At one point or another, we all have wondered why some people have more money than they could ever spend, while others do not have enough to secure even the most frugal of meals. Why some countries are lit with fireworks that their citizens look at from gravity-defying skyscrapers while others are crippled with ongoing epidemics. Why, if in theory we all have access to the same opportunities, there is such disparity among and within countries? What is being done to remedy it? The issue of wealth and income inequality is perhaps one of the most heavy-hitting ones in current society, and it is also among the most obvious.
As the developed world lines up for the purchase of the new smartphone, somewhere in a developing country a woman is burning firewood to light up her home, which lacks electricity. From access to basic services to opportunities for life improvement, justice and possession of power, in the world, historically, wealth and income have been decisive factors on whether a person will be able to fulfill their potential or not. It is imperative, then, to understand the workings of wealth and income inequality in order to close the widening gap between the earnings and net worth of the top 1% and the rest of the world, disregarding ethnic background, sex, religion and any prejudice that may place a person at disadvantage when compared to another.
WHAT IS ECONOMIC INEQUALITY?
As defined by Ray (1998), economic inequality is “the fundamental disparity that permits one individual certain material choices, while denying another individual those very same choices”. Economic inequality, much like poverty, is a multidimensional issue with endless causes and just as many consequences. It affects virtually all aspects of a person’s life, including “education, health, nutrition, security, power, social inclusion, income or consumption and assets” (McKay, 2002). Also worth noting is that there is not any one cause for the presence of economic inequality between two individuals, rather, both causes and outcomes are deeply correlated and work interchangeably. For example, McKay cites educational inequality as possibly reflecting gender disparities.
WHY IS ECONOMIC INEQUALITY SO IMPORTANT IN THE CURRENT GLOBAL CONVERSATION?
- Inequality is related to poverty: Increased inequality of any kind is directly related to higher levels of absolute and relative poverty.
- Inequality maims growth: Countries with high levels of inequality, especially inequality of assets, according to McKay, achieve lower economic growth rates on average. Moreover, growth in average income across households will contribute more towards the reduction of poverty if said incomes are more equally distributed from the start.
- Inequality is an issue in and of itself: One could argue there is something very wrong with individuals and groups having more opportunities available to them than others; meaning than they have more chances to advance in life than their destitute counterparts.
- Inequality is a contributing factor to crime, social unrest or violent conflict: This is briefly discussed in this article we did earlier this year. As McKay put it, inequalities —even perceived ones— between groups can create tension between said groups and result in violence if the differences are marked or if things such as oppression of the group at a disadvantage are systemic.
TYPES OF ECONOMIC INEQUALITY
There are three main types of economic inequality, namely those that best reflect an individual’s position within the economic distribution: income inequality, wealth inequality and pay inequality.
- Income inequality: According to Business Dictionary, income inequality is “a measurement of the distribution of income that highlights the gap between individuals or households making most of the income in a given country and those making very little”.
- Pay inequality: It “describes the difference between people’s pay and this may be within one company or across all pay received in the country” (Equality Trust, W/D). The most notorious fight for pay equality has been done by the feminist movement, seeking equal pay for women and men working the same job. Pay inequality is also the reason why an employee may leave to enroll in a company with a better base salary and better benefits.
- Wealth Inequality: Is the unequal distribution of assets in a group of people, with wealth referring to “net worth”, or the “sum total of your assets minus liabilities”. An asset is a property owned by a person or company, regarded as having value and available to meet debts, commitments or legacies. A liability, meanwhile, is the
Other authors describe the types of economic inequality as: inequality of outcome —which is an umbrella term for all of the mentioned above- and inequality of opportunities. The latter of which occurs “when individuals are denied access to institutions or employment, which limits their ability to benefit from living in a market economy” (Economics Online, W/D). While it cannot be said that inequality of opportunities is the sole contributor to outcome forms of economic inequality, it is perhaps the most important causing and perpetuating factor of this issue.
From a moral standpoint, the existence of an increasing income gap is horrendous. There is no possible justification for a few rich households to make a disproportionally larger chunk of the national income compared to the general population, especially with the socio-economic problems it can carry. However, economists are torn on the implications of income inequality and whether it is positive or negative.
Economists had forecasted that in developing countries, industrialization would lead to an expansion of the internal income inequality rate driven by a minority of entrepreneurs. Income inequality would later contract as the rest of the population caught up. However, this proved to be untrue in countries such as China, where income inequality among all socio-economic sectors is growing. Ben Chu, from The Independent points out that this is a warning sign: “When rising national income and economic productivity in a still developing country does not result in a fall in income inequality, that’s a decent indicator income is being expropriated by a politically-connected minority, rather than genuinely earned”. Chu also says that “extraction by exploitative developing world elites is one of the most serious threats to the trend of greater global income equality, not only because of its direct impact on the aggregate figures, but because vested interests tend to obstruct the economic reforms that poor countries need to keep growing”.
