Question

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

Short answer

The main reasons economists give for the increase in income inequality are: 1) Technological change, which benefits highly skilled workers while displacing low-skilled laborers; 2) Globalization, which exposes low-skilled workers in developed countries to wage competition from abroad while benefiting highly skilled workers and capital owners; 3) Changes in labor market institutions and policies, such as the decline of labor unions and shifts in minimum wage laws; 4) Changes in tax and transfer systems, which have become less progressive and disproportionately favor the wealthy; and 5) Increased income from capital, which benefits the wealthy and further widens income inequality.

Step-by-step solution

1. Technological change

Technological advancements and the rise of automation have played a significant role in widening income inequality. As technology rapidly advances, it benefits highly skilled workers who can adapt and utilize the new tools, while low-skilled laborers face displacement due to automation of jobs. Additionally, the rapid growth of tech industries creates a high demand for skilled labor, leading to increased salaries for this particular group of workers.

2. Globalization

Globalization had led to increased trade, foreign investment, and offshoring of production, which has in turn affected income distribution. The integration of world economies and the growth of emerging markets have created a situation where low-skilled workers in developed countries face increasing wage competition from low-cost workers abroad. In contrast, highly skilled workers and capital owners benefit through opportunities to expand their markets and investments.

3. Changes in labor market institutions and policies

Changes in labor market institutions and policies, such as the decline of labor unions and shifts in minimum wage laws, have contributed to income inequality. The declining power of labor unions has made it difficult for low-skilled workers to bargain for higher wages or improved working conditions, leaving them at a disadvantage compared to high-skilled workers who possess more bargaining power due to their specialized expertise.

4. Changes in the tax and transfer systems

Over the past few decades, there have been changes to tax policies in many countries that have disproportionately favored the wealthy, such as reductions in top income tax rates and corporate tax rates. As a result, the tax system has become less progressive, placing a lighter burden on the wealthy while reducing public funds available for redistributive programs like education, healthcare, and social benefits.

5. Increased income from capital

There has been a significant rise in income from capital (such as stocks, bonds, and property) relative to income from labor in the past decades. This trend disproportionately benefits the wealthy, who typically own more financial and physical assets. Capital income typically has a higher return than labor income, which leads to an increased concentration of wealth at the top and further widens income inequality. In conclusion, there are several main reasons for the increase in income inequality, including technological change, globalization, changes in labor market institutions and policies, changes in tax and transfer systems, and increased income from capital. Understanding these factors is essential for analyzing the problem and proposing potential policy changes to address this issue.