Carter Allen, Anthony Perfetti, and Prabjeet Singh
Introduction
Income inequality refers to how the income is unevenly distributed within the population. Thus, higher income inequality means the less equal the distribution of wealth. Income inequality has been a significant policy issue in the United States of America. A rise in income inequality is often viewed as a society divided between rich and poor people who have resources and people who don’t. This somewhat invokes an image of political repercussions and injustice, maybe even social unrest. We researched income inequality trends in the United States of America to observe how income inequality has changed and impacted America over time and analyze its current state. Building on historical analysis, racial income inequality has always been an issue in American history. In our paper, we conduct a deep-dive research of the correlation between income inequality and race. We also look into various factors that lead to this racial income gap and analyze why some racial groups earn more than the others in the US and the best approach to decreasing this racial income inequality.
Income inequality has continuously been researched concerning gender and race. There is a concern for understanding the relationship between income inequality and domestic violence. Many studies have been done to find conclusive evidence on the relationship between domestic violence and income inequality. Next, gender income inequality has become an issue recently, specifically regarding the pay gap. Female participation in the workforce has been studied as it relates to the economy as a whole. Women have been discriminated against as it relates to high-wage jobs; this discrimination accelerates income inequality in the whole economy. We will discuss how this impedes economic growth for everyone. The next portion of this chapter compares and contrasts the relationships of income inequality and other economic factors between more and less developed countries. The purpose of this section is to stress the importance of variables such as financial development, the development of human capital, the impact of government policy, and the connection between income inequality and economic growth overall. These factors share their own independent relationships with income inequality; however, they are all interconnected. This interaction between factors makes each increasingly crucial in their own way as a negative impact on one variable will ultimately carry negative implications to the other connected factors. This portion of the chapter will expand on how these variables and their connectivity play a role in the resulting level of income inequality between countries with different levels of economic well being. The relationship between financial development and income inequality will focus on the importance of financial intermediaries for providing investment opportunities and removing information asymmetry. Next, examining the impact of human capital on income inequality will look specifically into the effect health and education can have on potentially reducing income inequality overall. By studying the relationship, government policy has with both financial development and human capital development stresses the importance and interconnectivity of government with these factors. Examining the relationship between these factors will demonstrate how the relationship between government policy and income inequality mirrors financial development and human capital relationships with income inequality. Finally, connecting all economic development factors between more and less developed countries building on the previously mentioned factors of economic growth, this section of the chapter will conclude by examining the broader relationship between income inequality and economic development.
We will also look at how the outbreak of coronavirus in 2019 has contributed to income inequality both domestically and globally. On domestic income inequality, this paper will focus on the impact of COVID 19 on the incomes of individuals living within the country, particularly the low and moderate-income earning communities, especially to the Black and Hispanic groups. The paper will also describe how COVID-19 has contributed to global income inequality between and within nations globally. The research adopts a systematic review of previously conducted studies to obtain the necessary information to make its findings and conclusion.
3.1. Income Inequality Trends
The term “income” refers to the amount of money available to a household in a given year. It is made up of wages, self-employment and capital gains, as well as public cash transfers, from which income taxes and social security payments are deducted. The household’s income is divided among its members, with adjustments made to represent variations in needs for households of various sizes. Income inequality has been a major policy issue in the United States of America. In the part of the paper, we will conduct a deep analysis and dissuasion on this age-old issue. A rise in income inequality is often viewed as a society divided between rich people who have resources and poor people who don’t”. This in turn invokes an image of political repercussions and injustice, maybe even social unrest (Cingano, 2014).
The income inequality patterns over the last 30 years, as well as their effect on economic development, show that the income gap between rich and poor is at its highest level in the last 30 years in most Organization for Economic Co-operation and Development (OECD) member countries (Cingano, 2014). In the 1980s, the top ten percent of the wealthiest in each of the respected countries earned seven times as much as the poorest. Today, the top ten percent of earners earn about 9.5 times as much as the bottom ten percent (Cingano, 2014). However, this income disparity has widened not just because the top ten percent gain more, but also because incomes at the bottom grew at a much slower pace during prosperous years and also dropped during recessions (Cingano, 2014). This brought relative income poverty to the attention of policymakers for many countries.
In the past, there have been many researches to determine whether income inequality is advantageous or disadvantageous for an economy. The theoretical work on the subject suggests both of these possibilities (Cingano, 2014). In theoretical literature, there are alternative theories that predict that income inequality can have a positive or negative impact on economic development (Cingano, 2014). Higher-income inequality can be disadvantageous to the growth if 1. High-income inequality becomes unacceptable to voters. This will result in them demanding higher taxation and regulations or losing trust in pro-business policies, which will harm the economy as it will reduce investment and Race and Income Inequality (Cingano, 2014). 2. There are imperfections in the financial market, implying that an individual’s ability to invest is determined by their income or wealth level. In this scenario, Poor people may be unable to make worthwhile investments. This will lead to under-investment by the poor, leading to an aggregate output that will be lower than in the case of perfect financial markets (Cingano, 2014). 3. If the introduction of new technology is contingent on a certain level of domestic demand. On the other hand, higher inequality can be advantageous to growth if High inequality encourages people to work harder, spend more, and take risks to profit from high rates of return. Or if higher inequality fosters gross savings and thus capital accumulation since the wealthy have a lower tendency to spend (Cingano, 2014).
However, the econometric studies based on harmonized data covering OECD countries over the last 30 years indicate that income inequality has a negative and statistically significant effect on subsequent growth (Cingano, 2014). The disparity between low-income households and the rest of the population is particularly important. Surprisingly it was also found that income increase in the top household causes no harm to the economy’s growth (Cingano, 2014). The microeconomic data from the adult skilled survey (PIAAC) demonstrated that increased income gaps depress skills growth among individuals with poorer parental education backgrounds in terms of the quantity of educational attainment and its quality. Individuals from richer backgrounds are not affected by income inequality in terms of educational outcomes (Cingano, 2014).
This also implies that policies aimed at reducing income disparities should be followed not only to enhance social outcomes but also to ensure long-term growth. Redistribution strategies, such as taxes and transfers, are a vital mechanism for ensuring that the benefits of economic growth are spread more broadly, and the findings show that they are unlikely to reduce or undermine economic growth (Cingano, 2014). However, it is also important to foster equality of opportunity in terms of educational access and quality. This necessitates an emphasis on families with children and teenagers, as this is where human capital accumulation decisions are made, such as active labor market strategies, childcare supports, and in-work benefits (Cingano, 2014). Policies like promoting employment for disadvantaged groups through active labor market policies, childcare supports, and in-work benefits should be promoted (Cingano, 2014).
3.2 Race, Gender, and Income Inequality
3.2.1 Race
The US is a diverse nation with many different racial and ethnic groups and a wage gap can be observed among these racial groups this raises various questions such as why is there a wage gap between these different racial and ethnic groups? Do income inequality and race correlate if yes and how does an individual’s race impact his or her Income? Why do men in several minority groups in the United States have substantially lower wages than those of the benchmark majority group? The existing work showed a significant racial and ethnic difference in formal schooling and premarket factors. According to recent studies, these differences, especially in formal education, appear to play a key role in shaping wage disparities (Black, Haviland, Sanders, & Taylor, 2006). One example is that studies found that Mexican American men in their third and subsequent generations earned 21% less than non-Hispanic white men. The Mexican Americans’ relative youth and gaps in English language proficiency and years of education were found to account for roughly three-quarters of the earnings gap (Black, Haviland, Sanders, & Taylor, 2006). In another example, it was found that black men earn 24% less than non-Hispanic white men. However, only about one-fifth of this gap could be accounted for by differences in schooling but, when the armed forces qualifications test (AFQT) was used as the measurement the differential between wages of blacks and whites declined by approximately one-third of its unadjusted level (Black, Haviland, Sanders, & Taylor, 2006).
