Chapter 15: Problem 27

What are the main reasons economists give for the increase in inequality of incomes?

Short Answer

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Income inequality has increased over the last several decades due to several main reasons: globalization, which has led to greater competition and wage suppression; technological advancements that have increased the wage gap between skilled and unskilled workers; decline in labor unions, leaving workers with less bargaining power; changes in tax policies that disproportionately benefit the wealthy; and the growing education and skills gap, which has limited opportunities for those with lower levels of education.

Step by step solution

Introduction

Income inequality refers to the unequal distribution of income among a population. This has been a growing concern among economists in recent decades, as the gap between the rich and the poor continues to widen. Here are some of the main reasons offered by economists to explain this increase in income inequality.

Globalization

One of the significant factors contributing to income inequality is globalization. As economies become more integrated, competition in the market increases. This can lead to job losses in high-cost countries and wage suppression since workers in low-cost countries often receive lower salaries. As a result, the incomes of people in different countries are becoming more unequal.

Technological advancements

The rapid advancements in technology have had a significant impact on income distribution. Highly skilled workers who can take advantage of new technologies have seen their incomes rise, while those with less skills have not seen the same benefits. In other words, technology has increased the wage gap between skilled and unskilled workers.

Decline in labor unions

Labor unions have historically played a significant role in promoting income equality by advocating for higher wages and better working conditions for workers. However, over the last few decades, the influence and membership of labor unions have been in decline. This has left workers with less bargaining power, leading to stagnating wages and increased income inequality.

Changes in tax policies

Many countries have adopted tax policies that disproportionately benefit the rich, such as reducing top income tax rates, lowering capital gains tax rates, and offering tax breaks to corporations. These policies contribute to income inequality by allowing the wealthy to accumulate more wealth while the middle and lower classes see little relief.

Education and skills gap

There is a growing divide between individuals with high levels of education and those with lower levels of education and skills. Those with a higher level of education generally have access to better-paying jobs, while those with lower levels of education face limited employment opportunities or are forced to accept low-paying jobs. This disparity in access to quality education and skill development has significantly contributed to income inequality. By examining these reasons, we can gain a better understanding of the main factors that have led to the increase in income inequality over the last several decades.

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