Why do some countries have higher income inequality than others?

September 9, 2019

Income is the flow of money that you receive perhaps based on your work, business, state benefits, and/or properties that you are lending. Since everyone has different incomes, it results in income inequality within a country. For instance, in the UK, the richest 10% earns almost 10 times as much as the average income of the poorest 10%.

 

Some countries, like Mexico and Chile, have higher income inequality than other countries, like Slovenia, Denmark, Iceland, and Norway.

 

 

 

Why?

 

5 Reasons of why some countries have higher income inequality than others:

 

  1. Wage Gap: This is the gap between wages of high-income and low-income workers. This gap is small for low income inequality countries (like Denmark and Sweden) because unemployment is low and that it is relatively rare for people to earn very high wages.

  2. Role of the State: Taxes and Cash Transfers do help reduce income inequality as it redistributes the income throughout the society. However, poor government institutional structures and/or corruption could lead to those with low-income not receiving the help that they need. 

  3. Social Marginalization: Even if a country may be growing economically, the income may not be equally distributed. Whether it may be that the business owners are earning much more than their workers or that the urban incomes are rising faster than the rural, only a particular group of people may be benefiting without the others.

  4. Weak Bargaining Power & Labor Laws: many people in low-income inequalities tend to work informally without any employment contracts. In India and Indonesia, for instance, around 80% of their population is in this situation. This means that workers may be unemployed at a very short notice and that they are very rarely offered opportunities of training and promotion. Thus, workers have weak bargaining power, meaning that they have very little say in their income.

  5. Technology and Globalization: the increase in technology may mean that low-skilled workers in a country may be replaced by new and efficient technology. Low-skilled workers may also find themselves out of job due to cheaper labor in other countries. On the other hand, high-skilled workers may find themselves to earn more thanks to the new technology; however, socially this would be widening the income inequality gap.

 

Consequences of Income Inequality:

 

Income inequality leads to inequalities in opportunity. Those with low-income will not have equal access to healthcare, education, and jobs. In Asia, for example, infant mortality is much higher in the countryside than in the cities. This leads to majority of the population often unhappy with the political situation. The consequential social conflicts may make it hard for the government to have control and arrive at a consensus.

 

 

How do we reduce Income Inequality?

 

  1. Empowering women to work full-time and earn higher wages has shown to slow down the rise of inequality. Including more women in the workforce will further reduce the gap and ensure that their children are better provided with education and healthcare.

  2. Stronger Labour Market Policies to address working conditions, wages, and their distribution.

  3. Focus on education (especially in the early years) to provide equal opportunities.

  4. Make tax systems more progressive and provide government transfers to low-income households.

 

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