Income inequality is one of the most troublesome macroeconomic factors in modern national economies, an element that is both unsustainable and creating severe social tensions. In the United Kingdom, which will be the focus of this report, economic inequality is high in comparison to other developed countries. This policy brief will attempt to discuss means to reduce inequality by addressing the core of the issue through the establishment of regulations on corporations and redistribution of wealth and resources towards supporting improvements to human capital.
Issue
The issue at hand is wealth inequality, which is an economic term for unequal distribution of assets among residents of a specific area. Otherwise known as the wealth gap, it inherently demonstrates the difference in economic inequality between the poorest and richest layers of the population. In the UK, income inequality is extremely high. The majority of households maintain the £17,000-18,000 bracket with benefits, which is lower than the median £27,300. Furthermore, the bottom 20% has an average of £7,383 original income and £12,478 disposable income which is significantly smaller than the £88,776 original income in the top 20%. As a result, the richest fifth of the population holds 40% of all income in the UK while the bottom fifth holds only 8% (Figure 1; The Equality Trust n.d.).
It is important to consider that this does not consider the ultrarich populations. These levels have remained steady since the early 1990s despite some growth in median household incomes. The Gini index, which is commonly utilized in economics to represent inequality, stands at 33.2 for the UK, which is higher than most EU and developed countries, particularly with similar populations (McGuinness & Harari 2019). While the poorest suffer the immediate effects of income inequality, it is damaging to the national and global economy as well. Inequality restricts the growth and development of human capital by limiting access to education and health behind a paywall. It has been associated with reduced innovation as well. Evidence suggests that in OECD economies, inequality has led to stunted prosperity and a decrease of 4.7% in cumulative GPD (Brian 2015).
Policy
The primary policy will focus on addressing the core issue of income inequality, which is the rich and corporations accumulating more wealth at the cost of all other income brackets. It is suggested to introduce a policy that will limit the distribution of wealth to executives, investors, and shareholders as well as corporate expenditures to a set annual total. Furthermore, that condition will be accompanied by incentives such as raising the ceiling if the company will invest in the following aspects:
- Job training and specialization programs for lower bracket incomes;
- The increase year over year salaries to non-executive workers;
- Hiring a set percentage of workers whose household income is lower than the national median.
At the same time, the policy will change the government’s approach to its programs. Funds will be redistributed from programs that offer benefits and tax cuts for the middle class and potentially some for the poor. Unemployment payments will be limited to extraordinary events. Funds will be redistributed to incentivize participation skills and job training, as well as holding down a job. Finally, the government will introduce a gradual rise in the minimum wage, for hourly employees as well as salaried ones, to avoid loopholes. All regulations will be accompanied by strict auditing and high fines for non-compliance.
Economic Reasoning
Wealth inequality has been largely attributed to the business approach in corporations that have taken place since the 1980s. It follows the idea introduced by Milton Friedman, a Nobel Laureate in economics, stating that the primary purpose of any business or firm is to make money for itself. Fast forward to the modern-day, and corporations, executives, bankers, investors, and anyone involved in these high echelons of business has adopted the ideology. However, this has come at the cost of innovation and the regular consumer as the primary indicator of a corporation’s health has become its ability to maximize shareholder value, at whatever the cost (Denning 2019). Thus, the first part of the policy seeks to address corporate oversight, in the attempts to limit these payouts to a particular total. The free market will remain untouched to dictate price and demand, but the interventionist policy will focus on the corporate business practices and attempt to disincentivize it, but rather invest in public development.
Inequality is a vicious cycle that follows the famous maxim “the rich get richer, the poor get poorer” (Leung 2015). The concept underlies the economic theory of wealth concentration which suggests that in realistic economic conditions, newly acquired wealth simply accumulates in the top income brackets, allowing create new wealth. Furthermore, inequality is based on what is theoretically known as the ladder of opportunity. The poor lack the opportunities to achieve the best education, training, paying for supporting resources which all eventually reflect on the tier and quality of the job that one receives. Therefore, it is the role of public policy to establish equality in the ladder for individuals to receive an education and receive a reasonable opportunity in the economic niche (Greenlaw & Shapiro 2018). Also, the minimum wage raise stimulates consumer spending on these resources and provides further opportunities for development.
Populations Affected
As mentioned, the policy will benefit the lowest income brackets of the population by offering opportunities for job acquisition and specialized training. It will benefit regular consumers as well since corporations may be willing to reduce profits to lower prices. It will affect almost everyone in the workforce by ensuring a greater income and possibilities for career growth, which is a significant factor in overcoming financial issues. The policy would negatively affect the top income bracket, particularly the ultra-rich. Highly specialized professionals should not be affected but executives and shareholders who manipulate their wealth to acquire more will be greatly limited.
Potential Effectiveness
Unfortunately, in industrial countries, previous efforts to regulate corporations often failed or did not reach the full potential. The most successful attempt at predatory practices by banks and corporations was achieved in the United States in the aftermath of the 2008 financial crisis. The Dodd-Frank Act was a piece of legislation that was able to effectively protect consumers and prevent financial organizations from taking advantage of the lower-income brackets to their advantage. It also greatly influenced corporate financing, requiring disclosure and much greater transparency, while placing minor limitations on unjust wealth acquisition (Parrino 2016). Most Western countries have attempted measures to reduce inequality through fair tax brackets, raising the minimum wage, and offering programs. While some targeted groups do see benefits, the general economic tendencies remain the same at the national level (Saez 2016). Without the participation of the private sector, the government simply lacks the resources to make a significant impact on the issue.
Conclusion
Income inequality is a serious economic issue in the UK. In the long-term, it is unsustainable and to protect the economy and ensure future economic growth, policy interventions are necessary. It is suggested that placing regulatory measures on corporations, inciting human capital investments and redistribution of public funds are potential solutions to the crisis. Although not politically popular, such interventionist policy measures consider long-term outcomes rather than short-term benefits.
Reference List
Brian, K 2015, OECD insights income inequality: the gap between rich and poor, OECD Publishing, Paris, France.
Denning, S 2019, ‘How to solve America’s $100 trillion problem of wealth inequality’, Forbes, Web.
The Equality Trust n.d., The scale of economic inequality in the UK, Web.
Greenlaw, S & Shapiro D 2018, Principles of economics 2e, OpenStax Economics, Houston, TX.
Leung, M 2015, The causes of economic inequality, Web.
McGuinness, F & Harari, D 2019,Income inequality in the UK, Web.
Parrino, RJ 2016, ‘SEC adopts rule to implement Dodd-Frank CEO pay ratio disclosure requirement’, Journal of Investment Compliance, vol. 17, no. 1, pp. 122-130, Web.
Saez, E 2016, ‘Income and wealth inequality: evidence and policy implications’, Contemporary Economic Policy, vol. 35, no. 1, pp. 7-25, Web.