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Defining Inequality Word

The document discusses defining economic inequality and how it relates to issues like health, education, economic growth, and stability. It explores how inequality can negatively impact these areas and provides examples of research showing correlations between inequality and poorer outcomes. The document also discusses how governments can intervene through taxes and benefits to reduce inequality.

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TECHNICAL SAMIULLAH
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41 views5 pages

Defining Inequality Word

The document discusses defining economic inequality and how it relates to issues like health, education, economic growth, and stability. It explores how inequality can negatively impact these areas and provides examples of research showing correlations between inequality and poorer outcomes. The document also discusses how governments can intervene through taxes and benefits to reduce inequality.

Uploaded by

TECHNICAL SAMIULLAH
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Defining inequality

Economic inequality means unequal access to wealth and income. This brief mostly
deals with income. In most developed countries, market income is mainly from wages
and salaries, but also from returns on capital such as shares and rents. People's market
income is then reduced by taxation and/or increased by government transfers such as
pensions and child payments.

Inequality is usually discussed in terms of equivalised household income, which takes


account of how many people the income has to support, and (often) whether the
household pays rent. Inequality in a society is usually measured as the ratio of high
incomes to low; for example, the ratio of the top 20% of equivalised household incomes
to the bottom 20%.

It is important to distinguish between inequality and wealth and poverty. A rich country
can be relatively unequal, and a poor country can be relatively equal.

Many effects of poverty are well known. For example, children of poor families do not
perform as well at school as those of affluent families. Poor people have worse health
than rich people.

These are results—or at least correlates—of poverty, and they have been documented
in most societies. The relationships are usually fairly easy to demonstrate by correlating
two variables; for example, by linking family income of a large number of subjects and
the test scores or health status of those subjects.

It is less easy to demonstrate a causal relationship between inequality of itself and other
social outcomes, principally because inequality is not a characteristic of an individual.
Also, the causal mechanisms may be less obvious.
Is there an economic issue?
Two pressing economic issues today are the need to lift productivity and the need to
promote growth while avoiding financial instability of the kind that culminated in the
global financial crisis. It is possible that inequality reduces labour productivity. It is also
possible that it is a brake on growth and can lead to economic instability.

Health
If people are not healthy they will not work to their full productive capacity.

Ascertaining whether inequality is a direct cause of ill health (as opposed to merely
being correlated with it) is difficult. On balance, the research seems to indicate that
inequality causes poor health. One possible mechanism for this is through increases in
stress, which is a known risk factor for many diseases. Specifically, World Health
Organization research shows that in Europe more unequal countries have poorer mental
health outcomes.

More simply, in most rich countries there are diminishing marginal returns to an
individual’s expenditure on health, so a transfer of funds from treating the rich to
treating the poor would both reduce inequality and improve the total health of the
population.
Education
If children are less successful at school, they are less likely to become highly skilled
workers. Their productive capacity, and therefore the productive capacity of the
economy, is diminished. OECD research concludes that policies to improve high school
and tertiary education completion rates also improve gross domestic product per capita.

Inequality reduces performance because of its segregating effects. There is a good deal
of evidence that children’s school success depends at least partly on the interests and
aspirations of their peers. The influence of peers is greater than any school effects,
including teacher quality. If schools are segregated, children from socioeconomically
disadvantaged households will mix with other disadvantaged children, and thus with
children who do not perform well at school. Segregation is more likely in an unequal
society. The negative effects of poor children associating with less gifted children are
greater than any positive effects of affluent children associating with more gifted
children. So inequality may cause a net reduction in educational attainment.

Unlike in health, a simple transfer of resources to poor schools may not be very effective
in reducing inequality. The research cited above suggests that unequal outcomes will
persist to some extent as long as there is residential segregation or parental choice of
schools.

Economic growth
In his book Inequality and Instability, James K Galbraith concludes:

... more egalitarian societies tend to have lower steady-state unemployment. They also
tend to have higher rates of technical progress and productivity growth.

A more equal wage distribution encourages specialisation in higher value-adding


industries, while low wage, low value-adding industries cannot compete.
Meanwhile, work by International Monetary Fund economists shows that ‘longer
growth spells are robustly associated with more equality in the income distribution’.

Thus inequality may have a generally slowing effect on economic growth.

Economic stability
A number of economists have argued that inequality leads to economic instability. One
mechanism by which this happens is that the rich consume a smaller proportion of their
income than the poor. They save money which people on lower incomes would spend.
This leads to a reduction in aggregate demand, which in turn leads to unemployment. In
response, governments take measures to stimulate demand, such as lowering interest
rates. This feeds into asset bubbles—for example, unsustainably high housing prices.

Meanwhile, as inequality grows, individuals facing low or declining relative incomes


maintain their consumption through borrowing (financed by the savings of the rich). A
very small rise in unemployment or interest rates can lead to defaults on mortgages or
consumer loans and can have catastrophic results.

There is some level of consensus that inequality in advanced countries helped cause the
global financial crisis.

How can government reduce inequality?


Governments can intervene to promote equity, and reduce inequality and poverty,
through the tax and benefits system. This means employing a progressive tax and
benefits system which takes proportionately more tax from those on higher levels of
income, and redistributes welfare benefits to those on lower incomes.
Ending such inequalities is a prerequisite for human development. Jinnah captured this
70 years ago: “No nation can ever be worthy of its existence that cannot take its
women along with the men. No struggle can ever succeed without women
participating side by side with men. There are two powers in the world; one is the
sword and the other is the pen. There is a great competition and rivalry between the
two. There is a third power stronger than both, that of the women.”

A good way to mark World Day of Social Justice today is to take stock of how far we
have come in achieving what was envisioned by Jinnah.

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