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Stylized Facts about Income Inequality
Unequal distribution of income across and within countries has been attracting a lot of attention recently. There is a big body of literature focused on the research of causes and consequences of income disparities among individuals of the same country, cross national studies, peculiarities of income inequality within different groups of countries, etc. (Gottschalk & Smeeding 635). A number of studies of income inequality have been conducted at the macroeconomic level to identify reasons of economic growth of developed countries. At the same time, economists are researching income inequality at the household and individual level to assess nature of social classes’ existence.
There is considerable variance in the inequality of individual or household income across developed countries. According to some estimates, the largest income inequality is found in the United Stated, while the smallest is in the Scandinavian countries. Moreover, even after using purchasing power parity to make corrections for real income differences across developed countries, still citizens in the United States from the lowest income quartile have living standards at substantially lower level, compared to living standards in other developed countries.
At the individuals’ level, there is evidence of substantial income inequality between men and women. On average, if the country has a centralized wage setting system like in Sweden or Canada, then income inequality between two genders is considerable larger, than in the countries without centralized wage setting system (Gottschalk & Smeeding 636).
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Causes of Income Inequality
The underlying reasons of income inequality existence are extensively studies and discussed in the literature. There are two major groups of studies that provide explanation of the income differential. First group of scholars explain existence of income inequality through the savings accumulation system. They argue that savings usually concentrate in the upper income group of individuals s they have more opportunities to save money. There is evidence, that savings rate of the groups of people from the groups preceding highest income bracket is almost equal to zero. In particular, in the United States around 2/3 of all savings are concentrated in hands of 5% of all saving holders. Similarly, only small share of the population accumulates assets with the highest yield, like real estate (Kuznets 7).
Another group of studies explains reasons of income inequality existence in society through the structure of industry in the country. Majority of the developed countries are reorganizing their economic structure in such a way that facilitates industrialization and urbanization, at the same time shifting away from concentrating on agriculture.
Hence, it is clear that economies face substantial rural-urban income inequalities when people in the rural areas are on average poorer compared to city dwellers. Moreover, there is evidence that inequality among people that live in the rural areas is smaller compared to those who live in urban areas.
Therefore, it is obvious that industry structure of the economy, urbanization and globalization of societies substantially do not only affect emergence of income inequality, but at the same time, they cause latter tobecome even larger (Kuznets 9).
Income Inequality over Time
Variations in income dispersion are observed not only within or across countries. Additionally, income inequality is changing over time, becoming larger in one setting and shrinking in another. The United States as well United Kingdom are two developed countries that have experienced the largest increase in income inequality within their territories across time. Among other developed countries, Sweden, Norway and other Northern European countries had the smallest increase in the income inequality.
Trends and speed of increase or decrease in the income inequalities are not directly associated with level of the income. For example, in the sample of OECD countries during the period of 1980-1990, some countries that had the lowest level of income inequality also suffered from the largest increase of the inequality (Gottschalk & Smeeding 637).
Equality versus Efficiency
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Alongside with freedom and democracy, social and economic equality is considered to be one of the most important principles desired by every society. However, there is a long lasting discussion in the literature about relative efficiency of the income equality in the nation. On one hand, income equality decreases efficiency through reduction of motivation for investments as well as incentives for productive work. However, on the other hand, a lot of scholars argue that those countries that have relatively smaller income inequality should have larger consumer demand that boost consumption and spending in the economy, compared to countries that have less egalitarian distribution of income (Kenworthy 225).
Disagreement and discussions of the need in income equality is mostly based on the ethical contemplation. Equalization of income across people requires interference into the personal life of those who have larger income compared to others. It has been proven historically on the examples of failed authoritarian socialist countries (USSR, China) that efforts of the government to redistribute income among people are accompanied with elimination of private property and individual freedoms. Moreover, another argument in favor income inequality is just compensation for the corresponding amount of effort and contribution that an individual is delivering. Based on the principles of economic theory, it is argued that inequality is necessary to attain efficiency in economic development.
On the other side, proponents of egalitarism in income distribution argue that the nature of private property is contradictory and unjust. They claim that essence of private property is inequality (Kenworthy 225).
Impact of Public Assistance Programs and Social Insurance
There are a number of theoretical and empirical studies in the literature investigating impact of public assistance programs and social security on the behavior of people and economic development of the country. At the same time they unveil effects of the capital accumulation by the government through various social security funds. Mostly those studies are focused on the labor market and impact of social assistance programs on the labor force participation rate, amount of working hours, retirement age, etc. For example, amount of social security contributions required to pay by the government is one of the crucial factors affeccting decision making process of hiring new employees (Ahmad 110).
There is no consistency in the literature regarding pensions and their impact on the retirement age. For example, Atkinson (250) summarizes that several empirical studies that have used same survey for their research have found inconsistent results. In particular, there is no conclusion whether amount of pensions has a crucial impact on the decision to retire.
According to Ahmad (112) there is evidence in the literature that social assistance programs of the government have negative impact on the life of people. At the same time he points out that this is primarily caused by the programs’ poor design and low targeting abilities.
Particular attention should be devoted to unemployment benefits and compensations. There are no doubts that larger unemployment benefits are associated with larger unemployment spells in the country and hence, are not economic effective. Atkinson (252) considers that there is a need for unemployment benefits to be conditional in order to reduce misuse of their primary goal. Once, unemployment benefits are limited, there will be larger incentive for people to re-enter the job market again.
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Finally, public social assistance programs are targeted mostly at poor people in order to redistribute income and improve life of people from the lowest income group. Pensions, social security, as well as unemployment benefits are delivered by the government to temporarily assist low income people, and other qualifying individuals during the periods when they are unable to work and earn income. There is evidence in the literature that social assistance programs substantially improve living conditions of poor people, increase their access to health care, education, and enhances their social life (Ahmad 112).
Personal Experience of the Impact of Public Assistance Programs and Social insurance
For many years, one of the biggest U.S. public assistance programs were food and nutrition programs to provide low income people in the country with opportunity to afford enough food for living. These programs are designed to protect people from starvation and at the same time they create demand on products of agriculture. Currently, major food and nutrition programs include school meals programs, Supplemental Nutrition Program for Women, Infants, and Children, and Supplemental Nutrition Assistance Program. These programs are targeted at people who cannot afford purchasing of food on their own means. I have personal experience of knowing people that have been involved in the food and nutrition public assistance programs. I have observed how people participating in the Supplemental Nutrition Assistance Program did not only receive opportunity to have food. At the same, they have been taught basis of healthy diet and lifestyle.
To sum up, it is clear that income inequality is a driving force and facilitator of economic development. It has existed in the society for many years. Income inequality is different both across and within countries. At the same time it changes over time, irrespective of its level. Hence, government is redistributing income and financial resources among people to avoid to big differentiation among people. Primarily government is achieving redistribution with the help of various public assistance programs and social security that provide for the basic needs of people.
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