Income Inequality: Causes and Solutions

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We have all heard the phrase of income inequality in our lives. But few of us actually thought about it or even consider thinking about it. Before diving into solutions, what is causing this problem in the first place is essential because without knowing the issues of what causing this problem in the first place and looking for solution will lead us to nothing. There are several reasons why some people are paid millions while some barely earn minimum wage.

According to Henry Hazlitt’s ‘Economics in One Lesson’ (1988), “Wages are a function of the market price of skills required for a job”, which means the labor market decides the wages one will get. That means if a large number of workers can offer the same skills, then demand for the job will decrease. The significant development in technology also widens the income inequality. According to ‘Causes of Economic Inequality’ (National Debate Blog), “Growth in technology arguably renders joblessness at all skill levels. For unskilled workers, computers and machinery perform a lot of tasks these workers used to be do. In many jobs, such as packaging and manufacturing, machinery works even more effectively and efficiently”. Hence, jobs involving repetitive tasks have largely been eliminated. Skilled workers are not immune to the nightmare of losing jobs. The rapid development in artificial intelligence may ultimately allow computers and robots to perform knowledge-based jobs. Another significant matter is Gender. According to the U.S. Census Report (2004), “In America, the median full-time salary for women is 77% of that of men. However, women who work part time make more on average than men who work part-time. Additionally, among people who never marry or have children, women make more than men”. Another factor is education. According to Gary Becker’s and Kevin M. Murphy’s ‘The Upside of Income Inequality’, “Individuals with different levels of education often earn different wages. The higher the education skill the fewer workers will able to offer”.

Now that we have looked at few reasons, we can look at few solutions. Raising the minimum wage has a significant impact on income inequality According to the Deutsche Bank Research (Asia Economics Monthly, 12 February 2015), “The government of Singapore, a nation that takes economic growth seriously, has overseen sustained increase in median income for Singaporeans over the last five years. Median monthly income from work of full-time employed citizens increased by 30% during the period. The technocratic government achieved this increase by public sector initiatives to raise incomes of low-wage workers. Yet, the unemployment rate of Singapore remains a low 1.9%”. But the minimum wage must be tied with expenditure. If the expenditure increases with the minimum wage, then this will have no significant effect. It also has limitations as “There’s only so much you could do in terms of making workers more expensive without actually harming the people you’re trying to help”, Kearney said. Another thing that can be done is quality education. Michael Spence, a Nobel Prize-winning economist, found that higher education leads to value-added jobs, which have higher incomes. Education begets higher wages, so education must be a priority to end rampant inequality. As Harvard’s Steven Strauss writes in the Huffington Post, the 2% unemployment amongst highly skilled workers in 2006 and 2007 is indicative of a skills shortage. Such a labor shortage leads to higher wages for the highly skilled. However, the many individuals who fail to achieve such skill levels enter fierce competition for low-skilled jobs, driving down wages and increasing inequality. Education solves this problem by turning out more highly skilled workers who will earn high wages. Another thing can be expanding businesses and infrastructures. Kearney says: “That’s like electricity to a previous generation, so that’s an obvious infrastructure investment that would make a place more conducive to job growth”. Better roads, airports, bridges will create more opportunities for businesses hence boosting the economy. Bolstering human capital will also help to minimize income inequality. “We could tax more from all the folks at the top to spend money making investments in the people who are being left behind”, says University of Maryland economist Melissa Kearney. That includes access to affordable health care, job training, apprenticeships and vocational education. Most important is improved basic education, beginning with prekindergarten programs for 3- and 4-year-olds. “I don’t think education by itself is a solution to income inequality”, says MIT’s David Autor. “It’s the best tool in our toolkit”. Altering corporate governance is another way to cope up with this. As Autor says, “It’s possible to imagine adjustments to the structure of corporate governance that would think a little harder about additional stakeholders and potential beneficiaries aside from just owners”. Democratic presidential candidate Elizabeth Warren has proposed that workers at a corporation be allowed to elect 40% of the board of directors. According to Stock Buybacks, Similar arrangements in Germany have resulted in much more limited use of one manifestation of shareholder capitalism.

In conclusion, the road to solve income inequality is a long stretch but we have to take small steps at a time to figure out this. Otherwise, this will stretch of road will go beyond our solving capability.

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