The AFQT scores were used as a measure of human capital for the research by Dan Black because it is not a very crude measure unlike other primary human capital variables like – years of schooling – which are typically used in the wage regression. According to him, the AFQT achievement scores better summarize the measure of premarket human capital than years of schooling, making it more useful in empirical studies that look at the role of premarket variables in the race wage gap. In his paper, he was interested in the role played by the premarket factors in shaping labor market outcomes. Thus, the analyses were not conditioned on experience or occupation. His key concern was that any ethnic disparities in occupation or experience could be due to prejudice. However, the conventional method of relying on non-test indicators of premarket human resources was adopted. The data gathered from the National Survey of College Graduates (NSCG) did not have any test-based achievement measures. However, they did have the data on the degree level and exceptionally detailed data on the field associated with the highest degree (Black, Haviland, Sanders, & Taylor, 2006). The data contained information related to the cumulative educational disadvantage experienced by many young minority men. This disadvantage manifests in an inability or disinclination to tackle complex and lucrative courses in college. This detailed data was more helpful in taking account of relevant heterogeneity in schooling opportunity than the data provided by the years of schooling (Black, Haviland, Sanders, & Taylor, 2006). Two other reasons for the focus on college education were first, approximately 9 of 10 young Americans at least complete high school education. As a result, most of the variation in completed education is at the college level. As the years of completed education are generally on the rise, authors expected that the highly educated would become an increasingly important part of explaining the minority wage disparities. The second reason was that there is a somewhat independent interest at the top end of the labor market regarding the role of discrimination. (Black, Haviland, Sanders, & Taylor, 2006)
Because of their large sample size, Dan Black and his colleagues examined wages of three different minority groups; Asians, Blacks, and Hispanics. Upon reviewing their sample, in terms of income, they discovered that men in each of these minority groups earn less than non-Hispanic white men. The reasoning behind this might be that each minority group has faced discrimination and disadvantage at some point in recent US history. Because of that reason, it is reasonable to seek empirical evidence of wage disparities resulting from such discrimination (Black, Haviland, Sanders, & Taylor, 2006). Discrimination against blacks in the labor market in America is unquestionably less widespread and averted than it was before the Civil Rights Act of 1964. However, racial misunderstanding and bigotry still exist in today’s day and age. Furthermore, Blacks have relatively poor access to education (Black, Haviland, Sanders, & Taylor, 2006). There is a significant disparity in educational quality between blacks and whites. On average, Blacks also have a lower level of completed education than whites. The analysis done by Dan Black allowed him to capture one systematic portion of this heterogeneity, which takes the form of racial differences to the highest degree (Black, Haviland, Sanders, & Taylor, 2006). The data on parent’s educational attainment and region of birth was used to make some advancements in dealing with the significant socioeconomic disparities between blacks and white. As stated above, data might serve as proxies for differences in unobservable premarket factors that are most likely to affect educational opportunity and human capital quality (Black, Haviland, Sanders, & Taylor, 2006). Similarly, to Blacks, Hispanic and Asian men earn less than non-Hispanic white men, though the reasons for these disparities do not seem to be the same as those that drive the Black-White gap. Hispanics and Asians in America are mostly immigrants or children of immigrants, unlike African Americans. Most Hispanic and Nisan men are bilingual and speak languages other than English when at home. As a result, English language ability and assimilation are more critical for these groups. Moreover, much like Blacks, Hispanic men also generally have low levels of premarket human capital, whereas Asian men mostly have quite high levels (Black, Haviland, Sanders, & Taylor, 2006).
The authors found that the college-educated men in each minority group stated above tend to earn less than non-Hispanic white men, wage gaps are around 19% for Hispanics and Blacks while 10% for Asian men. A decent amount of this wage gap is a result of measurement error in the recording of education in the Census. Pre-market variables such as differences in age structure, formal schooling, and English language proficiency may explain the entire wage gap between Asian and Hispanic men. However, these pre-market variables only account for a quarter of the wage gap among black men. The remaining three-quarters of the unadjusted wage gap was explained when researchers focused only on people whose parents had some college education, and the whole gap was explained when the emphasis was narrowed even further to blacks not born in the south (Black, Haviland, Sanders, & Taylor, 2006).
Do income inequality and race correlate if yes and how does an individual’s race impact his or her Income? “upon careful analysis, one can easily observe various pieces of evidence of racial differences in various socioeconomic outcomes throughout American history” (Bayer & Charles, 2016). Patrick Bayer & Kerwin Kofi Charles presented new estimates of the black-white differences in earnings among prime-aged men since the 1940s and they also assessed the role played by the different types of factors in driving the relative earning changes. They focused on three major parts. First new facts about racial differences in earnings over the past seven decades were presented. Then they studied two dimensions of racial earnings differences first the earning level gap and then the second what they called the earning rank gap. The level gap at a given percentile is the difference in the difference in earnings between black and white men at the same percentile of their respective earnings distributions, the rank gap measures how far below his percentile in the black distribution a black man’s earnings would rank in the white distribution (Bayer & Charles, 2016). These two measures gave them a more comprehensive picture of black relative earnings than does either alone. Using this quantile regression, they discovered that the black-white wage gap narrowed steadily from 1940 to 1970 and expanded dramatically, returning to its 1950 level by the end of the Great Depression. In recent decades, earnings levels, like the median gap, have worsened, but the re-widening has been relatively modest by comparison (Bayer & Charles, 2016). The differences in rank earning gaps developed in a different way than the differences in earning levels. In 1940, the median black man’s earnings would have placed him in the 24th percentile of the white earnings distribution, based on all men’s earnings. However, in the years after the Great Recession, the percentage had barely improved, only rising to the 27th percentile. However, at the upper end of the distribution, the black man’s earning rank at the 90th percentile has gradually grown, increasing from about the median of 75th percentile of the white earnings distribution (Bayer & Charles, 2016). The combined impact of the various factors that influence earnings gaps, which function through two distinct types of forces, may explain these shifts in black relative earnings. The first one being Positional convergence shifts which were the relative positions of blacks and whites within the earnings distribution (Bayer & Charles, 2016). Things like labor market discrimination and occupational exclusion andskill disparities resulting from differences by race in schooling quality were liely to affect this convergence. The second type of force was the distributional convergence. Since blacks and whites hold different initial roles in the earnings distribution, this convergence, by comparison, results from shifts in the shape of the overall earnings distribution, which influences the black-white relative earnings. This distribution is affected by skill-biased technical changes, decreasing residual earnings inequality, and institutional changes such as higher wages or declining unionization (Bayer & Charles, 2016).
In the second part of their paper, Bayer quantitatively assessed the relative importance of positional versus distributional convergence over the past seventy-plus years. He broke down the shifts in black relative earnings decade by decade. This breakdown allowed for flexible accounting of non-participation and how a particular observable skill, such as educational attainment, influenced the earnings distribution in each period (Bayer & Charles, 2016).
He found that black man’s earnings at the median have relatively risen and fallen mainly as the result of distributional convergence like the Great Compression and the rise in of the middle class from the year 1940 to 1970 and the rise in income inequality after 1970 and just, by contrast, the positional convergence has been relatively much more important than distributional factors in driving changes in the relative earnings for 90th percentile blacks. It was also discovered that the distribution factors that harmed the labor market prospects of all low-skilled men after 1970 were the primary drivers of the rapid relative increase in the proportion of black men with no earnings after 1970 (Bayer & Charles, 2016). These factors disproportionately impacted black men, mostly due to their higher over-representation at the bottom of the earnings distribution (Bayer & Charles, 2016). He also researched the role of educational attainment in explaining changes in racial earnings gaps. There were two major discoveries from this section of his research. The first is that over the last seventy years, the median black man has not seen any positional increases in wages, owing to the phenomenon of increasing labor market returns to schooling. Since 1960, massive historical racial disparities in elementary and secondary school achievement have been observed. Elementary and high school attainment has dropped dramatically, and racial disparities in school quality have also decreased (Bayer & Charles, 2016). However, any positional benefits from these changes did not materialize, because, although the gap in completed schooling between blacks and whites has narrowed, the labor market returns for an additional unit of education have increased dramatically in terms of both wages and the likelihood of working. As a result, any positional improvements a low-skilled black man may have achieved had he obtained more education were offset by the fact that the labor market penalized racial inequalities in the remaining education even more severely (Bayer & Charles, 2016). Another significant finding in the field of education was that the increase in relative earnings achieved by the 90th percentile black man was primarily due to positional earnings gains made by higher-skilled blacks within higher education categories. They also found that the differences in earnings between black and white men with at least a college education have systematically fallen over time (Bayer & Charles, 2016).
3.2.2 Gender Pay Gap
Over the past years, the gender pay gap has dramatically narrowed, upon women taking over occupational positions initially made for men only. Women are taking over the strategic position in the labor market, making the relationship between the two labor occupations linked closely. However, some research states that female occupations pay less, which is still subject to more research. One of the most significant features of women’s statuses for the last many decades in the labor market was that women’s tendency to work in a relatively small number in some small-paying female predominated jobs. Initially, one woman manager among five managers in an organization and professional position was given job opportunities in traditional women professions such as kindergarten teachers, librarians, nurses, elementary school teachers, and dietitians, who were low-paying professional positions male occupational works. In the blue-collar jobs, women were underrepresented, which include craft occupations a higher-paying production precision. However, there has been a significant change from this starting from the year 1970 where women’s and men’s differences remain the same, but occupational disparities have been reducing slowly. This study seeks to address gender occupational disparities.
In the past, occupational segregation and the gender-pay gap were aimed at gender-specific factors like gender differences in the labor market of qualifications (Blau & Kahn, 2000). There are some advances made where the gender pay gap has been viewed with demographic pay differentials regarding overall wages structure.
