From 1950 to date, studies have been heavily directed towards looking at the reasons why income inequality has been increasing at such high rates (Apel, 2015; Apergis, Dincer and Payne 2009; Dabla-Norris et al., 2015). Income inequality has been on a high troll in the US and on a global scale with Gini coefficient global inequality ranging between 0.55 and 0.70. According to the International Monetary Fund, income inequality is the most widely considered measure of inequality of outcomes where the trends in income shares of the population and the market and net Gini coefficients are the major parameters used to estimate income inequality (Dabla-Norris et al., 2015). Markedly, Inequality has been the major cause of deteriorated growth due to the deprived ability of lower-income households to accumulating human and physical capital. Determining the causes of income inequality is among the first steps of palliating the extreme effects associated with the phenomenal. In this case, this essay will concentrate on establishing the major causes of income inequality with a specific focus on a particular geographic area; the US. The readers will be informed of the different factors, including technology, education, financial openness, trade openness, financial deepening among others, contribute cohesively to propagating income inequality in the US with a brief mention of the major effects that income inequality has in the considered geographic area.
To begin with, technology acts as the number one contributor to income inequality in the US (Dabla-Norris et al., 2015). Even though technology brings in benefits of increased production through increased automation and communication, the aspect of skill-based technological trends that accompany technological growth is one of the leading causes of inequality. Essentially, the skill-based requirements fuel income inequality in that they establish a distinction of income levels between those who are well-equipped to work with the adopted technology and those who lack the relevant skills. In this case, those without skills either lose their jobs or are forced to acquire relevant skill set so as to be fit for the specific jobs. The technological factors fuel the income inequality in the US.
Closely related to technology is the aspect of education. According to the IMF, the skill premium statistics for the US for the two periods between 1997-2001 and 2002-2007, show that there has been an increased income gap between the most and the least knowledgeable employees (Dabla-Norris et al., 2015). It is good to mention that, skill premium estimates the relative earnings from employment after completing tertiary education compared to the gains after finishing upper- and post-secondary non-tertiary education. In this case, the higher the education acquired by an individual, the higher the income the individual is likely to earn. According, Rajan (2015), prosperity is becoming hard to attain nowadays since the passport to riches is a good education, and many in the middle-class population can seldom afford it. As can be deduced, therefore, the differences in education levels in the US are one of the main causes of increasing income inequality.
From another perspective, the labor market institutions are undergoing many changes which cause inequalities in income. For instance, there are lots of changes within the US labor market institutions where trade union membership is on a decrease which is accompanied by weak income protection policies, inflexible recruiting and firing, and insufficient employment protection regulations. All these factors affect the labor market as in a negative manner whereby they cause inequality in income. The major reason being that the variations in the labor markets result in some employees being under more protection than others are. This means that those with well-defined labor market policies and employment protection legislations are prone to receiving frequent, better and higher income than those having poorly defined policies and protection legislations (Alvaredo et al., 2013).
Financial systems tend to lower the income inequality within the US and other developed countries (Dabla-Norris et al., 2015). However, systems such as financial deepening result to income inequality. As Dabla-Norris et al., 2015 note, financial deepening improve the allocation of resources by enabling households to increase retirement savings, capitalize on business opportunities and increase investment in education. The income inequality comes in the early stages of financial deepening. Here, the rich (those with high financial capability) enjoy the benefits of financial deepening whereby they have a larger and easier access to finances that enable them to acquire resources. Further, those with high economic capability rip higher skill premium benefits which allow them to rip faster and easier return on capital. In other words, the ones with higher financial capability get higher and quicker income benefits than those in the lower economic sectors. As such, there is a disparity in the income levels of the two extremes of financially capable people. It should, however, be noted that the financial development earned in the long run results in a scenario where the introduced income inequality almost cancels out.
