Download The question of income inequality in developed nations

2017
Research report
Economic and Social 1
The question of income inequality in developed nations
By: Finn Rawlins
What is a developed nation?
A developed nation is defined as a state with a more developed economy than that of developing
nations. Economic development is usually assessed in terms of “gross domestic product (GDP),
with most developed nations having a higher GDP than less economically developed nations
(LEDCs) as evidenced by the fact that the countries considered developed nations held 60.8% of
global GDP based on nominal values in 2015 according to the International Monetary Fund. Also,
gross national product (GNP), the per capita income, level of industrialisation, amount of
widespread infrastructure and standard of living in nations is used to assess economic
development. Furthermore, developed nations have often constructed more technologically
advanced infrastructure than other nations.
Moreover, developed nations typically function as post-industrial economies whereby the economic
sectors based on services, information and research provide more wealth, and therefore typically
generate a higher average wage, than the industrial sector. Post-industrial economies will often
include a declining manufacturing sector, resulting in deindustrialisation and facilitating the growth
of the service sector along with increases in the amount of information technology available. These
changes result in the commencement of an “information age” wherein technology, knowledge and
creativity are required in most areas of economic growth to continue said growth.
The populations of developed nations currently comprise approximately 16% of the global
population with 1.2 billion people living in developed nations. In 2013 the majority (59%) of
immigrants emigrated to developed nations. These immigrants, when they are unskilled workers,
are either unable to find employment, clearly evidenced by the fact that from 2010-2011 there were
7.1 million unemployed foreign-born immigrants in the OECD (Organisation for Economic
Cooperation and Development), or are competing with natives for the lowest paid positions in
employment and therefore contribute to income inequality fairly substantially. This is still particularly
relevant in today’s economic circumstances as apart from in Italy and Spain the percentage of
immigrants moving to the OECD to seek employment has held steady since 2012.
What is income inequality?
The term “income inequality” refers to “the unequal distribution of household or individual income
across various participants in an economy” whereby the rich possess a disproportionately larger
portion of a country’s income compared to the poor and the general population. Income includes the
revenue streams created by wages, salaries, interest on savings accounts, dividends from shares in
stocks, rent, and profits from sales. Therefore, true income inequality includes inequalities in every
sort of income between the rich and the poor. However, income inequality based on wages alone
has grown so much throughout the last 30 years that it has reached a level at which it can be
measured by every major statistical measure, particularly in the United States of America.
In the United States of America in 1980 the top 10% of earners possessed 30-35% of the national
income; in the present day the top 10% of earners in the United States of America possess 50% of
the national income. Furthermore, the difference in household and family income between the top
0.1% of American earners and the bottom 90% of earners reached over $6,000,000 in 2014 with
substantial income gaps between the top 0.1% and every other level of society into which research
was completed:
Furthermore, in all developed nations income inequality has increased in the period of the year
2000 to the year 2010. According to the Gini coefficient (the standard measure of inequality utilised
in the social sciences which is unweighted by the size of a country’s population) the score for
developed nations has increased from 29.8 out of 100 in the year 2000 to 30.4 out of 100 in the
year 2010 (where 0 represents perfect income equality (i.e. where everyone receives an equal
income) and 100 represents perfect income inequality (i.e. where one person receives all of a
nation’s income)). This shows that current governmental methods to combat income inequality in
developed nations have been relatively unsuccessful thus far.
What are the causes of income inequality in developed nations?
Income inequality in developed nations is caused by multiple contributing factors. The first of these
is the effect of the labour market on wages. Since wages are determined by the market value of a
given skill utilised in the profession, which can either increase or decrease over time as a result of
changes in the market demand for that skill and the supply of that skill, the wages to be paid for a
given profession can drop dramatically if a large number of workers are willing to offer a particular
skill to only a few employers who desire it. The large number of workers available results in a high
supply while the small number of employers decreases demand for the skill and subsequently
lowers demand for workers proficient in that skill. This results in workers competing for a lower
number of jobs and therefore being more willing to receive lower wages for their work, thus
increasing income inequality.
