What are the causes and consequences of inequality and poverty?
Consequences for economic growth
Inequality of opportunities
Globalization and technological progress have affected different types of labour differently
People's life opportunities are shaped by their birth conditions and subsequent circumstances. Those born into affluent families often enjoy better health, education, and employment prospects, allowing them to realize their potential. In contrast, those born into poverty face numerous challenges, including inadequate nutrition, limited education, and fewer job opportunities. This perpetuates a cycle of poverty, hindering social mobility. The OECD reports a decline in both intergenerational and intragenerational social mobility in many countries, attributing it to unequal opportunities. Developing countries face even greater challenges, with children in poverty having minimal chances to improve their living standards.
Discrimination
Different levels of ownership of resources, particularly the unequal ownership of capital
Inequality arises from unfair treatment or discrimination based on factors such as gender, race, ethnicity, age, religion, sexual orientation, or socio-economic status. This discrimination affects both opportunities and outcomes. For instance, lower-income children face unequal educational opportunities, limiting their access to higher-paying jobs. Wage discrimination exacerbates inequality, occurring when workers in similar roles receive different pay based on irrelevant characteristics like gender, race, or age, rather than skills or productivity.
Differences in human capital
Simple economic theory suggests that a person's income is influenced by the supply and demand for their specific skills. If there's a higher demand for highly-skilled professionals, like computer engineers, compared to unskilled labor, the wages of the former will be higher, resulting in inequality. This can be justified as a reward for the investment in their human capital. However, in recent decades, the wages of skilled workers have risen faster than those of unskilled workers, contributing to growing inequality. Additionally, weakened trade-union power in many countries has reduced job security and protection for low-skilled workers, leading to further income disparities.
Ownership of physical capital, like companies, allows people to earn profits, while financial capital, such as shares, yields dividends. Higher incomes often correlate with more capital ownership. Conversely, lower-income individuals rely mainly on wages. Recent trends show that profits and share values have outpaced wage growth, contributing to increased wealth concentration among the affluent.
Global trade and widespread company production relocation reduce demand for manufacturing workers in developed countries. Technological advancements replace skilled labor with machinery, leading to depressed wages and rising structural unemployment among manufacturing workers. However, sectors like finance, technology, and electronics demand skilled labor, causing incomes in these professions to rise. This phenomenon, termed the "hollowing out of the middle class," results in a small percentage earning high incomes, a larger group on low incomes, and a diminishing middle-income population, exacerbating inequality.
Market-oriented, supply-side policies
In the 1980s, market-oriented supply-side policies gained popularity in the UK and the US under leaders like Margaret Thatcher and Ronald Reagan, coinciding with a rise in inequality. Financial market deregulation, a key aspect of these policies, increased income opportunities for the wealthy but is also implicated in the 2007 financial crisis due to heightened risks. Labour market reforms, aimed at reducing union power and increasing flexibility, led to depressed wages and the growth of non-standard employment, including precarious arrangements like zero-hours contracts. Non-standard employment presents risks such as job insecurity, lower earnings, uncertain hours, and limited access to social security benefits, as highlighted by the International Labour Organization (ILO).
Government tax and benefits policies
Many countries have witnessed a decline in the top income tax rate, benefiting higher-income individuals. Corporate profits are often taxed at lower rates than individual income, favoring capital owners. Additionally, governments tend to tax savings, dividends, and capital gains at lower rates than wages, further benefiting higher incomes and wealthier individuals. The adoption of austerity policies, aimed at reducing public debts, has led to reduced government spending, impacting income redistribution programs and worsening the standards of living for lower-income individuals.
Unequal status and power
In economies where resources and income are concentrated among a small percentage, wealthier individuals wield disproportionate influence over government policies. Political candidates relying on donations from the affluent may prioritize policies benefiting their supporters, such as reduced minimum wages, relaxed business regulations, and tax cuts for the wealthy, adversely affecting lower-income individuals. Furthermore, low-income people are less likely to participate in the political process due to factors like background, education, social networks, and time constraints, resulting in inadequate representation of their interests in government policy.
The relationship between inequality and economic growth is debated extensively. While large income gaps can incentivize entrepreneurship and innovation, a more equal society may lack such incentives. Some argue that high inequality hampers growth by limiting opportunities for lower-income individuals, leading to a detrimental cycle of poverty. Children from poorer backgrounds may lack skills, lowering productivity and impeding economic growth. The OECD emphasizes that a population unable to invest in skills is detrimental to the economy. Additionally, the social and political instability associated with high poverty levels can hinder growth. Many economists assert that inequality is damaging not only for the poor but for everyone.
Consequences for living standards and social stability
Wide income gaps logically result in a degree of poverty for those below the average income level, leading to low living standards and economic vulnerability. Poverty involves difficult choices and constant stress, affecting essential aspects like heating, rent, and children's needs. In unequal societies, neighborhoods become associated with income groups, perpetuating disparities. Concentrated government-subsidized housing in specific areas deepens the concentration of low-income residents, limiting education and opportunity. High inequality contributes to social instability, fostering resentment, criminal behavior, and tension, especially when young people feel jobless and disenfranchised. A significant population in relative poverty can erode support for the political system, creating an unstable social and political climate. This underscores the harmful impact of high inequality on everyone.