The term wage structure can be defined as the ray of prices determined for rewards to employment and labor market skills. The human capital market has enabled the analysis of gender differences and qualifications (Blau & Kahn, 2000). Unlike men, women have not accumulated sufficient labor market experience because of the traditional divisions. Generally, women experience more discontinuous work lives. They anticipate shorter, thus resulting in low investment in job training, lower incentive to invest in capital investment, and inadequate investment in market orientation. These elements like training and education, which women do not support, are the main determinants of wage pay in the labor market, resulting in fewer wages for women. Also, women spend a large part of their time in housework, thus reducing their efforts and time in the job compared to their female counterparts, thus reducing wages and productivity.
Women’s occupations and wages are also influenced by the discrimination which exists in the labor market. There are various forms of discrimination that women may experience in the job market (Blau & Kahn, 2000). One of these discriminations is model discrimination which is discrimination of employees by co-workers, customers, or discriminating taste of employers. In this case, employers may discriminate against women based on their gender which, maybe the case also from the customers and co-workers. Another form of job market discrimination is statistical discrimination, where women and men are treated differently in terms of expected productivity, thus resulting in employers discriminating on average productivity. Yet, their strength in productivity is not the same as that of men. Lastly, discrimination exclusion of women from the male jobs may result in excess labor supply in female occupations while the demand is low. As a result of excess supply in the female professional employment, there will be fewer wages since the employers have the bargaining power. Therefore, females will earn fewer wages while males continue to enjoy high salaries while working as women in the job market.
The reduction of the gender pay disparities over the previous years can be associated with rising wage inequality in the environment (Blau & Kahn, 2000). This is a controversial statement because women continue having on average less experience than men and still work on low–paying industries and professional occupations. Since men have invested primarily in the skills and other qualifications compared to women, they attract more rewards than women. Women should be disadvantaged in this case, implying that the gender pay gap should have increased in decreasing where the relationship does come from between reducing the gender pay gap and the increasing level of women discrimination. The answer to this question can be explained well by the rising rewards to skills and inequalities, which reduce the wage by offsetting gender discriminating factors while improving specific gender factors. The shift in demand in the labor market favored women because it widened wage inequality. Secondly, there is a high increase in the number of women employed as managers and increased occupational professions suitable for both males and females. Lastly, the decrease in unionization rate positively influences the female while disadvantaging men in the labor market. Most male occupational professions depend majorly on unions which, upon the decline in membership, women occupations strengthen.
There are various causes of gender differences in occupations that are in existence in the labor market. The factors include but not limited to; the employers’ preferences for a strong workforce, which are men over women, cause the massive difference in the occupations in terms of productivity and wage pay (Blau & Kahn, 2000). There are significant circumstances under which women are discriminated against in the job market, including job promotion and training, especially on-the-job training. These will lead to increased gender disparities in skills and qualifications due to the lack of sufficient training for women. Also, gender disparities may be in terms of job titles and positions due to inequality in the promotion.
Most women spend more of their time performing housework in their free time, thus having less time for training and practicing their skills (Blau & Kahn, 2000). Most employers in the job market desire to have highly qualified and experienced personnel, automatically locking out women in the job market. During payment of the salaries and wages, those employees who are more qualified are paid more, thus gender pay gap.
There has been a significant decrease in the gender-pay gap in the labor market. The new education regulations and policies have enabled females to access educations like the male and even better. Women’s access to schooling equally to men has resulted in more qualified and experienced female in the labor market. The shift in the market demand has resulted in to increase in inequalities that favor women in the job market. Therefore, the gender-pay disparity in the job market is getting narrower and narrower.
3.2.3 Government’s Policy Surrounding Gender Pay Gap
Globally, there has been a more significant concern for gender income inequality. Different nations’ policymakers have attempted to attain more equitable societies by narrowing down gender differences (Dabla- Norris et al., 2015). There is also an increasing recognition in pursuit of the policy makers’ objectives from a social equity perspective that would positively influence the macroeconomy. In this regard, various researchers have conducted studies on female participation in the workforce and its link to the general economy and establish connections between gender and income unproportionally (Gonzales et al., 2015). Moreover, the researchers have identified the gender income inequality basis and its effect on the economy. It is also imperative that the female gender suffers when it comes to income equality as they are regarded as vulnerable people in certain activities. The article seeks to discuss gender income inequality and its effect on the economy.
Gender-related inequality and income inequality interact via various channels. Firstly, the gender wage gaps directly result in income inequality as primarily the female are discriminated against from high wage rate jobs due to their perceived vulnerability than men hence result in income inequality as the men tend to earn more from those jobs than the ladies (Gonzales et al., 2015). Moreover, high labor force gaps in participation between women and men have a likelihood of resulting in earning inequality and hence creates and accelerates income inequality in the economy. The differences in the economic outcomes resulting from income inequality significantly affect unequal opportunities between the men and the women or boys and girls.
Moreover, gender income inequality impedes economic growth in various ways. Firstly, higher wealth and income inequality lead to the underinvestment of human and physical capital associated with lower mobility levels across generations (Dabla- Norris et al., 2015). Moreover, it can result in the dampening of the aggregate demand of labor by both genders as only a few individuals will acquire the best wage rates. Besides, inequality also stimulates economic growth and development by availing entrepreneurship and innovation incentives to particular individuals to start and run businesses (Gonzales et al., 2015). Such an instance indicates the ambiguity in the economic growth. Some studies suggest that lower-income inequality levels are strongly associated with the economy’s longer and faster growth spells.
Additionally, income distribution is crucial in its respect. A rise in the share of income for the top 20% is associated with lower growth in a country’s GDP in the medium term. In comparison, the bottom 20% increase in income share is typically associated with a country’s higher GDP growth (Dabla- Norris et al., 2015). Moreover, gender inequality influences economic outcomes through development. A positive relationship exists between per capita GDP and gender inequality, human development indicators, and competitiveness. Mostly, women are more vulnerable to making household income investments, especially for their education. Therefore, their higher level of participation in their children’s education results in a development in the economy (Galor & Zeira, 1992).
Moreover, the gender gaps in participation in economic activities typically bar the talent pools in the labor market, which eventually results from inefficient allocation of resources and also lower growth in GDP levels (Gonzales et al., 2015). Therefore, higher gender inequality has a direct association with lower economic growth. Similarly, gender inequality has a negative association with growth levels, specifically in low-income countries. Another impact relates to the stability in macroeconomics in which the countries face a declining workforce increase in their economic participation. Such participation by the women directly influences the stability in gains by mitigating the declining labor force effect on the county’s growth potentials (Duflo, 2012). Moreover, it influences a nation’s pension system by stabilizing it as both the women and men work actively and save on their pensions.
Following the impacts on gender income inequality, the government should consider reinforcing policies that counteract gender income inequality. One way to achieve gender income equality is equal opportunities for women by eradicating the obstacles that prevent the female gender from exercising their full potential in economic participation (Duflo, 2012). Eradication of such barriers would provide them with various options of being economically active by choosing the economic activities to venture in. Moreover, working towards gender equality in a particular nation improves the female’s activities as they engage actively in economic projects, which would, as a result, lead to more favorable economic outcomes, low inequality, and higher growth in the overall economy (Gonzales et al., 2015).
Moreover, the use of redistributive policies helps in lowering gender income inequality. Some of these associated inequalities include unequal access to labor, education, finance, and health (Gonzales et al., 2015). The equal access of the essentials named above of economic growth aids for growth in the economy and its overall development. Therefore, the exercise of gender income inequality is a social vice that should be eradicated by policy setters and also government regulations (Duflo, 2012). Achievement of equality in gender income is a dream in every nation and, if achieved, would result in numerous benefits to the economy’s health.
3.2.4 Domestic Violence caused by Income Inequality
Globally, there has been great concern about domestic violence and income inequality. Various researchers have tried to identify the relationship between the two but to no avail. Many debates and deliberations have attempted to elaborate more on the violence and instability by relative deprivation (Weede, 1981). Income inequality is presumably one of the fundamental conditions of relative deprivation. More recently, zero and positive relationships subsisting between violence and inequality have been reported but to no avail has the relationship been identified (Weede, 1981). The article seeks to elaborate more on domestic violence and income inequality and establish their relationship.
Typically, less equal distributions are associated with higher income inequality (Pickett & Wilkinson, 2015). Moreover, income inequality is usually accompanied by wealth inequality in the economy, simply the uneven distribution of wealth. Therefore, income inequality occurs when there is an unproportionate distribution of income across various households and various people. On the other side, domestic violence refers to the violent actions committed by the heterosexual partner through intimidation, severe harassment, physical injury, indecent behavior, any wilful damage to property without consent, or even a threat of committing any of the named offensive acts (Jackson, 2007).
