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The Features Of Income Inequality Drivers

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This essay will deal with the drivers of income inequality across households within nations. It is vital to understand household income and what income inequality is before discussing the drivers behind the variations in earnings. This essay will give a brief outline on what income inequality is before taking a look at the influencing factors. The main drivers that will be examined are globalisation, taxation, labour markets and skill-biased technology. It will answer the question: can they create a vulnerability to Famine? The reality of the situation is that globalisation is leaving third world countries with low skilled workers vulnerable to deprivation. It will look at the clear links between multinational value chain activities and income inequality within and between nations. The links show how these global value chain activities are, because of governance, mainly controlled by groups of developed-world firms.

In order to discuss and evaluate the drivers of income inequality, we must first understand exactly what income is. For the purpose of this essay we will focus on household income. Household income is the collective money earned by each member of the household through means of work or benefits and returns on any asset owned by the household, for example investments. The model Y = f (L, H, K, I, T), where Y is value added, L is land, H is labour, K is capital, I is raw material and T is technology, can be used to express income in a mathematical formula. Income inequality is a common issue within and between nations. This is an extreme concentration of wealth or income in the hands of a small percentage of the population, often described as the gap between the richest and the rest of society (Kopp, 2019). For example, in the Unites States of America, the richest 1% of the population possessed 38.6% of the nation’s wealth in 2016 according to a Federal Reserve report, stated Kopp (2019). Figure 1.0 below shows the difference in the percentage of income in the United States between the top 1% and the bottom 50% of the population in the last 40 years. There are two mains theories of poverty; poverty is individual or poverty is structural. These theories are based on right-wing versus left-wing politics. To believe that poverty is individual is to believe that people experience poverty because they are lazy and uneducated. To believe that poverty is structural is to believe that people experience poverty because they get temporarily trapped in holes in the economic system.

Evidence indicates that globalisation and technology increase returns to human capital by showing that the ability to adapt to growing information technologies and expanding markets is not reflected in the premium for years in education like people would expect, but in the returns to observable qualities such as ability and adaptability (Stolk et al., 2011). When talking about labour markets affecting income inequality, there are two main categories to focus on; changes affecting supply and changes affecting demand. Stolk et al (2011) looks at trends in education that affect the supply, specifically how the source of education-related inequality is the growth of disparity within the education groups rather than across different education groups. When looking at the labour demand, some of the most prominent drivers of income inequality are globalisation, taxation, labour market institutions and technology. It has been shown that financial globalisation increases income inequality indicators. Stolk et al (2011) states that the financial globalisation driver in income equality stems from the fact that FDI is associated with investments in high-skilled and technology intensive sectors which leads to an increase in wages for those workers, which widens the income distribution.

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While these drivers are responsible for income inequality, they can also be the solution to this worldwide problem. Trade globalisation reduces measured income inequality (Stolk et al., 2011). Low tariffs have been seen to reduce the variation of income, which benefit the disadvantaged in our society because the type of goods associated with these tariffs are bought by underprivileged people. It has also been demonstrated that better tax systems have been shown to have correlation with less inequality in post-tax incomes. When you look at the GDP-to-export ratio, the majority of this ratio can be related to agriculture, which is associated with the less wealthy population. Therefor an increase in this ratio has a decreasing effect on income inequality. To compress the widening income gap, trade unions introduced policies to reduce income inequality between high-skilled and low-skilled workers. Labour market institutions are a heavy factor with relation to income inequality. The centralisation of these labour markets by trade unions has seen a decrease in the variations of pay. Unions reduce income inequality by compressing wages so that the wage gap between skilled and unskilled workers is smaller than outside the union (Stolk et al., 2011). This gives low-skilled workers incentive to join these trade unions, however, it is harder to keep high-skilled workers in the unions when they can negotiate better pay outside it. Less productive workers benefitted more from a centralised system so in order to maintain membership unions had to take a more decentralised approach (Stolk et al., 2011). This defeated one of the main aims of the trade union, which was to minimise the pay gap between high-skilled and low-skilled workers.

This essay deals with the question: can these drivers create a vulnerability to famine? To answer this question, we must first have a clear grasp on what famine is. Famine occurs when there is a life-threatening lack of food. However, Devereux (2001) argues that food insecurity affects people who cannot access adequate food irrespective of food availability and that a famine can occur even if food supplies are adequate and markets are functioning. Basically, famine can affects those in lower social classes, because of the drivers of income inequality, rather than actual lack of food. In Poverty and Famines, Sen recalculates data from four famines to demonstrate adequate food availability and negligible decline from pre-famine food availability and exchange entitlement collapse for specific population groups as a proximate cause of famine (Devereux, 2001). Globalisation, while providing a range of opportunities, still holds a threat in society. A narrower purely market-orientated globalisation gained ground in the 1980’s benefitting those who were already economically strong but distributing the benefits extremely unevenly and aggravating the situation for many vulnerable people (Eide, 2008). Globalisation helps those already in a position of success. In most developing countries, the truly vulnerable groups do not have the strength to resist the pressures of market globalisation so they are nether protected against the harmful negative consequences arising from international trade on their established sources of livelihood, nor do they achieve the positive benefits that could have resulted for them had all trade barriers and subsides in developed countries been eliminated (Eide, 2008). Without the benefits of globalisation, these groups of people are being left behind and are the ones experiencing poverty. Their income becomes smaller and smaller until they are at the lower end of the pay gap. This leaves them vulnerable to famine. It is not the case of food being scarce or unavailable, but rather that they simply cannot afford to feed their families. If you look at the famines that have occurred in the last 20 years, the majority have occurred in third world countries such as Niger and South Sudan. Initiatives such as fair trade have been put in place to attempt to help close the gap on income, but until a solution is found to the negative effects of globalisation, not much will change.

