Difference in Economic Power Essay

  • Length: 6 pages
  • Sources: 6
  • Subject: Economics
  • Type: Essay
  • Paper: #90438224

Excerpt from Essay :

Economic inequality refers to the situation whereby wealth, assets or wealth are not distributed equally among individuals within a group, among some groups within a population or even among countries. Economic inequality is also described as income inequality, gap between the rich and poor, wealth and income differences and inequitable distribution of wealth. This issue of economic inequality can imply various notions such as equality of outcome, equality and the equality of opportunities. There exist differing opinions on the importance of economic inequality and the impact it has. There are some studies which have put emphasis on inequality as being a social problem. Whereas some inequality might promote investment, when it is too much inequality can end up being destructive. Though income inequality hinders long-term growth, it can also help long-term growth. Economic inequality differs between different societies, historical periods, and the existing economic systems and structures. This paper will look at the extent of inequitable distribution of wealth and its causes. The paper will also look at some of the effects of inequitable distribution of wealth. Finally, the paper will highlight some of the policy responses that have been put in place to reduce or completely eradicate inequitable distribution of wealth (Hacker, 2012).

The organization of Economic Co-operation and Development carried out a study titled Divided we stand: Why Inequality Keeps Rising gave its conclusions on what causes inequality, its consequences and the policy implications for ever rising extremes of poverty and wealth across 22 Nations that are its members. Income inequality within the OECD countries has been recorded to be at its highest level over the past half century. Wealth inequality in the United States has further increased from its already existing high levels. When looking at median incomes for the upper 10% and then contrasting it with the lower 10%, countries that are traditionally more egalitarian like Germany, Sweden and Denmark have seen an expansion of the gap between the rich and poor to 6to 1 today from 5 to 1 in the 1980s (Krugman, 2014).

A study conducted by the World institute for Development Economics Research carried out at the United Nations University states that the richest 1% of adults alone were owning 40% of the assets in the globe as ta 2000. The three richest individuals in the whole world have more financial assets as compared to the lowest 48 nations put together. According to the PolitiFact, the top richest 400 Americans posses more wealth as compared to half of all the Americans put together.

Even though there is an existing discussion on the recent trends in the economic inequality in the globe, the issue is just clear and it is true when it comes to both the entire global inequality trend and also its components of between-country and within -- country. The existing data shows that there has been a large increase in the international component between the year 1820 and the year 1960. This however might have gone down slightly from that time at the expense of an increase in inequality within countries (Hacker, 2012).


There are various factors that cause the unequitable distribution of wealth within societies. The recent increase in income inequality particularly in the OECD countries has been as a result of an increasing inequality in salaries and wages. These factors are such as labor market. A big factor that has led to economic inequality in the modern market economies is to do with how wages are determined by the market. A small part of the economic inequality is as a result of the differences in the supply and demand for the different work types. In a mode of production that is purely capitalist, the wages of workers are not controlled by organizations or employer but they are under the control of the market. Wages work in a similar way as prices of any other good. Therefore, wages can be termed as a function of the market price of a particular skill. This means that inequality is driven by this price. Under the supply and demand law, the price of skill is determined by the race between the skilled worker demand and the supply of this skilled worker (Madrick, 2013).

Alternatively, markets can concentrate wealth, pass on the environmental costs over to the society and abuse the customers and workers. Markets, even though they are stable they in many cases lead to high inequality levels. Those employers that offer wages that are below the market find themselves understaffed with their competitors taking advantage of this situation and offer a higher wage so as to snatch the best of their labor from them. A job with many workers that are willing to work for a large amount of time -- high supply that is competing for a job that has few people require-low demand leads to low wage for that particular job. This is due to competition between the workers hat brings the wage down. On the other hand a job where only few people are willing to work-low supply but has a large need for the position-high demand leads to high wages for the job. This is due to the competition that exists between employers for the employees will end up driving it up. This interactions between supply and demand lead to a gradation of the level of wages in the society which in turn has a significant influence of unequitable wealth distribution (Krugman, 2014).

The other factor causing unequitable distribution of wealth is taxes. This is in terms of the rate at which income is taxed together with the progressivity of the existing system of taxation. A progressive tax is one that the tax rate goes up when the taxable base amount also goes up. In this progressive system of taxation, the level of top tax rate has a direct impact on the inequality level within a society either through increasing or decreasing it as long as there is no change in income due to the change in tax regime.

The other factor that leads to unequitable wealth distribution is globalization. Trade linearization can lead to a shift in economic inequality from the global scene to a domestic scene. When there is trade between rich and poor countries, the workers that are low skilled in these rich countries end up getting low wages as a result of competition while those in poor countries see an increase in wages. Trade liberalization therefore has a significant effect on the increasing inequality within the United States. This increased trend in trading with poor countries as well as the fragmentation of the means of production has led to low skilled jobs becoming tradable (Madrick, 2013).

The other factor causing unequitable distribution of wealth is education. This is in terms of the variation of an individual's access to education. Education, particularly in areas where there is a high demand for workers lead to the creation of high wages for the people that have education. However, an increase in education first increases and then decreases growth and also income inequality. Therefore, those who are not able to afford education or simply make a choice of not pursuing optional education end up receiving lower wages. This is justified by the fact that lacks of education results to lower incomes and hence lower aggregate savings and investment (Friedman, 2010).


There are various effects of unequal distribution of wealth that researchers have come up with. These effects include high rates of health and social problems, a lower level of economic utility within the society from resources hat are devoted on high-end consumption and even a lower level of economic growth incase human capital is neglected to a high-end consumption. A rising inequality in the world is the most important problem since it brings harm to economic growth. Where there exists high and persistent unemployment that leads to an increase in inequality, leads to a negative effect on the subsequent growth of an economy (Friedman, 2010).

Higher rates of social and health problems such as; obesity, homicides, mental illnesses, teenage births, drug abuse and lower rates of social goods such as; educational performance, country life expectancy,, status of women, social mobility are higher in countries or states that have higher inequality. Social stratification and inequality often result to higher levels of psychological stress and status anxiety that might end up causing depression, less community life, dependency on chemicals, diseases that are stress related and parenting problems )Domhoff, 2009).

Crime rate is also related to unequitable distribution of wealth in the society. Studies have shown that there are tendencies of violence within societies that have a higher income difference. Economic inequality is significantly related to the homicide rates, most of those who are inv0lved in crime do so because of the low incomes they have and hence go into crime so that they can be able to get some sort of income to satisfy their needs.

A high income inequality also leads to less forms of social, civic…

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