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Income Inequality Term Paper



History has it that in most of the successful ancient civilizations, economic inequality was commonplace between the ruling class and the ruled. This status quo mostly resulted in anger and resentment between the two groups due to the great economic divide.

These historical realities are still very much alive today in our present day society where income inequality is rampant. The Organization for Economic Cooperation and Development (OECD) asserts that the difference between the rich and the poor in terms of economy has continued to expand over the last years with the rift between the middle and rich stretching even further.

These facts reinforce the supposition that income inequality is at its all time highest level in the world. Social and economic trends such as change in family structures, increasing numbers of immigrants from poorer nations and globalization have led to rich and middle-income countries experiencing rising economic inequality. Ironically, all this is against a backdrop of great economic growth and prosperity that has been experienced by most of the countries in the world.

Wilkinson suggests that economic inequality is positively related to social vices such as homicide and racism and inevitably fosters social instability (51).

With these daunting realities in mind, it makes sense to explore all aspects of income inequality so as to come up with solutions and measures that can be used to decrease it. This paper shall set out to answer the question as to whether income inequality can be diminished through an extensively and articulate study of what income inequality entails and the various factors that cause it.

Various measures which have been put in place to curb income inequality shall also be highlighted and their respective effectiveness showcased. This shall be in a bid to provide a better appreciation of the issue thereby leading to an enhanced understanding of income inequality, how it affects society and consequently, how it can be diminished.

Definition and overview of income inequality

Income inequality refers to the disparity in earning between top earners and the bottom earners (Tanzi and Chu 21). Care should be taken to avoid the common misconception that income inequality necessarily implies the difference between the rich and the poor in the society.

This is because to a large extent, the income inequality mostly applies to the difference between the rich and the middle-class people in the society. Mainstream media is constantly arraying reports that suggest that the share of income received by the top 5% of the population in countries has exponentially increased over the past half a century. These findings are backed by research findings as can be observed in the report forwarded by the Office for National Statistics

While different authors disagree as to the exact percentage of the income that the top 5 percent of the American population receive, there is agreement by general consensus that this figure is well over 20%. This is a marked increase from the figures in the 1960s and 1970s (Office for National Statistics).

The figures presented certainly lay claim to the speculations that there has been an increase in the gap between the rich and the middle class over the past two decades. Smeeding strongly contend that due to the gross injustice perceived by the majority of the population as a result of the income inequality phenomena, social instability and demands for redistribution are almost certain to follow (127). This has been necessitated by the perceived hindrance of inequality to the economic well being of a country.

In the recent years, there has been considerable effort directed at investigating the impact of income inequality on the social, economic and political aspects of life (Tanzi and Chu 117). This is due to the bleak possibilities that income inequality threaten the core foundations to societal development.

Governments all over the world have come up with measures to try and keep the disparities low. An increase in activities that lead to economic growth has also been proposed since it is supposed that a good economy will be beneficial for all members of the society. However, most of these proposals have failed to consider the root causes of inequality.

An understanding of the causes can lead to more effective policies aimed at offsetting the balance thus leading to more equitable earning. Various economic scholars and analysis have consequently tried to highlight the various causes of income inequality through extensive studies of the main aspects that have led to an increase in this predicament.

Causes of income inequality

There are a myriad of issues that lead to income inequality in society. However, the varied causes do not apply uniformly throughout all countries since different countries have different social and economic factors which must also be taken into consideration. Contrary to popular believe, the increase in income inequality over the past two decades has not arisen from people in the lower earning bracket losing their earning power but rather from the upper bracket gaining an even higher earning power thus widening the gap between the two groups (Ryscavage 116).

This is a reality which most economists agree with especially in light of the positive economic growth rates and raised standards of living for the general population experienced in most countries.

Education has been seen as one of the primary causes of income inequality. Studies indicate that the returns to skill (measure of the difference in earnings between more-skilled and less-skilled workers) have changed radically over the past 3 decades. From the 1980s, there was a heightened increase in the wage differential in the labor market (Ryscavage 115). The main differentiating factors were by education or experience.

Emphasis on education resulted in higher institutes of learning graduates earning more than similar workers who had only high school diplomas. Due to this shift, higher wages are paid to workers who are more skilled or occupy management and administrative positions than to workers involved in the manual section of the organization.

It follows logically that income gaps attributed to education levels are significant since only a small proportion of the population get to pursue the highest levels of education. This observation implies that children of poorer parents are less likely to become rich in future than children of richer parents.

A significant change in the family composition also contributed vastly to the income disparities that are observed today. Statistics provided by Ryscavage indicated that a rise in divorce rates and marital separations compounded with the upsurge of premarital pregnancies led to an increase in the number of single parent families (114).

