Why Does Income Inequality Exists?

1 January 2017

Why does income inequality exist? Income inequality, also known as economic inequality or wealth and income differences typically refers to inequality among individuals and society, but it can also refer to disparity among countries. There are many reasons for this phenomenon to happen within the societies, most of them are often inter-related. However, we could say that the most important factor that causes greater income inequalities are wages and salaries. The determination of wages by the market is a major cause of economic inequality.

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Wages work in the same way as price and by applying the law of supply and demand, the wage is determined by the race between the demand and supply of skilled workers. When the demand of skill surpasses the supply of that particular skill, we would expect that the market will offer a higher wage or price in order to persuade the skilled worker to work with them. The price of the skill will fall however, if there is an oversupply of that skill and seems like that the market won’t be needing too much of them. The competition of the employees for the employees will drive up the wage hile the competition of many willing workers for a job will drag down the wage.

Therefore, the law of supply and demand has significant effect in the modification of wage level within the society. Many people believe, and we do too, that innate abilities and attributes, such as intelligence, motivation, strength and charisma, play an essential role in the income inequalities. Every individual were born with their own unique abilities, skills, talent and forte. People who have high abilities would act and operate more accurately and effectively in the society regardless of the labor market.

A person who was born with a talent in the field of arts would most likely to succeed and earn more if he had correctly chosen that career path. A mediocre or a hobbyist writer would probably be looking for a sponsor or publishers but a talented one is another story, the latter would be sought out by publishers instead. In some materials and references we’ve found, it was said that another cause of income inequality is taxation. However, we’ve also encountered some essays, statements and studies disagreeing with this, claiming that they do not believe that taxation has created chasm of wealth between the rich, middle and lower class citizens.

We may agree that tax contributes to income inequality given a different situation and taxation system The technological changes, computerization and developing applied sciences also influence the economic inequality for the manpower is being replaced by electricity. This will lead to a higher demand for skilled workers to use computers and operate electrical machineries and equipment and would eventually increase theirs and other relative wages while the unskilled workers’ salaries would not. Hence, as the level of technology rises the income inequality is likely to continue.

Speaking of skilled and unskilled workers, here comes another factor- education. It is also one of the important factors that create income inequality. In school and trainings knowledge, skills, talents and abilities is being developed and instilled, making the person to be more worthy as an employee to the employer. A college graduate earns and receives higher pay compared to a high school grad or one that have attained nothing at all. This happens especially when an area or an industry requires a skilled worker, one that was knowledgeable with the work; this creates high wages for those with education.

As a result, those, who were not able to afford education or had chosen not to pursue generally receives lower income. We could also relate family structure in this, because there are people who would like to be educated but are not capable of paying certain fees, daily allowances and other attributable expenses. There are also struggling families, single mothers and single fathers. Although some single mother claims they can do better without their partner; some families better off without a father or a mother; having one parent at home is an indicator that a family would have low income.

But having both parents at home couldn’t still guarantee equality either way. At worst, a person marries their peers which make it two professionals of the same job at home thus the two gets minimum wage if the situation calls for a lack of demand of their profession. Another cause of the existence of wealth and income differences is the wealth concentration which is also known as wealth condensation. This refers to a theoretical process by which under certain conditions, newly-created wealth concentrate in the possession of the already-wealthy individuals in the society.

As for example, those who have capabilities and rich can make investments and save up great fraction of their income thus, accumulating their chance of getting even richer. Another one is the use of family inheritance, and individual may receive wealth from their family and would be able to establish eventually his own business therefore increasing their income. Those who owns a business would earn more income and the workers or his employees make a lesser wage and therefore unable to build his own build his own to increase his income. Globalization is also a factor in income inequality.

This term refers to the increasingly global relationships of culture, people, and economic activity. This contributes in the economic growth of developed and developing countries. As an outcome in the competition created in the trade between the rich and poor countries, the wages of the unskilled worker in the rich country would be reduced while the pay for the unskilled worker in the poor country would increase. Race, culture and religion could also be an ingredient in the income differences. Some encourage wealth-acquiring behavior, some do not.

Some provide basis of discrimination and racism proven by the fact that in some countries, people who belong to a certain ethnic and racial minorities are more likely to be poor. There’s also a gender income gap which favors males in the labor market. There are more than discrimination for this gap to happen, there are reasons like female considers not only the pay but also the circumstances when at work. Men are more likely to accept an adventure-packed job, they are risk takers and are more willing to travel and relocate when the job calls for it.

Women are less willing and do not take the job due to marriage or pregnancy. Males are more engaged in dangerous occupation which usually pays up more than ordinary job. And prior to the previous paragraph, risk taking is also a factor in the economic inequalities. Individuals do not all have the courage to take up job which are risky; they are not all alike, willing to take a step forward or backward in a whim. It can be consider reckless at times but it was said that risk takers do well and rise to the top of the income distribution, some falls to the bottom though.

Those who prefer playing safe are said not to be likely to reach the top. We also think that those who have taken risks and succeeded would actually be more confident in the future which is an added bonus, because confidence and boost of ego would be a useful tool in acquiring other jobs and earning the trust of their employers. The next factor is related to the culture and gender issues. Diversity of preferences within a society often contributes to income inequality.

For example, two equally capable individuals with identical earning potential might choose different strategy and paths to earning income; accordingly there would be an income differences. The trade-off between work and leisure is also important. One might choose to have more work which means less leisure for them while the other might choose the contrary. When equally able individuals undertake risky activity such as starting a new business, some succeeds and some fails; and the presence of both successful and unsuccessful feat in the society results in economic inequalities even though the individuals are identical.

We have also encountered other acknowledged factors that impact inequality in income which includes: policy reforms, development patterns, economic neoliberalism, inflation, mobility, rising proportion of urban household and age distributions. These many reasons and factors all contributes and explains how and why economic inequality existed and still existing, either they are due to cycles in the market, voluntary actions or not.

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