3.15 - Causes of Economic Inequality & Poverty
Inequality of opportunity and resource ownership
Inequality of opportunity exists when individuals in the same society lack equal access to chances for advancement, often shaped by factors beyond their control. This form of inequality is closely linked to income differences.
Factors contributing to inequality of opportunity
- Parental background - The most significant influence, as family circumstances at birth often dictate access to education, job prospects, and future earnings.
- Gender and place of birth - These elements further limit opportunities, with certain groups facing barriers that affect their income potential.
- Economic recessions - During downturns, children from wealthier families may benefit from extra resources, while those from poorer backgrounds experience greater disruptions to their education.
- Link to income inequality - High inequality of opportunity always correlates with elevated income inequality, with no examples of countries having high opportunity gaps but low income disparities.
Income levels are also influenced by the ownership of resources, as households earn from providing factors of production to the economy.
Causes of unequal resource ownership
- Factor payments - Earnings come from rents (land), wages (labour), interest (capital), and profits (entrepreneurship), with unequal distribution leading to income gaps.
- Shifting income shares - The portion of national income going to capital and entrepreneurship is increasing, while labour's share decreases, worsening inequality.
- Evidence from reports - Studies on major economies indicate that a 1% drop in labour's income share raises overall income inequality by 0.1% to 0.2%.
Human capital differences and discrimination
Human capital encompasses the abilities, knowledge, and expertise within the workforce, which directly affect earning potential. Variations in these attributes contribute to income disparities.
Impacts of human capital on income
- Skills and education levels - Individuals with advanced qualifications and specialised abilities command higher salaries compared to those with fewer skills.
- Job quality - Lower-skilled roles often involve unstable employment and poorer conditions, leading to reduced earnings.
- Changes in workforce composition - In developed economies, the proportion of mid-skilled jobs dropped from 53% to 41% between 1995 and 2010, with growth in both high-skilled positions and low-skilled roles.
Discrimination further entrenches income inequality by restricting access to opportunities based on personal characteristics.
Forms of discrimination affecting income
- Gender, race, or religion - Affected groups struggle to secure employment and often earn less when hired.
- Age-related barriers - Older workers may be forced into early retirement, resulting in lower lifetime income and reduced pensions.
- Geographic disadvantages - People in rural areas have limited access to well-paid jobs and may face lower wages due to distance from urban economic hubs.
Unequal status, power, and government policies
Disparities in influence and authority within society can lead to uneven income distribution, often favouring those with greater leverage.
Sources of unequal status and power
- Market power - Concentration of businesses into monopolies shifts income from buyers to company owners through higher prices.
- Social privileges - Influential groups may gain exclusive advantages, such as preferential access to resources, which enhance their wealth.
Government actions through taxation and support systems can either reduce or amplify income inequality, depending on policy design.
Role of government tax and benefits policies
- Redistributive effects - Progressive taxes require higher earners to contribute more, while benefits like pensions or jobless support aid lower-income groups, helping to close income gaps.
- Trends increasing inequality - Many nations have weakened these systems, with top tax rates in advanced economies falling from an average of 66% in 1981 to 41% in 2008.
- Other policy changes - Reductions in property and inheritance taxes allow wealth to concentrate, and cuts to welfare payments limit support for the less affluent.
Globalisation, technological change, and market-based policies
Globalisation and advancements in technology reshape job markets, often creating winners and losers in terms of income.
Effects of globalisation and technological change
- Skill valuation shifts - Technology devalues some abilities, leading to wage drops for affected workers, while boosting earnings for those in demand.
- Job market transformations - Traditional industries see employment declines, whereas tech sectors expand, contributing to income divides.
Market-based supply-side policies aim to promote growth through reduced government involvement but can inadvertently heighten inequality.
Features of market-based supply-side policies
- Deregulation and privatisation - These measures increase business concentration, enhancing monopoly power and reducing labour's income share.
- Labour market flexibility - Policies like cutting minimum wages, weakening unions, and lowering job protections shrink workers' earnings relative to national income.
- Tax reductions - Cuts primarily benefit the richest individuals, further concentrating wealth.