This shift from the traditional family set up which had two providers (i.e. the male and female figure) means that a single parent family structure does not receive as much income as a two parent one. Furthermore, due to moral decadence and the fear for responsibilities, most men bail out on their families leaving the women as the sole providers for such single families.

In most situations, women earn lower incomes as compared to their male counterparts. Other changes in the family structure such as an increase in the number of persons living alone and cohabitation of unrelated individuals has also led to the increase in the income inequality as such groups of people cannot enjoy the benefits that stem from collective spending and catering of bills which greatly increases the individuals economic power.

On the same note, Ryscavager acclaims that the gradual population increase being experienced globally has contributed significantly to the prevalence of income inequality (124). He states that population increase has an adverse effect on the labor market and consequently the labor prices. In America, the population that stands between the ages of 18-25 is significantly large. Ryscavager states that the presence of a large working population accompanied by a general lack of employment opportunities leads to a desperate situation which finds most of these people underemployed and underpaid.

However, the profit margin received by the employers still grows, bettering their income status while frustrating that of the employees. Such scenarios have greatly contributed to income inequality not only in America but in most economies across the globe.

In addition to this, overpopulation has influenced the migration patterns in various localities within the states. The movement of masses from the rural areas to major cities not only affects the income distribution in the states but also the general prices of goods and services within these cities due to increased demand.

However, these financial changes are not reflected on the pay slips those in the lower income brackets are forced to pay more on the same salaries as opposed to high income earners who probably don’t feel the financial pinch associated with inflation. Also, in such situations, the low income earners are more likely to spend more than they save on their payments. This leads to fewer developments on their side a fact that further facilitates poverty and income inequality.

A notable shift in economic activities away from the good-producing industries to the service-producing industries is also blamed for the current income inequality. Prior to the 1980s, goods producing industries paid much higher wages than the service producing industries (Ryscavage 112).

Loss of jobs in these industries therefore had a direct and dire implication for the middle class society who relied heavily on this industry for their livelihood. Smeeding asserts that there is evidence that both the changing supply and demand for labor of different skills can explain some of the changes in earned incomes across rich nations (26).

Businesses have also been blamed for further advancing the inequality through various practices. Business enterprises both large and small have adopted various measures so as to ensure that they remain competitive in a market that is increasingly saturated and competitive in nature.

In a bid to increase their profitability, most organizations are constantly laying-off of sections of their labor force and decreasing the wages of the remaining workers so as to achieve higher profits. This compounded with the effects of high mechanization has meant that a good section of the population is increasingly unemployed thus moving closer to the bottom of the income inequality bracket.

Immigration is another social occurrence that has been blamed for the disparities in economic levels. Smeedings asserts that in general, nations which exhibit higher levels of immigrants will have greater inequalities especially at the lower end of the income distribution (15). It has been observed that most immigrants to developed countries originate from poorer nations. They more often than not lack any special work skills and mostly join the unskilled work force.

In the past decade, there has been an influx of immigrants to most western nations leading to an increase in the people on the lower end of the income scale thus increased income inequality. Further competition for the already scarce jobs increases leading to unemployment by the legitimate citizens and immigrants alike.

Another perspective of education as a cause of income inequality has been advanced by Tanzi and Chu. The authors propose that the cost of high learning is increasingly becoming higher making it out of the realms of the lower income bracket families. This therefore means that such families are unable to provide a high education for their children leading to them earning lower salaries and wages.

The higher earners on the other hand can afford the high cost of education and the members of such families thereby end up being in the top earning bracket due to their high levels of education (Tanzi and Chu 11). This vicious cycle means that the rich keep getting richer while the low and middle class stagnate.

Globalization has also been blamed for the increase in income inequality mostly in the developed nations. Globalization is a process characterized by major integration of economies and cultures. This trend is becoming rife and with it a shift in the way business and societies operate.

Keller suggests that globalization is more of a gradual process whose impacts on economies are less revolutionary in nature (52). One of the adverse repercussions of globalization is that it leads to laying-off of workers as jobs are outsourced. The study by Keller indicates that a division of labor undertaken on an international scale whereby multinational companies from Western nations draw on developing countries work forces for manufacturing activities has increased the unemployment level in the West (36).

Further reinforcing these findings, Keller observes that the deindustrialization of the west (whereby industries shift to the developing countries) has led to 10-20% loss of manufacturing jobs in the USA (58). This has led to an increase in income inequality since most of the workers in the manufacturing companies are mostly middle to low class members of the society.

Effects of income inequality

Most of the effects of inequality are negative. The linkage between inequality and crime is especially troubling. Bernasek, an economic reporter for the New York Times hypothesized that, as the income distribution becomes more bipolarized, the interaction between the two groups from the different sides of the income divide is further minimized.

