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Income Inequalities Pros and Cons Essay

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Updated: Feb 24th, 2022

Introduction

Economic inequalities in the world have remained unchanged despite the significant improvements in the level of extreme poverty globally. For instance, income disproportions in Organization for Economic Co-operation and Development (OECD) countries have increased by approximately 10% since the mid-1980s (Keeley, 2015). The debate on income discrepancies is based on whether the variations are good or bad for economic growth. The positive and negative implications of economic inequity have been largely discussed and contested in the political and economic arena. Although most economists argue that economic imbalances have pervasive effects on socio-economic factors, income disparities can also have beneficial impacts on the socio-economic climate around the globe. The purpose of this paper is to analyze the beneficial and adverse consequences of economic inequalities. The paper hypothesizes that income inequalities have both productive and inauspicious implications on a national and global setting. It will incorporate a multi-faceted and neutral view to enhancing an in-depth understanding of the effects of economic inequalities.

Literature Review

The dialogue on inequalities always differentiates economic inequalities and opportunity inequalities. According to Keeley (2015), economic variations refer to the uneven distribution of income, employment, natural resources, and human and financial assets. On the other hand, economic opportunities refer to the individual, organizational, or national outcomes which result from the disproportionate distribution of economic resources. The economic disparity can significantly affect an individual’s opportunities, especially those within the lowest cadre of the economic spectrum. The socio-economic factors associated with income disparity include social unrest, unemployment, poverty, inadequate education, and healthcare services inaccessibility. Research conducted by Mustafa et al. (2019) showed that high and unsustainable imbalances in Iraq led to increased corruption, decreased well-being among the poor, destabilized occupational and educational choices, and increased crime. These findings were supported by the OECD report on “income inequality.”

According to the OECD report, income variations contribute to high crime rates, reduced wellbeing, low living standards, and educational inequality in a given country (Keeley, 2015). Another study conducted by Dabla-Norris et al. (2015) revealed that inequality could dampen investment by fueling economic and political instability and policies which facilitate disparities. A recent survey by the International Monetary Fund (IMF) showed that the growth and sustainability of a nation are negatively impacted by the rate of polarities in the country (Dabla-Norris et al., 2015). Several studies have attributed the limited economic growth of a country to unequal income distribution (Dabla-Norris et al., 2015; Keeley, 2015). The result of poor economic policies is a rising influence of the rich on one side and economic stagnation of the poor and the middle class on the other side.

In contrast, the proponents of economic inequalities have argued that disparities are the necessary evil for a given country’s economic development. Castells-Quintana and Royuela (2017) demonstrated in their study that economic discrepancies can lead to higher aggregate savings among the elite, which, in turn, facilitates financial investments and growth. According to Castells-Quintana and Royuela (2017), incoming variations have growth-enhancing characteristics which pave the way for capital accumulation and innovation. The OECD report also concurred with the stance that income polarity could reduce the pervasive demand for consumer goods (Keeley, 2015). Other economists posit that as long people have the opportunities to invest, compete, and save, income disparities are not problematic (Dabla-Norris et al., 2015). Social imbalance promotes economic growth by discouraging the social consumption of goods.

Discussion

The global imbalance between the rich and the poor is facilitated by disproportions in income equality and policies which respond to income unevenness. The social status of the elites, individuals in the highest cadre of the economic spectrum, allows them to be naturally allocated power and influence, which they can use to stop the implementation of regulations that encourage economic liberation and market-based reforms. For example, policies such as raising taxes for high-income earners in the United States received widespread backlash and criticism from a section of the public (Dabla-Norris et al., 2015). Between 1975 and 2012, 47% of the total tax incomes in the US went to the elite (Keeley, 2015). The trend of sharing economic growth among the nobilities has also been observed in Australia, Canada, and the United Kingdom. The reproval and rejection of market-oriented policies that aim to address income variations frequently provide a safety net for the elite to climb the economic ladder at the expense of the poor.

On the negative side, income inequalities can impede a country’s economic growth and facilitate widespread poverty. There is a growing body of evidence from the IMF and OECD which supports the notion that economic imbalance is bad for the economy (Keeley, 2015). Income disparities have significantly contributed to several social issues, including inadequate access to quality healthcare and education (Keeley, 2015). For instance, impoverished people have meager access to better healthcare, nutrition, and education. It deprives the indigent of the opportunities needed to accumulate wealth and physical and human capital. This could be attributed to the differences in the allocation of resources between the penurious individuals and the rich. The poor are likely to allow their resources to basic needs, which are essential for survival, while the rich allot resources to products and services to improve their wellbeing. Incapacitating the impoverished people reduces the human resource productivity of a nation and the quality of the skill-mix available in its labor market.

While economic inequalities have inarguably negative consequences in a given country, they are also equally important for the long-run growth of the economy. Income inequalities can benefit the economy by promoting capital investment and accumulation. According to Keeley (2015), wealthier families invest more and spend less compared to poor families. He argued that when high-income earners have a surplus of wealth, they find ways to make investments while impoverished households and the middle class are materialistic-driven. Additionally, the middle-class earners contribute to a country’s debt crisis by taking a large sum of loans they cannot repay (Keeley, 2015). Economic inequalities can produce incentives that facilitate capital investment, which can promote economic growth.

To sum up, economic inequalities have both negative and positive implications. The adverse impacts of economic disparity include political instability, distortive policies, financial crises, and a stagnant domestic market. On the other hand, income disproportions discourage hoarding and social consumption of goods among the poor and allow the rich to make capital investments. The significance of the economic imbalance does not depend on whether or not they are beneficial or harmful to the economy; instead, it relies on the degree of its impact on the population. When income variations are controlled, and growth-enhancing incentives are allowed in the market, income can benefit the economy. However, unsustainable imbalances will lead to market stagnation, low productivity, and social unrest.

References

Castells-Quintana, D. and Royuela, V. (2017). Tracking positive and negative effects of inequality on long-run growth. Empirical Economics, 53(4), 1349–1378. Web.

Dabla-Norris, E., Kochhar, K., Suphaphiphat, N., Ricka, F., & Tsounta, E. (2015). Causes and consequences of income inequality: A global perspective. International Monetary Fund.

Keeley, B. (2015). Income inequalities: The gap between the poor and the rich. OECD Publishing.

Mustafa, A., Ahmed, H. S., & Salahaddin, S. (2019). Causes and consequences of the income inequality in Kurdistan region of Iraq during 2018. AL-Anbar University Journal of Economic and Arabic Sciences, 11(25), 557–576. Web.

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