Furthermore, lack of education (both at a base level and also at specific levels in given fields of
work) plays a large role in income inequality. When there are large numbers of under-educated and
relatively unskilled workers competing against more educated competitors for positions in
employment the less educated are more likely to either remain unemployed or to be placed in lower
paid positions within employment. Also, the more skills an educated person has to offer the higher
their market value and therefore the higher the wage an employer can justify paying them. This lack
of education is typically not due to any problem with governmental policy as the majority of
developed nations offer free education to at least a primary level. Lack of education is in fact often
due to the innate abilities of members of given populations in intelligence, drive and personal
propensity for academics.
Lastly, growth in technology, which is unavoidable in post-industrial, information-based economies
(on which the majority of developed nations subsist), can contribute to income inequality. The
amount of currency spent on technological advancement has increased globally over the last 2
decades with 1.99% of global GDP spent on technological advancement in 1996 compared with
2.12% in 2013. This increase contributes to income inequality in developed nations in particular
because as technology progresses more and more due to the economy in developed nations (which
is typically more technology-based as the economy is post-industrial) less-skilled workers in lower
paid positions are finding their positions in employment are either becoming obsolete in their
entirety (causing all people employed in a that particular position to lose their employment and
therefore increasing income inequality) or becoming partially obsolete (causing some people
employed in that particular to lose their employment and therefore increasing income inequality,
although increasing it less then positions becoming completely obsolete). These two outcomes
force employers to employ less employees of the sort that would be likely to contribute to income
inequality anyway to any given position and thereby forces these unskilled workers into even lowerpaid positions. This subsequently increases income inequality in developed nations as a result of
the movement of these unskilled workers onto even lower levels on the career ladder.
What approaches have been taken to attempt to reduce income inequality in developed
nations?
Firstly, developed nations can follow the French approach (and the approach currently being
followed by the majority of western developed nations) and consistently increase the minimum
wage according to multiple factors, specifically increasing prices, the increasing wages of the
“SHBO” (blue collar workers) and then subsequent “coups de pouce” (discretionary increases to the
minimum wage made by the government). This approach to minimum wage increases helps to
combat rising prices (as the minimum wage is increased to remain on par with prices) whilst also
allowing for continued decreases in income inequality via “coups de pouce”. Despite “coups de
pouce” being rare within the French system lately the relative value of the French minimum wage
(i.e. its value relative to goods and subsequently the buying value of the minimum wage) has
continue to rise over the last twenty years therefore decreasing income inequality gradually over
time.
A further approach to tackling income inequality in developed nations is that taken by the United
Kingdom. In the United Kingdom policy towards income inequality is influenced by the desire to
achieve both horizontal equity (i.e. people in identical situations should be treated identically) and
vertical equity (i.e. people with higher incomes should pay more taxes by being taxed either
proportionally or progressively). In the United Kingdom income tax is calculated as a percentage of
earnings so that as income rises taxes rise. This means that members of the United Kingdom’s
population will pay more or less tax depending on whether they earn more or less. Typically,
members of the UK population who earn more than £11,000 a year with an employer (i.e. people
who are not self-employed) will pay their tax through PAYE (Pay As You Earn). This is included as
a part of their pay-package in their employment, meaning that the reduction of income inequality is
institutionalised and does not require personal effort from employees.
Lastly, OECD nations typically attempt to reduce income inequality by increasing household income
via a basic benefits system, paid via multiple forms of household benefits including but not limited to
unemployment, child, pension and disability benefits. This attempts to redistribute income over an
individual’s lifetime as the rich pay more into unemployment benefits and other systems of benefit
but their higher salaries result in larger pensions with OECD states paying up to 18% of GDP in
benefits with up to 12% of this being old-age benefits such as pensions as a method of
redistributing wealth and reducing income inequality by increasing household income in lowerincome demographics within a given population.
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