In establishing the relationship between domestic violence and income inequality, researchers have tirelessly identified some connections. Of primary concern is the technical issue that concerns the monotonicity of the relationship between the variables. The functional form of relationship subsisting between economic development, instability, and conflict has been in dispute in cross-national research (Weede, 1981). Most of the researchers who have contributed to the cross-national research regarding the inequality-violence relationships assumed a linear and a monotonic relationship between instability and economic development. However, a non-monotonic specification of the GNPC violence indicated a regression between logged violence and GNPC (Weede, 1981).
According to Weede (1981), income inequality does not impact domestic violence when the average income effects and population are controlled, but the other violence determinants are not controlled. He further argued that the high average income relates strongly to less violence as the partners are at par and agree on the family budgets without the feeling that one of the partners has a higher income than the other Weede, 1981). Moreover, the partners’ high average income results in fewer deaths as the married partners contribute towards the family necessities. If one lacks income, an agreement is made to minimize domestic violence due to the reduced income inequality (Weede, 1981).
Furthermore, Weede (1981) argued that armed attacks to deaths ratio due to domestic violence are associated with the higher-income countries than the low-income countries, assuming that the developing nations are faced with severe underreporting of the armed attack in such nations. The researcher associated domestic violence with political violence that emerges from various instances of income inequality in nations. Moreover, Hibbs (1973) argued that the index in internal wars correlates with the logged deaths resulting from political violence. In this regard, the Hibbs’ index is not considered a significant improvement over the indication of deaths in a particular country.
Moreover, a summary of the entire series of quantitative studies regarding personal income inequality and its relation to domestic violence, Simpson and Sigelman (1977) argued that there existed a strong relationship between violence and high average incomes. The researchers argued that high average incomes within various households were associated with less domestic violence. Hardy (1979) also commented that the variability between the two variables depended on multiple households’ inequality-violence significance. Hence, he considered the ratio variable issue a non-important variable in our context. Therefore, it is evident that the previous work should be taken seriously and that the relationship between domestic violence and average incomes should be recognized.
Regarding the correlation effect of the variables, Weede (1981) commented that his results did not provide much plausibility to explaining the relative deprivation of the independent cross-national violence variations. Gallup (1976) provides some insights on the average income relationship with violence across nations. It is crucial to interpret the observed relationship between less violence and moderateincome levels through relative deprivation theory. In this regard, if the income inequality bears a more substantial effect, an individual could conclude that most people would choose reference groups within their residential societies rather than international comparison.
Conclusively, there exists less evidence of the subsisting relationship between income inequality and domestic violence. Domestic violence refers to the household violence committed by one of the partners through unjustified forces and damage to property without consent. At the same time, income inequality relates to the economic condition that describes the uneven distribution of income throughout a given population. According to Weede (1981), there is little correlation between income inequality and domestic violence. He further argued that the average income is associated with less domestic violence in a specific nation’s households.
3.3 Comparing income inequality of more and less developed countries
3.3.1 Financial Development
There is a general belief that financial development can improve economic growth by providing efficient allocation of funds which effectively reduces the cost of borrowing and financial transactions (Sehrawat & Giri, 2018). This interaction between developing financial systems and economic growth has provided evidence the two can have a positive impact on narrowing income inequality. Authors such as Law and Tan, 2009 as well as Sehrawat and Giri, 2018 argue that improving the financial sector of a country can be a useful tool for improving income distribution. However, these same studies also argue that deepening a financial market only benefits the reduction of income inequality if a threshold level of financial development is accomplished. Despite this theory there have been many cases that argue financial development may have more of a negative impact on income inequality than a positive one (Kim & Lin, 2011). Moreover, authors Law and Tan present the theory that financial development is pro-rich having the greatest impact at its lowest levels of development when only few are able to capitalize on the growing market opportunities (Law & Tan, 2009). Considering the relationship between financial development and income inequality there are essentially two schools of thought. One school argues that financial development reduces income inequality referred to as the inequality narrowing hypothesis, and the other argues it has the opposite effect referred to as the inequality widening hypothesis of financial development (Law & Tan, 2009). The main arguments surrounding these theories are based around the short and long term gains that citizens of any given country are able to experience through financial development and in particular increased financial intermediation. Financial development can provide sources for economic development which in turn creates greater opportunities for individuals to make money. When financial markets are operating efficiently they can provide all market participants the opportunity to take advantage of effective investments. This is possible because financial institutions give investors the opportunity to allocate funds in more productive avenues, generating financial growth and therefore boosting economic growth (Sehrawat & Giri, 2018). This illustrates the connection between financial development and the reduction of income inequality through development of a strong financial market. Additionally, the further a countries financial system develops the greater the number of financial institutions and intermediaries there will be within that country. Aside from these institutions providing jobs and personal financial growth opportunities, financial institutions are extremely efficient in collecting information. This data collection proves to be greatly important in accurately monitoring economic growth and financial information effectively mitigating information asymmetry that occurs in the market. Removing information asymmetry is vital in supporting the least wealthy population of a country. When imperfections are present in financial markets the least wealthy are typically most affected by information asymmetry, and transaction costs due to their lack of financing available. As a result those entrepreneurs who are more financially constrained are forced to rely on their own wealth or resources no matter how limited they might be to invest in their own projects. Due to having this limited supply of cash and resources most poor entrepreneurs remain in poverty thus perpetuating income inequality within a country. (Sehrawat & Giri, 2018). This furthers the narrative on the importance of developing strong financial intermediaries. Removing information asymmetry from the market limits market imperfections and improves the chances for the poor to increase their income overall. Without the strong financial intermediaries it becomes increasingly difficult to reduce the amount of poverty in a country while the wealthy population will continue to thrive.
While there are many positives that develop as a result of increased financial intermediation, there are also some arguments supporting the income inequality widening theory suggesting negative aspects of financial development. The inequality widening theory suggests that in the early stages of financial development “Only the rich can access and profit from better financial markets. At this stage, financial development increases growth but disproportionately benefits the rich. However, as the economy grows richer, financial structure becomes more extensive and income inequality across the rich and the poor declines because financial development helps an increasing proportion of society.” (Kim & Lin, 2011). So while long term financial development may prove to be beneficial for the economy having a positive effect on income inequality the initial result of financial development may have a negative impact on income inequality between the rich and poor. Additionally, the wealthier population in developing financial systems can leverage their resources against those who are less well off by limiting the ability of lower income individuals to increase their economic situation. The rich population possesses the ability to offer collateral in order to aid their chances of receiving loans while already being more likely candidates to repay their loans in the first place. The opposite is true for the poor population as they might not be able to receive loans even when financial markets are established because they either have nothing to offer as collateral or they are just deemed too high risk from the perspective of the bank. Due to this disproportionate advantage to the rich the theory was developed that financial development may in some ways worsen income inequality implying financial development has a positive relationship with income inequality. (Law & Tan, 2009). While financial development may have an initial shortfall only benefiting the rich, enough development in the financial system will eventually reach a level where enough funds can be pooled to finance other investments (Kim & Lin, 2011). When the development of the financial system reaches this level where finances can be pooled for further investments there is more money available to be loaned out stimulating the economy and ultimately creating jobs. This may be the threshold point at which poor individuals begin to reap benefits from financial development. Despite this claim of a threshold level of financial development that is necessary for the poor to experience benefits there have been other studies that have found even very small amounts of financial development actually lead to a reduction of poverty. “By using a sample of 26 countries including 18 developing countries, Jalilian and Kirkpatrick (2002) examined the link between financial development and poverty. They used bank deposit money assets and net foreign assets as their measures of financial sector development. Their empirical results suggest that a 1 percent change in financial development raises growth in the incomes of the poor in developing countries by almost 0.4 percent—a significant impact.” (Sehrawat & Giri, 2018). Considering both contradicting points of view data suggests that any improvement to financial development has positive effects on improving the income of the poor. Even if it results in a disproportionately greater benefit to the wealthy in the early stages of financial development the poor are still significantly better off.
Continuing, the discussion of financial development from a government perspective. Policy changes can have a large impact on how the financial sector of a country is allowed to operate and to what degree of regulation financial institutions will have. Understanding the relationship between financial development and income inequality is imperative in order for governments to establish how they should be allowing these institutions to operate. This will effectively allow policy makers to assess whether further financial development or regulation will narrow income inequality or expand it. However, multiple studies have found that financial development is a very small aspect of reducing income inequality overall and and there are other factors related to financial development that prove to be more crucial in a country’s ability to reduce income inequality. “Likewise, employing panel data set of 50 low-income developing countries over the period of 1970– 2008, Agnello, Mallick, and Sousa (2012) demonstrate that financial development has a significant negative effect on income inequality for 62 countries for 1973–2005 and conclude that removal of policies towards directed credit and excessively high reserve requirements reduce inequality.” (Adams & Klobodu, 2016). Building on earlier data demonstrating the significant role that financial development can have on income inequality, government policy can drastically change how effective developing financial systems can be. When governments implement strict regulation on banks and require such higher reserve amounts there is essentially less money for the banks to loan out. With increased difficulty in acquiring a loan, most of the money loaned out will likely go to wealthier people or businesses that are seen as less risky borrowers to the banks. This further constrains the low income population who are deemed higher risk, widening income inequality. Government policy can play a vital role in the development of the financial industry based on the amount of regulation and policies they implement which in turn has secondary implications on the narrowing or widening of income inequality.
