Effects of Income Inequality on Economy
Income inequality is a problem that is today affecting almost every economy across the globe. Income inequality is a phrase that is used in reference to the uneven distribution of individual or household income among a given population. In simple terms, it can be referred to as the gap between the rich and other people forming the population. In most countries today, the gap has been viewed as continuously widening, creating different impacts on their economic muscles.
Income inequality can have various kinds of effects on an economy. However, it should be noted that the greatest effect of income disparity is economic instability. In fact, income inequality greatly curtails the growth of an economy since it creates differences in the spending habits of the entire population. Those who usually earn much less often tend to spend more on consumables compared to those in the high-income brackets. As a result of this, those in the lower income brackets are unable to grow economically since most of their earnings or profits are used up in consumption. Since the low-income earners often use most of their earnings on consumables, they are unable to save or even acquire credit facilities as a means of raising their economic standards.
The above argument has also been cited by some economists who say that in one way, income disparity can fuel economic growth. According to their argument, a greater portion of the rich’s income is not spent on consumable; instead, they tend to save and invest more. As a result of this, there is expected economic growth due to the increased investments made by those with high incomes over the years.
Income inequality is viewed by most people to be a result of government policies that impact an even distribution of income among its population. One of such policies is marginal top tax rates cuts, weakening of unions and persistent unemployment. With cuts in top tax rates, there are minimal wage increases and little capital improvements. However, it facilitates spending on high-end goods, thus widening the gap between the profit seeker and the wage earner. The overall result of this is an increase in the levels of income inequality and suffering on economic growth.
Persistent unemployment is yet another scenario of income inequality. When the rate of unemployment keeps rising, there is a redundancy of earnings, meaning that the wages remain stagnant for a very long period of time. Even if they increase, it is often with a very little percentage. Besides, any labor gains in productivity are simply passed on to those at the helm of the industries. Thus, the low-earners shall remain poor while the owners of the industries continue to enrich themselves. In most occasions, it is viewed that certain governments initiate policies that enable companies to profit by maintaining high levels of unemployment. This continued income disparity can significantly harm economic growth in the long term.
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