This could jeopardize the falling trend of income inequality across all countries seen from 1998 to 2008, when countries such as China and India started a rapid economic growth. This growth lead to a massive amount of people moving from their rural homes to cities, where they got higher incomes working in manufacturing plants and the building industry. As said by Branko Milanovic, leading expert on the issue, the decrease in the global income inequality rate can only be sustained “if countries’ mean average incomes continue to converge and if high inequalities within countries ae kept in check”. Which is the exact opposite of what is happening in China and other countries.
CONTRIBUTING FACTORS TO INCOME INEQUALITY
- Education: The access –or lack thereof-to quality education greatly affects equality within societies. Studies have proven that countries with a higher-quality secondary education across all socio-economic groups have lower income inequality rates.
- Competition for talent: In many industries, executives and other valuable employees are offered big salaries and bonuses in order to stop the talent fugue. This has led to a disparity on how much it is produced and how much is wasted keeping certain employees happy. Naturally, while the executive salaries get inflated, people working in lower-ranking job perceive a much smaller salary.
- Family and social interactions: It is often the case that in poor households, the children do not learn the social and emotional skills that will allow them to advance in life. As a result, the confidence and communication skills that are crucial for thriving in the business world are amiss.
- Increased demand for high-skilled workers: At present, more and more companies are investing heavily in a highly skilled workforce. As in the case of executive wages, the salaries of high-skilled workers gets inflated, driving down the wages of low-skilled employees. This generate a marked income inequality between employees.
GLOBAL WEALTH INEQUALITY: A WIDENING WEALTH GAP
According to a report on inequality developed by Oxfam using data from Credit Suisse, in 2015 the richest 62 people had as much wealth as the poorest half of the world’s population. In comparison, the same amount was held in 2010 by 388 people.
The organization blames a global network of tax havens for allowing the rich to hide trillions of dollars from their countries’ governments. The president of Oxfam America, Raymond C. Offenheiser, said that: “Tax havens are at the core of a global system that allows large corporations and wealthy individuals to avoid paying their fair share, depriving governments, rich and poor, of the resources they need to provide vital public services and tackle rising inequality”.
The report, which contained information that 9 in 10 companies from the World Economic Forum’s strategic partners had presence in at least one tax haven, was dismissed at this conference as “bogus” and “misleading” for the way its metrics were developed. Oxfam used a system of adding up assets and subtracting liabilities as a mean to estimate net worth, which placed indebted university graduates from the US Ivy League in a worse-off position than, say, a farmer in Africa.
However, Oxfam is not alone in its claims. In an article written by Patricia Cohen for the NY Times, Professor Jeffrey Winters says the figures from the report show an acceleration of the accumulation of wealth in a few people. Winters also says that a marked stratification is showing even among the 1%, where the gap between those at the top and the bottom of the wealthy pyramid is increasing.
CONVERGENCE OF WEALTH AND INCOME INEQUALITY
Observations from both Branko Milanovic and the Oxfam report point towards an alarming reality: The rich are using their status, position and influence to further concentrate their wealth. Wealthy people have benefitted from massive economic events, such as China’s rapid growth and the Wall Street crash of 2008 to increase the amount of money in their bank accounts, and although there are some social-minded millionaires, the increasing economic inequality worldwide is disparaging.
Millionaires in the USA, the poster children for people who have significantly increased their wealth since the financial crash of 2008, are doing so in a crumbling country. America’s education, health care and other social services are underfunded and the living standards of the working people are declining, furthermore, class tensions in the country are reaching a boiling point. Ironically enough, USA was the only country to increase its wealth in the midst of the financial crash, which has caused significantly damage to world politics, namely those between the global imperialist superpowers.
This is what the unsustainable, unbridled quest for money and power has brought us to, and it is on us, as Professor Winter points out, to “adopt policies that make it harder for the ultra-wealthy to shape our government and society, or we can do what we have been doing, which is greatly facilitating the ability of the rich to shape society”.
Is America Having the Wrong Conversation About Income Inequality? By Gillian B. White
Top 1 Percent Own More Than Half Of the World’s Wealth by Patrick Martin
How Wealth Inequality Exacerbated The Great Recession by Sam Pizzigati
5 Key Takeaways From The World’s Widening Wealth Gap by Andrew Soergel