Other findings from Law and Tan’s 2009 study on less developed countries establish that financial development was nearly insignificant in determining income inequality. In comparison the impact that real GDP per capita and inflation can have on income distribution seemed to have a far greater influence on income inequality overall (Law & Tan, 2009). While this sounds as though financial development has no impact on income inequality through this comparison, financial market development has proven to be a popular way to promote economic growth (Law & Tan, 2009). This is important to identify because economic growth and GDP as mentioned earlier, are strongly correlated to income inequality. While financial development may not be as strongly correlated with income inequality as economic growth. It remains true that financial development aids economic development which in turn can be beneficial in improving income distribution. Considering this notion it is imperative for governments to establish a stable financial system if they hope to narrow income inequality. This is possible when financial intermediaries improve their efficiency in order to better allocate resources and effectively improve the productivity of assets, reducing inequality overall. Due to the potential impact that financial intermediaries can have on income inequality, establishing a strong financial system should be at the center of any country’s pro-poor development strategy. This would essentially reduce income inequality by improving the conditions of those living in poverty (Law & Tan, 2009). This illustrates the potential good that financial intermediaries could have with respect to income inequality. However, firms are in the market to maximize their profits, and are not necessarily worried about improving problems the country might have with income distribution. Considering the potential impact these institutions may have it seems that government regulation is the only thing that could realign the goals of the firm with the goals of society. Strong government regulation of the financial institutions can ensure the greatest chance of financial development improving the well being of the poor by reducing income inequality.
Building on the connection between government and financial development. A strong financial sector allows the government of a country to more accurately monitor inflation. Given that less developed countries lack the financial infrastructure to successfully monitor inflation there is a risk that early financial development can cause inflation to rise. While there are ways to counter growing inflation like adopting the currency of another country that has proven to be more stable, this is often used as a last resort. Most countries will try to manage inflation on their own if they can, however less developed financial systems may have a tougher time in doing so. Higher levels of inflation often increase income inequality due to their lack of resources that those less fortunate possess. More affluent individuals will have resources of investing available to them to protect their wealth by purchasing other more stable currencies. However, those living in poverty will not have these resources available to them and they rely on the limited money they have in order to survive (Law & Tan, 2009). Extreme cases of inflation such as that of Venezuela have seen many residents resort back to trading and barter of goods and services rather than payment as inflation of their home currency skyrocketed making the Venezuelan Bolivar nearly worthless in comparison to the USD. Viewing these types of extreme cases of hyperinflation allow us to see the value and importance financial development has on income inequality and monitoring inflation. This also proves the importance of government interaction and developing strong financial intermediaries which will not only aid economic growth and improve income inequality, but also stabilizing a country’s currency by monitoring inflation. Despite having no strong direct positive relationship between income inequality and financial intermediaries the role of the financial system overall is a vital aspect of a country’s ability to grow. With higher levels of regulation and changes to government policy financial intermediation could potentially express very positive impacts on economic growth, countering inflation by stabilizing local currency, and ultimately reduce the gap of income inequality amongst a country’s overall population.
3.3.2 Relationship Between Human Capital Development and Income Inequality
There has been a fairly dramatic evolution in the relationship between income inequality and education as economies become further developed. When examining this trend in a more developed country such as the United States we see there is a gradual change in who this wage gap is effecting. Shifting from a wage gap between those who attended college and those who did not, to a wage gap within particular educational groups themselves such as a wage gap between those who attended university based on their degree. However there has been practically no change in wage inequality for non-college workers since the year 2000 (Autor, Goldin & Katz, 2020). This was a product of many economic developments as the United States shifted from an industrial economy to a technology and serviced based one over time. The most imperative reason for such large increases in wage premiums over time has been caused by the growing demand for college educated workers. This growing demand for college educated workers mirrors the increase in educational wage gains, as the implicit framework of our economy continues to develop around improvements in education and technology (Autor, Goldin & Katz, 2020). The increased demand for college educated workers is what drove up wage premiums at such an exponential rate. While innovation and technology increased the wage premiums of students who receive certain degrees in fields such as medicine, technology and sciences, other degrees exhibit lower returns. The shift from industry to a service economy coupled with the growing demand for college graduates in the job market is what eventually caused income inequality to form among college graduates depending on their degree. “Returns to a year of K–12 schooling show little change since 1980. But returns to a year of college rose by 6.5 log points, from 0.076 in 1980, to 0.126 in 2000, to 0.141 in 2017.” (Autor, Goldin & Katz, 2020). Income inequality has drastically changed between college graduates however the remainder of the workforce that did not attend college has shown little to no change since 1970. This further illustrates the change the US economy has undergone where the wage gap between college graduates and less educated workers has narrowed for those who took to working in trades versus those who obtained a less valued college degree. These examples primarily demonstrate how education has impacted income inequality throughout the United States but common themes remain true when examining the impact education has in less developed nations. Education has proven to be a primary factor in reducing income inequality as well as a basic policy measure and main contributor for a country’s ability to achieve a stable democratic society (Sabir & Aziz, 2018). Further developing previous implications that education is strongly correlated to income distribution is also shown to be a strong factor in measuring the stability of society which is a vital part of improving overall well being. The groups of people who are affected by income inequality vary depending on the quality of education and the supply of university graduates in developed countries. The fact remains that education is a key contributor to limiting income inequality across nations regardless of a country’s growth and economic status. This form of improvement in human capital through education provides workers the ability to obtain skill based jobs. As more workers obtain higher levels of education the supply of skilled workers effectively increases as their relative wage decreases which aids in the reduction of income inequality (Sabir & Aziz, 2018). The idea of investing in education can be classified as an investment in human capital. When human capital increases the people who experience these improvements are now better off. This simplistic understanding of the relationship between education and income inequality demonstrating that even small increases in the level of education one receives can impact inequality. “Increase in investment in education increases the skills of worker and empowers them to find higher skilled jobs. This increases the supply of skilled workers, decreases their relative wage and thus income inequality reduces. A constant increase in the supply of skilled workers keep their relative wage constant even in the presence of skill based technological progress (Zakaria & Fida, 2016). Thus expansion in education improves the overall income distribution.” (Sabir & Aziz, 2018).
Despite a clear connection between improving education to narrow income inequality there are other factors that prevent developing countries from deciding to improve the quality of the education their children receive. This is largely caused by the opportunity cost of education to poor families in developing countries. Wealthier families will send their children to private schools while less fortunate families are faced with the decision between either sending their children to public schools or sending them to work. Both these avenues of children exiting the public school system result in further income inequality from both ends of the income distribution. This relationship demonstrates that high inequality reduces the support for public education while opting out of public education results in great amounts of child labor and children attending private school (Gutierrez & Tanaka, 2009). Due to the difference in child labor laws from more and less developed countries it is difficult to increase the level of education obtained by the general population. Some low income families in developing countries rely on their children working as a portion of their income and see child labor as a better way to improve their family’s standard of living instead of having their children attend the public school available to them. Due to this inequality in education that children receive the income inequality of developing countries in this situation will continue to grow as wealthy families continue to provide better education to their children relative to those living in poverty. The fact that education can have such a large impact on income inequality proves that educational policy of developing countries is extremely important or income inequality will continue to perpetually worsen. High levels of income inequality may result in segmented educational practices in which wealth determines what level of education you are able to receive, perpetuating further inequality (Gutierrez & Tanaka, 2009). The reliance lower income families have developed on the money their children can earn has made it tough to increase the average level of education nationwide. This is a direct result of the large opportunity cost for these children to attend school when it would be more beneficial to their family for them to work. In addition, government intervention has not always provided a solution to this problem as families rely too much on the income or chores from all members of the family to spare sending anyone to school. “First, while schooling is compulsory and enforceable in all high income countries, this is not the case for developing countries, where secondary education is usually not compulsory, and even when it is, enforcement is weak or null, so that attendance levels fall well below 90%. Moreover, in developing economies school attendance has an important opportunity cost for the household, either in terms of household chores or child labor income.” (Gutierrez & Tanaka, 2009). Without the necessary government resources to consistently enforce mandatory school attendance there is very little possibility for countries to improve their human capital through education to ultimately reduce income inequality.
