efficient skills are more likely to have higher income then ordinary
ones. However, we have to consider that
opportunity to study not every individual have and even if do, having same
opportunity to not guarantee that each of them will have same skills and would
inequalities plays significant role in determining individual’s overall income
and standard of living in general. On the other hand, wages are the easiest to
measure, used in many studies and there are many data-set on it.
is mostly increasing and the situation is getting worse instead of getting
better and many authors mention government corruption as a main reason.
Available data shows that there is high
correlation between the government corruption and social exclusion which
affects the income inequality. The interesting fact researches mention is that
social exclusion in more relevant predict of corruption than the GDP per
when it comes to the gender wage gap, studies show that there are still
differences in their wages, stating that women and man do not work and do not
operate in the equal labor market and there might be even difference in
Income inequality metrics
There are many theories who do explain the
causes of the income inequality it is important to know how to be measured as
well. Concept of fairness or even the term poverty is different from
Well known economist such us T. Malthus, D.
Richard and A. Smith manly focus on considering factors such as the capital
labor and capital in resolving this issue. Modern economist when being compared
with the above classical ones focus more on the individual household’s income.
In this research Gini index is mentioned as one of the measurement for
inequality and this are some other:
Coefficient of variation
There is something common for all
society and it is that none of them have equally share and same distribution of
wages. Wages distribution was best measured by Gini index.
are not equally shared, howeverthe differences explained by Gini index represents the range from 0 – 100. For
better undurestanding the Figure 1, high level of unequally present 100 while perfect equality presents 0.
to the author Anthony B. Atkinston in his book “Inequality”
explains that inequality or Gini coefficient shows that India and China are
close to 50 per cent, and above 40 per cent ,which is high, is in Brazil and Mexico, including other
Latino American countries. Considering this, next comes US and then UK. When it comes to the comparison based on Gini
coefficient Continental Europe have higher income inequality then Nordic
countries. From 1962 there was an
increasing the wealth from 11 % to 16 % in 1995, in the US. Higher wealth makes
people more secure and takes a part in political power as well. Furthermore,
the US wealth is not equal distributed among its citizens.
When it comes to measuring income
inequality, its critical to mention that wages have two dimensions and those
are: dispersion and the extend to which
is wage positively distributed. Gini
coefficient do measure the dispersion and compares shape.
INCREASE IN REAL GDP
Increase in the real Gross Domestic Product
shows the economic growth and GDP is used to measure National Income (Wages,
Interests, Rent, Profit). Researchers showed that increasing economic growth is
not guarantee that there will be increase in wages. It can occur that GDP rise
while average wage does not change or even decrease. This can be explained due
to that profit takes large share of GDP.
The other fact is that increasing real GDP cannot
be seen when there is rise in population as well. This means that if there is
increase in population for 4% and same percentage in real GDP, there will be no
change in GDP per capital nor in the real wages. However, a company can gain
higher profit but not necessarily share it for employee’s profit.
The Figure 2 shows the increase in real GDP
in the period 2010-2015 in UK which brought economic growth while average wages
Figure 2. UK GDP increase in 2010-2015
TOTAL INCOME EQUALITY AND ITS
Compering some undeveloped
countries, some individuals even live under the poverty line, and the higher inequality is related directly
to higher % of individuals living poor. Researchers clams based on survey made
that some individuals are for total equality, meaning that everyone will earn
the same amount while others are again this saying that too equal distribution
of earnings is not best solution. According to Lawrence and Skocpol who made
survey on this topic, they stated that Americans easily accept the difference
in wealth considering it as the result of individual choice and effort when
compared with Europeans. On the other hand, Fligstein and Shin stated that
individuals who are considered as poor will not just ear less then others but
are more likely to be working under unsafe working conditions as well. A rapid increase in investment is not
expected in accordance with the persistently weak credit demand and the
deleveraging of many banks. Even with the consumer to keep the household back
given the uncertain economic situation and the tense situation on the labor
market is still there. After two years of very low growth Southeastern Europe
has slipped into another recession. The recession has hit particularly hard the
Western Balkans. High unemployment, especially between the youth, is concerned.
Economic differences started making
the social status gap more and more
which caused many debates on how poor individuals are less useful for the
society and community. Income inequality is not just different within the
country and one society but mainly it exist across the globe, starting from the
U.S., Europe and transition countries as well.
FINANTIAL INSTABILITY AND DICLINE
doctrine states that taxes have to be on higher level in order to get by deal
with inequality. Not all researchers agree with this doctrine, explaining that
the taxes do transfer funds from private to public section and usually private
sector is not well known in sharing it. The country that do have high taxation
and can be good example of almost equal income distribution but same time do
not have positively economic growth is Finland. Although, that this county is
consider as rich one, the private sector is not that strong. High taxation in
this country do not bring much for the economic grow, but on the other hand in
brings free education and healthcare which is advantage for its citizens. This
means that the opportunity to study and reach higher level of education is
available for every citizen of that country as well as healthcare without any
cost in return.
Taking under consideration last decades and
the effects of globalization, it is important to emphasize that inequality is
increasing in developed country but at the same time decrease in poverty across
the globe was noticed. Globalization did help people find new jobs and free
movement contributed and help them in finding new opportunities. On the other
hand, working class do not benefit from it much. It is important to point out
and conclude that as GDP is often considered as basic statistics in economy but
it is not enough in analyzing the effects on the economic grow. UK paradox
mentioned in this paper was good example of it.
agree about that is better for the county to have economy which is likely to
growth even though there might be high level of income inequality rather than having equal distribution of the
income and the economy to be stagnating.