Another financial system is a financial openness that has been rampant in the US economic sector. The financial openness is closely linked to trade globalization in which case trade globalization constitutes trade openness. Financial and trade openness are mostly related to factors like technological advancement which, as already mentioned, cause income inequality. In advanced countries such as the US, trade openness and financial openness affects the ability of corporations to adopt labor-saving and offshoring which in turn reduce manufacturing practices and raise the skill premium (Dabla-Norris et al., 2015). This means that the overall inequality in income provision within the US is reduced as the skill premium is increased. Trade as a cause of income inequality is however dependent on the productivity differences, the relative factor abundance and the degree to which individuals get income from capital and wages across different countries.
On the aspect of globalization, there exists financial globalization which is said to increase the efficient allocation of capital on an international level and also increases risk sharing globally. Additionally, there is an increased flow of finances internationally which means that the portfolio flows and foreign direct investment of the subject countries increase (Dabla-Norris et al., 2015). Resultantly, the inequality in income increases due to the increased foreign liabilities and assets concentration in relatively higher technology and skill intensive sectors and thus resulting in a heightened demand for higher skilled workers. As such, the skilled and the unskilled will have a difference regarding what they are paid, not to forget the different chances they will have regarding securing employment. In other words, financial globalization is among the causes of income inequality in an advanced economic country like the US.
In a bid to overcome income inequality, the US government has been known to enact public policies including public retirement benefits and other social transfers, and progressive taxes. Despite this, instead of a mitigation of the income inequality, there has been an increase. The net income inequality has been growing in that gaps in existing tax, and transfer systems have been rising so as to counteract the market inequality within the country. With progressivity in tax systems, there are less effective tax rates for the high-income corporate entities and households. In other words, the redistributive policies in the US have in a way cause an inequality in income as the top marginal tax rates are declining with increasing pre-tax income concentration. Apel (2015) proves in his research that the political system of the US determines how inequality of revenue. As in any other countries, the stagnation of real wages for the general population through enhanced anti-labor policies shape the bargaining power of the employees. Further, an accumulation of wealth in the US can be altered through redistributive policies at the topmost parts of the income distribution in which case the taxes decrease for those with higher incomes (Apel, 2015). Apergis, Dincer, and Payne (2009) mention corruption as a major causative factor of income inequality. Here, the corruption in the political sector which leads to poor conformation to regulations and legislative policies becomes a major cause of income inequality.
Charles-Coll (2011) summarizes the causes of income inequality as to be either endogenous or exogenous. The endogenous causes of income inequality are those which crop from the individuals: intrinsic causes. The endogenous causes, in this case, determine how on is valuable in the market, or how competitive one is in the social sector. The personal attributes of the individuals thus play a crucial role in determining the extent of income inequality within a given geographical area. Relating this with what has already been discussed, the education level and skill-based mastery of an individual are essential in establishing the individuals capability to compete in the labor market and the corporate world thus increasing income inequality.
On the other hand, the exogenous causes of income inequality have everything to do with land (Charles-Coll, 2011). In this case, the aspect of land distribution determines the distribution of wealth and thus income. Specifically, Charles-Coll (2011) talks of land being a cause of inequality especially in those places where agricultural activities are major sources of income. Here, those with significant tracts of land are expected to earn more income than those with little or no pieces of land. In addition to this, there is the aspect of the industrial revolution which has seen to the development of new sources of income in some areas which are unavailable in other areas. In the US, areas like Texas have income dependence on land while areas like New York have a high dependency on industrialization and other developmental sources of income. This means that the individuals in the two areas do have varying incomes especially for those individuals within the same geographical regions.
To sum it all up, considering that income inequality is a major source of enhanced poverty levels due to impaired growth; dampened investments through political, financial, and economic instability such as the financial crisis in the US between 2007 and 2009; and poor living standards among the low-income individuals. It becomes necessary to understand what factors cause income inequality as this would allow the development of effective methods of mitigating the inequality. Being a developed country, the US has been among the top countries with high-income inequality which can be linked to the fact that it is the most advanced country regarding technology and other production resources. Big skill premium differences are resulting from the educational disparities that exist among the individuals. Also, the political system of the country has played a major role in establishing policies that govern or determine hoe evenly income is distributed throughout the labor market. Thus, income inequality in the US is caused by individual, corporation and governmental factors and governing them would help mitigate adverse effects of income inequality.
Alvarado, F., A. B. Atkinson, T. Piketty...
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