Continuing on, aside from education, the next most significant factor of improving human capital to narrow income inequality is improving the health of a country’s citizens. This can be measured by the average life expectancy a population has relative to the level of income distribution amongst the group. The theory surrounding the connection between the average life expectancy of a country and the level of income inequality a country experiences states that longer life expectancies can increase productivity of the labor force. A longer life expectancy increases productivity because there is less employee turnover. Increased life expectancy has proven to be a significant factor in reducing income inequality having a similar impact to that of education (Sabir & Aziz, 2018). Additionally, a higher life expectancy provides greater opportunities for workers to advance their skills by furthering their education and increasing their potential earnings over time. These factors of production that result from an increase in life expectancy provide a clear connection between health and income inequality and their negative correlation. The health of a nation is determined by a combination of factors, however the primary variable in determining one’s health is their level of income and access to resources such as hospitals, food, and water. This is another aspect of human capital that the government of a nation can manipulate based on how they allocate resources. Much like education there must be an infrastructure in place to support the needs of the general population. Where funding schools would be a representation of government spending on education, resources such as clean drinking water, food, and hospitals are all contributing factors to the improvement of healthcare that governments can help provide their citizens. In doing so the income inequality of a country will diminish. It is proven that increased government spending on health and education impact income inequality significantly as Sabir & Aziz, 2018 found human capital development to be the most important aspect of diminishing economic inequality. (Sabir & Aziz, 2018). In general, the education and health of a country is largely impacted by income inequality. This has been proven that small adjustments to either area of human capital can provide better quality of life to those who live in poverty as increases to human capital can reduce income inequality effectively. However, this development in human capital must be assisted by the local government if income inequality is to be reduced a significant amount as resources are needed to ensure both education and average life expectancy will increase.
3.3.3 Government and external forces impact on income inequality
As with many other economic indicators the income disparity of a country stems from many other external factors. Government plays a large role in controlling variables that could impact things such as income inequality through changes in policy and regulation that can effectively impact the amount of money in circulation and the unemployment rate through a series of Open Market Operations. These Open Market Operations allow the government of a country to control whether the economy is expanding or contracting by manipulating interest rates and increasing or decreasing money supply in circulation to control inflation. This can only be accomplished if the country has a stable currency and a trusted central banking system. For countries that have not developed these necessary variables it is much more difficult for these governments to reduce income inequality. As discussed in section 3.3 Financial Development, government policy and regulations play a large role in success or failure of financial systems. One aspect of financial development that has been very connected to government policy is the inflation level of a country’s home currency. This is important to note because inflation has a direct relationship with income inequality and it is necessary for the government to closely monitor inflation to establish economic stability. “Inflation is used as proxy for macroeconomic stability. Inflation measures the changes in the consumer price index (Mushtaq et al., 2014; Shahbaz & Aamir, 2008; Kai & Hamori, 2009; Shahbaz et al., 2007). It is generally expected that inflation has a potentially positive impact on income inequality because inflation hurts more poor than rich. Therefore it enhances income inequality.” (Sabir & Aziz, 2018). As inflation increases there are several ways that the poor are negatively impacted. To start off, high inflation can increase the population living in poverty as the purchasing power of these already low income individuals is further reduced. Meaning that when inflation rises it essentially increases the income disparity of a country as the poor are impacted greater than the rich. Additionally, higher levels of inflation result in less investment into new business opportunities which in turn slows the rate of production within the economy and may even limit the availability of certain goods in the market. A slow down in production as a result of high inflation will likely cause an increase in the level of unemployment based on the relative demand for goods being lower. This increase in unemployment is another way in which inflation carries negative implications on the economy sharing a positive relationship with income inequality, as inflation and income inequality rise and fall with one another. As discussed throughout earlier sections of this chapter government intervention plays a large role in developing a strong financial sector and particularly human capital which are both major contributors to economic growth and lower levels of income inequality. “The coefficients of health (life expectancy) and education (secondary school completion years) are found to be negative and statistically significant at 5% level. Indeed, our analysis suggests that education and health are the two most important factors that may help in reducing income inequality in the selected developing countries.” (Sabir & Aziz, 2018). Building on the vast importance of developing human capital through the education and health of a country, controlling inflation may very well be the next most important aspect of income inequality and government interaction. Increasing government spending on development of human capital is one of the most effective ways to ensure economic stability and low levels of income inequality. Some studies even argue that financial development is insignificant in narrowing income inequality if inflation and therefore real income are not stabilized by government interaction (Law & Tan, 2009). Inflation limits the effectiveness of financial development raising income inequality as real income is reduced and therefore less money is being invested back into the economy. The disproportionate impact inflation has on the poor decreases any positive impact financial development may have. Considering this impact, financial development, real income and inflation are significant determinants of income inequality in the long-run. However controlling inflation carries greater influence than most other factors relating to income inequality overall (Law & Tan, 2009). There are many aspects of government that can assist improving income inequality. However, only a balance of all these different variables can provide sustainable growth for the economy and ultimately reduce poverty and overall income inequality of a country. While human capital, inflation and financial development are the primary areas a government must focus their attention and resources towards in order to achieve less income inequality. There are other aspects of government that carry implications on income disparity as well.
Furthermore, opening trade markets can be beneficial to all countries involved in trade agreements. This not only increases the ability of citizens to consume goods from trade in poor countries but wealthy countries will benefit as well. Trade benefits all parties involved as countries from different geographical regions and of different economic status will have relative advantages in producing different goods. By identifying relative abundant factors between given countries the parties engaging in trade will be able to each specialize in the production of different goods. Specialization then leads to increased levels of productivity and therefore greater levels of income to the less skilled labor force while increasing the supply of goods in these countries. “Trade openness is negatively related with income inequality. The Heckscher Ohlin model states that an increase in trade liberalization benefits the abundant factor of production by shifting income towards it. For example, developing countries are rich in labor; therefore they produce and export labor intensive goods. It increases the employment opportunities, which reduces wage dispersions and economic inequalities (Bourguignon & Morrisson, 1990). Additionally, trade openness in many developing countries, boosts the real incomes of the unskilled labor force, thereby helping to reduce income inequality and poverty (Anderson, 2005).” (Sabir & Aziz, 2018). The value governments place on their imports and exports can drastically impact not only the level of income inequality within their own nation, but those who trade with them as well. In addition, specializing in the production and sale of certain goods can increase the economic well being of the country as mentioned above by increasing citizens ability to consume goods.
To continue, developing the integral role that the government plays in narrowing the level of income inequality in a given country. There must be a balance established between the variables mentioned throughout previous sections. Allocation of resources must be prioritized amongst financial development, human capital development, controlling inflation and establishing imports and exports. While there are other factors that impact income inequality outside of these variables they do not have as much influence on income dispersion in comparison to the factors mentioned above. If resources can be effectively allocated to these areas, governments should be able to successfully improve the level of welfare a country’s citizens experience and ultimately reduce income inequality throughout the general population. It has been proven that an increase in government spending can result in a significant reduction of the income inequality a country experiences. A 1% increase in government spending can reduce income inequality by 0.002 percent. This information proves that even small changes of government policy in developing countries can help reduce income disparity among the masses (Sabir & Aziz, 2018). This claim not only represents the relationship between government spending and income inequality. It also demonstrates the need for government spending in order for factors such as financial development, human capital, and import export practices to improve and eventually reduce income inequality as well. Building on this point, it is important to stress the significance of government investment in developing human capital through education and health of a country’s population. There is evidence to support that improvements on education and health from an increase in government spending results in a statistically significant decrease on the impact of income inequality. As it has been proven the development of human capital is the most important variable in diminishing economic inequality (Sabir & Aziz, 2018). Investment in human capital is so vital to the reduction of income inequality in a country because it has the largest proportional impact on productivity relative to other variables. Not to mention that education can be passed down and shared throughout the population as a transferable skill. Being that some of these skills are transferable government spending on human capital is essential to narrow the income gap in society and improve welfare in developing countries.
3.3.4 Economic Growth Relationship with Income Inequality
There are many different factors that are used to measure economic growth and quality of life as explored throughout the course of this chapter, but perhaps the most influential factor for measuring living standards is income. Income is a tremendous indicator of GDP growth rates by providing incite to how one’s quality of life may be altered based on what they can afford. Often you see higher levels of income differentiation in country’s who have expressed lower or unstable levels of economic growth however it does occur in developed countries as well. Given that economic growth has a positive relationship with income, the relationship shared between economic growth and income inequality is a negative one. Therefore greater levels of economic growth occur when there is less income inequality within a country. Referring back to section 3.3 on government and external forces, the relationship of economic development and inflation was explained, where greater levels of economic growth occur when inflation is low (Sabir & Aziz, 2018). Given the connection inflation has with both economic development and income inequality it can be derived that economic development shares a negative relationship with income inequality overall. Similar analysis can be done from past sections of this chapter to examine the relationship of economic growth with income inequality through the variables of financial development, human capital and government expenditure.