There is a clear link between multinational value chain activities and income inequality within and between nations. Global value chains can often leave third world countries less well-off then first world countries. Understanding how these value chains operate is very important for developing-country firms and policy makers because the chains are structured has implications for newcomers (Gereffi & Kaplinsky, 2001). Many industries access value chains by interlinking with multiple other firms through networking. This can alienate new firms, mainly from the developing world, and leave them vulnerable to the negatives of globalisation, which have been outlined above. Governance is a central concept to value-chain analysis as the starting point for interest in global value chains is the fact that some firms directly or indirectly influence the organisation of global production (Gereffi & Kaplinsky, 2001). They take decisions that have important consequences for the access of developing country firms to international markets and the range of activities these firms undertake (Gereffi & Kaplinsky, 2001). The leading firms in these value chains manipulate the market to suit their needs so that they benefit, leaving third world countries with very little benefits. Because a lot of raw materials come from developing countries, for example cotton, the prices for the raw materials are very low. Farmers receive very little profit, which contributes to the income inequality seen worldwide. Not only are first world multinational companies receiving large profits from price mark-ups, but they exploit the providers of the raw materials and pay them very little. This creates the huge income inequality between nations. This is why the Fair Trade initiative is so popular. Its aim is to protect farmers and other workers from the developing world. However, the problem of income inequality because of global value chains is being slowly corrected. Countries are seeking workers in third world countries because it is cheaper to source labour there. Offshoring low skilled tasks leads to a productivity boost to this type of labour and therefore an increase in their wage reduces the gap between high and low skilled wages (Lopez Gonzalez et al., 2015).

I hope that this essay dealt with the drivers of income inequality, famine and the links between multinational value chain activities and income inequality in a clear and efficient way. It is important to note that, while most drivers have a negative of the distribution of income, there are some drivers that help to reduce this inequality. The main examples of this are trade globalisation and centralisation of the labour market. The beginning of this essay posed a question: can these drivers create a vulnerability to famine? The short answer to this question is yes. Third world countries are the most susceptible to famine and, unfortunately, developing countries are also the ones that receive most of the negative impacts of globalisation. This essay also showed how there is a clear link between multinational value chain activities and income inequality. This is mainly down to governance and lack of fair trade because of overcrowded markets. However, there have been improvements and a compression of this income gap, which sheds light on the future. Changes in the distribution of income are not only an important economic phenomenon but also a formidable social and political challenge ( Lopez Gonzalez et al., 2015).

Bibliography

  1. Kopp, Carol. (2019) ‘Income Inequality Definition’, Investopedia, 24 March. Available at: https://www.investopedia.com/terms/i/income-inequality.asp. (Accessed on 1 April 2019).
  2. Stolk, C., Hoorens, S., Brutscher, P., Hunt, P., Tsang, F., & Janta, B. (2011). ‘Examining income inequality in the EU’ In Life after Lisbon: Europe’s Challenges to Promote Labour Force Participation and Reduce Income Inequality (pp. 27-38). Available at: https://www.jstor.org/stable/pdf/10.7249/mg1068re.10.pdf?ab_segments=0%252Fdefault-2%252Fcontrol&refreqid=excelsior%3A5e2fb4222700e18971df461b367e1fe9.
  3. Devereux, S. (2001) ‘Sen’s Entitlement Approach: Critiques and Counter-critiques’, Oxford Development Studies, 29(3). Available at: https://www.sas.upenn.edu/~dludden/FamineMortality.pdf. (Accessed on: 4 April 2019).
  4. Eide, A. (2008) ‘The Human Right to Food and Globalisation’. Available at: https://www.worldhunger.org/human-right-food-contemporary-globalization/. (Accessed on 4 April 2019).
  5. Gereffi, G. & Kaplinsky, R. (2001) ‘Introduction: Globalisation, Value Chains and Development’, IDS Bulletin, 32(3) pp 1-8. Available at: http://oro.open.ac.uk/8560/1/fulltext.pdf. (Accessed on 6 April 2019).
  6. Lopez Gonzalez, J., Kowalski, P., Achard, P. (2015) ‘Trade, Global Chains and Wage-income Inequality’ OECD Trade Policy Papers, 182 pp. 1-62. Available at: https://read.oecd-ilibrary.org/trade/trade-global-value-chains-and-wage-income-inequality_5js009mzrqd4-en#page1. (Accessed on: 6 April 2019).
  7. WID world (2017). Available at: https://www.vox.com/2018/7/29/17627134/income-inequality-chart. (Accessed on 6 April 2019).

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The Features Of Income Inequality Drivers. (2022, February 21). Edubirdie. Retrieved November 29, 2022, from https://edubirdie.com/examples/the-features-of-income-inequality-drivers/
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The Features Of Income Inequality Drivers [Internet]. Edubirdie. 2022 Feb 21 [cited 2022 Nov 29]. Available from: https://edubirdie.com/examples/the-features-of-income-inequality-drivers/
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