This in turn lowers both the expected future income of the poorer and their incentive to supply labor in the legal labor market is thus weakened. Findings indicate that the crime incentive for the richer is far lower due to high income while it remains heightened for the poorer (OECD).

This is because individuals feel more frustrated when they belong to the low income group than high income group. This leads to antagonism by the low earners to the high earners which lead to the propagation of crime. In addition to this, the relationship between inequality and violence is a robust one. This is purely due to the fact that to a larger extent, poverty is independently associated with higher levels of violence.

Research suggests that income inequality may be a significant determinant of health. Ryscavage compliments this statement to the fact that higher income inequality in society leads to greater difference in resources across the community which results in greater differences in health across communities (120). Health care acquisition thereby becomes almost an unattainable affair for the low earners since the cost of health care and a healthy lifestyle becomes more expensive in the community.

In her articles, Bernasek also suggest that income inequality leads to lack of solidarity and social cohesion due to stress related factors that are developed by income inequality. This in turn dramatically decreases life expectancy rates. These assertions borrow from the psychosocial environment interpretations which theorize that inequality produces a social environment that ultimately affects the individual’s health.

In recent years, studies to indicate the effects of income inequality have been sanctioned. It contended that inequality may hinder the economic growth of a nation (Keller 58). In the earlier days, income inequality was indeed a sign of economic growth since it marked the population shift from rural to urban with the urban population earning higher.

As such, it was seen as a necessary condition of economic takeoff. However, the Office for National Statistics proposes that inequality leads to redistributive demands in the form of heavier tax burdens and lack of incentives for investors which lead to the slowing down of growth.

In addition to this, inequality leads to instability to the political system which becomes characterized by riots, assassinations and even outbreak of civil wars. This state discourages investments thereby further plunging a nation into reduced earning.

However, Bernasek contends that the effects of income inequality are not inherently adverse. She asserts that without inequality, there would be no motivation for anyone to earn more than the rest of the people. However, given the many adverse effects that sprout from income inequality, the virtue of income inequality as a motivating factor seems to pale in comparison. There is therefore a pressing need to come up with means that alleviate the gap in income thereby leading to a more harmonic society.

Solutions to income inequality

While education has been observed to be one of the leading causes of income difference, it can also be one of the solutions. Keller theorizes that as the supply of education labor rises as a result of either government policies or private endeavors which universalize education, the wage premium on education will decrease (52). This will in effect negate the previous effects of increased income inequality due to the limited educated labor force.

As such, an expansion of education reduces inequality. In her study on education policy’s ability to improve income distribution, Keller asserts that the overall public expenditure on education is not sufficient to decrease inequality (71). She goes on to recommend that expenditures per students should be kept up so as to prevent the deteriorating of education quality. This move will benefit the entire population since it will result in reduced inequality in the long run.

However, research shows that in the Less Developed Countries, an expanding education can lead to an increase in income inequality. This is because if jobs remain unchanged, the educated members of society will end up receiving the better paying low-income jobs thus marginalizing the uneducated people’s labor (Keller 52).

In this case, policies that result in the increase in jobs have been observed to function better. Policy makers should also shift focus from theoretical to practical forms of education so as to produce a large self-employable workforce.

Immigration has been blamed for an increase in the income inequality since most of the immigrants are unskilled laborers as has been discussed previously in this paper. Smeeding declares that the opening up of western countries such as the US to legal immigration exposed the domestic poor to wage completion causing the lower-income and upper income gap to increase even further (46).

This being the case, government should put in place stricter immigration policies so as to prevent the influx of immigrant thus keeping decreasing the inequality gap.

Most western nations have some social schemes in place to protect their citizens from the extreme effects of poverty. High spending by the government on social benefits such as unemployment benefits and family benefits reduces the income inequality gap. Studies show that decrease in federal spending on social benefits in countries such as the USA has greatly increased inequality. Social schemes serve as a means to distribute resources. In health care, these social schemes enable the low earners to have access to medical services that would otherwise have been prohibitive to them.

Ryscavage contends that while such policies appear to be humanitarian in nature and of no economic value for the nation, they actually do lead to an improvement in the overall economic well being of the nation (115). He outlines that due the money saved due to these benefits can be used for other purposes such as education and improvement of living standards.

An analysis of the taxes and benefits redistribution in the United Kingdom pointed to the decrease in the gap between the top and bottom fifths by a ratio of four to one (Office of National Statistics). These results reinforce the fact that government policies can play a monumental role in the income inequality reduction. The UK reports stated that cash benefits such as income support made up 57% of the gross income of the poorest households. This articulates the fact that government policies can physically carry out redistribution of wealth.

Government policies on sensitive issues such as health can contribute a great deal in narrowing the income gap. Health care has been highlighted as one of the causes of an increase in income inequality. Government policies aimed at providing a universal health care solution should therefore be applauded since they will lead to a decrease in the gap between the top and lower levels in the income scale (Tanzi and Chu 86).