Understanding that countries who have experienced higher levels of economic growth generally have less or smaller income inequality overall. Where there is a greater abundance of resources for the general population when income inequality is low. Given there is a greater balance of resource dispersion the overall well being of citizens in more developed countries is higher resulting in higher GDP per capita. “The modern study of the relation between income inequality and economic growth dates back to Simon Kuznets, whose inverted-U hypothesis (1955) postulates that income inequality tends to increase at the early stages of development and then falls once a certain average income is attained. The implication is that economic growth in poor countries is likely to be associated with increasing inequality, at least in the short term and medium term.” (Castells-Quintana & Royuela, 2014). This is consistent with findings from earlier sections. Primarily there are similarities to the relationship financial development shares with income inequality as discussed in section 3.3 Financial Development, where a certain level of development must be attained before we can recognize the negative correlation between the two variables. This provides an explanation as to why the average income rate in developed countries tends to be higher, ultimately resulting in more money in circulation. Even though the relationship of economic growth follows a similar trend to financial growth in relation to income inequality, economic development is achieved through growth of all the previously mentioned sections of this chapter. If development is not a priority for financial growth, human capital, and government policy, income inequality will be higher in any country leading to greater economic instability. “According to the International Monetary Fund [IMF] (2007) and complementary works by the United Nations (2013), high income inequality can be detrimental to economic stability as well as economic growth. Besides income inequality being detrimental, it also affects the quality of life of indigenes and could lead to social unrest and political instability (Jauch and Watzka 2016).” (Adams & Klobodu, 2016). Given all of these aforementioned variables have negative relationships with income inequality. Establishing a balance between resource allocation and government spending on these variables is the only way to provide economic stability and low levels of income inequality. Obtaining stability is key in order for citizens to trust their government and ultimately reduce the likelihood of corruption being present in the market. “Tebaldi and Mohan (2010) note a similar argument, indicating that an economy with strong power to prevent corruption, an effective government, and a stable political system creates conditions to promote growth, decreasing income distribution conflicts and poverty.” (Lee & Lee, 2018). Achieving stability through the proper allocation of resources will maintain lower levels of inequality and improve the overall standard of living citizens experience. Ultimately economic development is a product of developing a strong financial system advancing human capital and government policy aiding these factors while monitoring inflation. When all of these aspects of economic development are prioritized income inequality decreases. This is why more developed countries tend to exhibit lower levels of income inequality. Establishing strength in only one of these economic factors is not enough. However, a balance between these factors will ultimately result in less inequality and fewer people living in poverty.
3.3.5 Covid-193.4 Covid 19’s Income Inequality Effects
Since the outbreak of the global pandemic of COVID-19, the pandemic has threatened the livelihoods of less-well-paid and less educated individuals more than who is better spent and more educated, many of whom can afford to safely stay at their home and still work (Brown & Ravallion, 2020). In the United States, the pandemic resulted in minority communities working in low- and moderate-paying occupations losing their job more than those in better-paying positions. Rich nations encountered more deaths than some developing nations despite their better preparedness and better health systems.
In the United States, minority groups, especially Hispanics and blacks disproportionately employed in low-paying jobs, suffered the economic and health impact caused by the COVID 19 pandemic. This was highly attributed to the fact that these groups exhibit many health conditions that put them at more risk of infection of the disease. In addition, they lack enough resources such as private insurance covers that would help them to fully protect themselves from the infections of the pandemic and its health impacts (Goolsbee & Syverson, 2021). Millions of these individuals across the country, particularly those from low and moderate-income communities, lost their employment due to the economic downturn from the global pandemic. No communities and groups were spared; young and old, men and women, or black and white. However, an economic downturn never affects every group in the same way. The income inequality between these groups has grown during the period of global pandemic (Brown & Ravallion, 2020).
Even before the pandemic, most black communities had not fully recovered from the great recession that happened some decades ago. The pandemic outbreak resulted in the disappearance of middle-income jobs, and individuals, particularly the black employees, were forced to settle for a low-paying job to sustain a living. Before the outbreaks, some households (such as North Carolina Households include the white and black families) were still unable to meet all their expenses without government assistance. The pandemic decimated the low wages sectors/industries. Some temporary job loss turning to permanent job loss. In the United States, the increasing level of domestic income inequality was offset by initiated large government income support initiatives (Brown & Ravallion, 2020).
As ordinary and poor people worldwide continue to suffer from the economic and health impact of COVID-19, most of the billionaires such as Bill Gates, Warren Buffet, Mark Zuckerberg, Jeff Bezos, and Elon Musk see their fortunes income and wealth increase. According to the reports by the Institutes for policy studies, the combined wealth of all U.S billionaires grew by 39 percent between March 2020 and January 2021, from approximately 1138.00 trillion USD to 4085.00 trillion USD. Also, the top five billionaires (Bill Gates, Warren Buffet, Mark Zuckerberg, Jeff Bezos, and Elon Musk) saw by increases by 85 percent in their combined wealth during the pandemic period (Shutterstock n.d)
With the peculiar nature of the current economic recession, there is a greater chance that established income and wealth inequalities will be worsened due to differences in occupational jobs among United States racial groups. Hispanics and Blacks overwhelmingly hold Low-paying positions, and previous studies have noticed that those low-paying jobs are also shed more easily during economic downturns (Goolsbee & Syverson, 2021). Furthermore, Hispanics and Blacks are more likely than non-Hispanic whites to serve in jobs that have been affected by disease-slowing shutdowns. This approach is expected to increase income inequality, which will be experienced in a significant portion of marginalized communities (Goolsbee & Syverson, 2021).
Additionally, the pandemic increased the international income inequalities between and within countries. According to Stiglitz (2020), coronavirus exacerbated and exposed the income inequalities within countries just as between countries. Stiglitz argues that the developing nations have poor health issues, less equipped health systems, and populations living in extreme poverty that increase vulnerability to infection. They lack sufficient the tools that developed countries have to cope with the economic fallout. International inequality—defined as the difference in per capita income between nations when each nation is treated as a unit—has maintained its pre-pandemic pattern, if anything is falling even faster as an outcome of the COVID 19 pandemic (Brown & Ravallion, 2020). Conversely, global inequality can be evaluated by weighting each nation by its population, and so by this metric, between-nation income inequality has grown, primarily because India has performed so poorly compared to the OECD’s wealthy nations, confirming the intuitive notion that developing countries experience the most significant income loss (Brown & Ravallion, 2020).
China’s relative success during the COVID-19 outbreak has led to a decline in (population-weighted) inequality. China is no longer a developing nation, so China’s unprecedented success did not counteract the inequality-increasing impact of India’s income fall. China’s rapid growth has reduced population-weighted between-country disparity for decades. For decades, China’s massive growth and development have reduced the population-weighted within-country income inequality since the country has lifted over one billion individuals from the bottom of the global income distribution. Currently, China is no longer considered a poor international country as it develops faster than other nations as it did during the pandemic; thus, it contributes little to reducing global inequality.
In developing economies, income distribution patterns are far more mixed, but most of them, such as some big emerging economies like India and China, have seen increasing inequality. In 2020, China (and not India) reported few deaths due to the pandemic and saw high economic growth (Deaton, 2021). Prior to the disease outbreak, China’s rapid development had elevated over a billion individuals from the base of the world income distribution. It had previously been liable for a decrease in worldwide income inequality when it totals measured to each nation. However, as China’s income has increased, this impact has significantly reduced. With the world’s population counting to 7.8 billion people, 4.4 billion of these individuals live in nations with lower per capita incomes than China. In contrast, only 2.0 billion people live in countries with higher per capita incomes (Deaton, 2021).
In conclusion, it is evident that the COVID-19 pandemic significantly contributed to income inequality both domestically and globally. In the U.S, the pandemic contributed to a loss in a considerable portion of low-wage jobs in Hispanic and Black communities compared to Asian and white employment, which is the primary explanation for income inequality in the United States. Although domestic inequality was still there before the pandemic, the pandemic accelerated the situation. The pandemic has made most of the nations worse off, leading to an increase in global income inequality while others like China are experiencing upward income growth. The countries that performed better in 2019 suffered higher per capita income decreases, primarily attributed to more casualties per unit of population and in part thanks due to other COVID-19 related harms. However, the inequality is expected to reduce because of the discovery of the various COVID-19 vaccines.