In light of the changing family structures as has been described in this paper, affirmative action and female empowerment policies should be considered in the fight for income inequality reduction. Single parent females should be afforded an opportunity to advance economically despite the odds that are in their path.

Another lasting solution to this problem would be to introduce or to increase the minimum wage levels currently in place. This is a government initiative and may come at a grave cost. However, the long term benefits to be accrued from such a venture far outweigh the short term inconveniences that may accompany it.

The increment of the minimum wage will in the long run ensure that the households earn enough to maintain their standards of living all the while affording them a opportunity to save for future development and investments. Additionally, the implementation of this policy will lessen the income inequality gap as well as the social inequality gap brought about by discrimination based on financial status.

Taxation remains the most important front from which the government forces can wage a comprehensive war against income inequality. This is because governments all over the world obtain the bulk of their revenue through taxation of their citizenry. With this in mind, an implementation of effective taxation policies can lead to the reduction in inequality. Progressive taxation is deemed as the surest way to reduce inequality.

Progressive taxation means that the higher earners are taxed highly and this taxation increases with increase in earnings.. However, taxation remains a touchy issue especially in democratic nations since citizens are opposed to the constant hike in taxation. Politicians are therefore wary of raising taxes since they may loss favor with the citizens if they increase the tax levels even if for a good cause.

At the present, most of the government policies fail to address the income inequality issue or end up abetting income inequality (Bernasek). This is mostly by the lack of adoption of measures such as increased social spending on education and health care.

Immigration still remains rampant and the adoption of a free market only worsens the situation for local businesses which must compete with their international counterparts who at times have the advantage of low cost production. Despite these deterring factors, reduction in equality can still be attained by the progressive implementation of the above outlined measures.

Decentralization of industries and companies may also help in alleviating the income inequality crisis. The concentration of industries in the town areas denies those in the rural areas jobs opportunities. However if these industries and companies are well spread throughout the states then they offer job opportunities to the locals and as a result, minimize the income gap between the citizens. To facilitate this, the government should establish more incentives offered to investors willing to start up their businesses in less developed areas.

At the same time, the government as well as responsible policy makers should impose higher taxes to all potential investors looking to invest in well established areas. Such investment policies may assist in the redistribution of industries from the towns to rural areas a move that will increase job opportunities, alleviate poverty and ensure equal distribution of opportunities and resources within the economy.


Inequality has been universally acknowledged as a major roadblock in the way for economic and social prosperity. This paper set out to investigate whether income inequality can be diminished and if so, how it can be done. To this end, the paper has articulated the issue of income inequality that faces both developing and developed nations alike.

The evidence presented herein suggests that globalization, education and a shift in the family structure are arguably the most fervent forces at play in the widening income inequalities in the rich countries. Previous misconceptions that inequality was inevitable on the road to economic development have been dismissed as it has been highlighted that inequality is actually a deterrent to the economic prosperity of nations.

Calls for improvement in the economy of the nation have been forwarded as the most effective way to deal with income disparities especially in developing countries. However, the trend in income equality gap increase continuous to persist despite the economic realities thus suggesting that the problem is unlikely to be resolved by policies aimed at mere economic growth.

Domestic policies including labor market institutions and welfare policies have been observed to act as powerful forces in countervailing inequality in nations. The unique political and economic structures of particular countries are of prime importance in reconciling the rich and middle classes. This paper also hints at the importance of a more stringent immigration policy for a diminished gap in the income scale.

Whereas complete income equality is an idea that will never be achieved in the world, lessening of the gap is an achievable goal that can be attained should the governments and other relevant institutes diligently undertake the practices and policies outlined in this paper. A more equitable community will not only be harmonious but will also lead to more industrial growth hence a higher standard of living for most members of the society.

Works Cited

Bernasek, Anna. “Income Inequality, and Its Cost” The New York Times, 25 June. 2006. Print

Keller, Katarina, R. “How Can Education Policy Improve Income Distribution?: An Empirical Analysis of Education Stages and Measures on Income Inequality.” The Journal of Developing Areas 43.2 (2010): 51-79. Print.

OECD. “Income Inequality and Poverty Rising in Most OECD Countries.” 21 Oct. 2008. Web.

Office for National Statistics. “Increase in Income Inequality: The effects of Taxes and Benefits on Household Income 2006/07.” 25. June. 2008. Web.

Ryscavage, Paul. “Income inequality in America: an analysis of trends.” USA: M.W. Sharpe, 1999. Print.

Smeeding, Timothy. “Globalization, Inequality and the Rich Countries of the G-20: Evidence from the Luxembourg Income Study.” USA: Luxembourg Income Study, 2002. Print.

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