3.5 Working from home affects income inequality
Following the impact of the global Coronavirus pandemic, working from home has become a regular code as per the government directives and measures. Various governments issued a lockdown order which prevented further mobility of individuals from one place to another. As a result, many individuals who had no alternatives of working from home lost their jobs, while the lucky ones adopted to long-distance working from the comfort of their homes (Bonacini et al., 2021). These government measures prevent the risk of virus exposure to many people as the virus is easily transmitted from one individual to another (Bonacini et al., 2021). Therefore, staying and working from home offered the best solution, which minimized the virus’s acute spread on a global scale. The article seeks to summarize the economic impacts of working from home as it has become a mandate to many working individuals today.
Following the uncertainty concerning the pandemic’s duration and for future contagion waves, many individuals and companies now view working from home as a usual emergent working way (Milani, 2021). As a result, the routine has potential effects in the income and labour distribution which relates to the long-lasting increase in working from home. Various research articles indicate that a positive shift in the feasibility of working from home is associated with a substantial increase in the average labour income (Milani, 2021). It is, however, a potential benefit to the privileged and hence results in the inequality of labour distribution among employees.
More specifically, the increase in the working from home (WFH) opportunity favours the older, highly-educated, highly paid, and male employees (Boneva et al., 2020). Moreover, the forced innovation can benefit the employees living in the regions that are more affected by the virus. Therefore, it is evident that WFH risks the prevalent pre-existing labour inequalities in the labour market, especially when the market is less regulated (Boneva et al., 2020). As an impact, the government policies should aim to eradicate labour inequality as human capital interventions play a more crucial role in the future labor markets. Moreover, WFH results in unfair distribution of labour as the individuals without the capability to work in such an environment suffer from isolation. As a result, their jobs are reassigned to other lucky individuals with the privileges and skills to work (Boneva et al., 2020). In this regard, it is unfair to the unprivileged, and hence it contributes to the inequality in the labour markets
Additionally, working from home leads to income inequality in labour markets. It is because only qualified and privileged individuals will work under such circumstances. Moreover, it favours the individuals with relative higher pay grades as they contribute to the program’s initiation (Bonacini et al., 2021). As a result, the few privileged individuals continue to benefit from their salaries. Simultaneously, the less fortunate suffer from job losses or even decreased salaries as they contribute less to the organizations’ regular services. As a result, discrimination in the labor market results in income inequality, contributing to poor economic growth (Bonacini et al., 2021. Moreover, it results in the slowing of labor supply and distribution in the labor market, leading to unbalanced economic growth (Bonacini et al., 2021).
Working from home is attributed to the regional imbalance when different countries utilize the initiative at different levels (Bonacini et al., 2021). Working from home requires a high level of technology and education that many countries do not have. Moreover, it requires the application of sophisticated systems that allow distant meetings between a group of employees (Bonacini et al., 2021). Most of the underdeveloped countries lack the necessary resources to implement the initiative and hence suffer economically. Most developed countries like the US and Italy essentially adopt working from home as they have developed technologies that support them to work from home (Bonacini et al., 2021). As a result, the privileged regions will develop economically. In contrast, the less privileged regions suffer from lack of resources leading to regional imbalances regarding the labor market and income inequality.
Moreover, working from home ignores the employee’s willingness and different personalities of the individuals. Some employees prefer the structure and routine of working in an enclosed environment like the office provides them (Mongey et al., 2020). Most employee staff prefer personal interaction with their colleagues and guidance with their respective managers to complete tasks (Mongey et al., 2020). Moreover, considering disabled employees is also essential as working from home may be disadvantageous to such employees as they need support to do their jobs. In instances where one has a family, it may be disastrous as one may shift their attention to home-based activities rather than work-related activities. In this regard, it may result in underperformance by those employees, contributing to economic downfalls (Mongey et al., 2020). Moreover, underperformance may render some of the employees dismissed and hence creating unfairness in the labour market.
Conclusively, the COVID-19 global pandemic has resulted in numerous changes in the labour market as employees in the regions affected will opt for working from home, which has a significant impact on the economy. Many companies and individuals have shifted to online working, which is associated with various economic impacts. The respective impacts include income inequality, unfairness in the labour markets, regional imbalance, increased income variations among individuals, and disruptions in the labour market. As a result, the policy setters in a particular country should assess the impacts of WFH on the labour market and consider developing policies and procedures that ensure quality and fairness in the labour market.
Conclusion
After researching the income inequality trends from the last 30 years. We found that the income gap between top ten percentile and bottom ten percentile has increased from top rich earning 7 times more to 9.5 times more compared to bottom poor. However, we also found that the income gap did not increase just because of the top ten percent earning more but mostly because the bottom ten percent experienced a much slower growth rate and even negative growth rates during the economic downturn. We conclude that income inequality has a negative effect on the economy as it decreases the skill development in poor and middle-class households. Thus, policies targeting income inequality improve both social outcomes and sustainable long term economic growth. Redistribution policies specially providing equal opportunity in quality education should be promoted (Cingano, 2014). We also researched the existence and past trends in racial discrimination and wage differentials among different ethnic and racial groups. We found various empirical evidence showing and explaining the existence of wage gaps among different racial groups. Reasons for the inequality extending from educational attainments to English proficiency. We found that the college-educated men in each minority group earn less than non-Hispanic white men, wage gaps are around 19% for Hispanics and Blacks while 10% for Asian men. A decent amount of this wage gap is a result of measurement error in the recording of education in the Census. Pre-market variables such as differences in age structure, formal schooling, and English language proficiency may explain the entire wage gap between Asian and Hispanic men. However, these pre-market variables only account for a quarter of the wage gap among black men. The remaining three-quarters of the unadjusted wage gap was explained when researchers focused only on people whose parents had some college education, and the whole gap was explained when the emphasis was narrowed even further to blacks not born in the south (Black, Haviland, Sanders, & Taylor, 2006). While looking into the correlation between race and income equality we found that the black man’s earnings have relatively risen and fallen mainly as the result of distributional convergence. This convergence by comparison results from shifts in the shape of the overall earnings distribution, which influences the black-white relative earnings and is affected by factors such as skill-biased technical changes, decreasing residual earnings inequality, and institutional changes. While researching the role of educational attainment in Black-White income disparity we found that the phenomenon of increasing labor market returns to schooling is hindering the decrease in wage gap among blacks and whites as although the gap in completed schooling between blacks and whites has narrowed, the labor market returns for an additional unit of education increased dramatically in terms of both wages and the likelihood of working. As a result, any positional improvements a low-skilled black man may have achieved had he obtained more education were offset by the fact that the labor market penalized racial inequalities in the remaining education even more severely (Bayer & Charles, 2016).
The evidence for income inequality related to domestic violence is not a clear-cut relationship. The evidence would appear to tell us there is only minor correlation. However we do see according to Weede (1981) the average income has an association with less domestic violence in certain areas.
Government should work to eradicate barriers in women achieving economic equality. By all races and genders achieving equal economic participation the economy as a whole will be better off. Low inequality equals higher growth in the economy.
Upon examining the interconnected relationships between financial development, the development of human capital, as well as government policy and external forces. It is proven that improvements to any of these areas has a positive impact on the economic well being of a country’s population effectively reducing the amount of poverty and income inequality of a country. While each factor is a vital aspect of achieving lower levels of income inequality overall the development of human capital has proven to play the largest role in improving well being. This is a direct result of improvements to health and education of a population effectively improving worker productivity as a higher life expectancy provides greater opportunity for people to further develop personal skills that ultimately improve efficiency and provide greater returns. Education plays an even more important role in the development of human capital and reducing income inequality in general. Improvements in the quality of education people receive provides the necessary tools and knowledge for employees to improve their well being. As mentioned in section 3.3 Human Capital Development, the higher level of education a person receives has proven to have a positive impact in reducing income inequality. In fact, even the smallest improvements in a countries education system have proven to have an extremely positive impact on increasing the income level of those who were living in poverty. The decisions the government makes and their ability to control externalities like inflation are heavily connected to having strong financial intermediaries and carry large implications on how effective reducing income inequality is. Ultimately the more that the government contributes to improving financial sectors and human capital the lower the level income inequality tends to be in a country. When considering all of these factors mentioned throughout this chapter are subcomponents of economic development it is not surprising to see economic development is negatively related to income inequality. Improving all other factors of well being through financial development and human capital decrease the level of income inequality meaning the greater level of economic development a country can achieve the lower the total income inequality a country should experience but is only achievable with government assistance.
In regards to Covid-19 and its drastic effect on the world and inherent driving of income inequality, the systematic review of the study found that nations with a higher mortality rate were impacted more as few deaths meant more gains. Wealthy nations have seen more casualties per head than the underdeveloped nation; despite their improved health systems, higher wages, more competent states, and more robust preparedness. Therefore, this paper concluded that per capita income dropped further in higher-income nations like the United States performed worse than other wealthy nations but better than several others. At the same time, other developing economies like China have seen increasing economic growth during the pandemic.
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