ECON 4331W
Introduction
The phrase "the rich get richer while the poor get poorer" has become a worldwide anthem at many political and economic forums. While these facts are actually true very few or practically no one goes forward to act in a manner seen to strike a balance if anything many individuals are individualistic and greedy. Elite economists from IMF recently released a study on the causes and consequences of rising income inequalities. It is believed as a result of income inequality there could arise a myriad of complex problems, most of which touch and significantly impact upon the economic growth of different states in the world. It is estimated that for every one percent increase in the income distribution share to the top 20% will drag down the economic growth by 0.08 percent in a span of five years, whereas a similar increase of 20% among the bottom earners will result in significant economic growth. Economists believe that income inequality is a "necessary evil" and acts as a propeller of economic growth. Income inequality acts as a motivating factor that significantly contributes to great financial rewards, innovation and entrepreneurship ventures.
Arthur Okun, an American economist in 1975, argued that “Societies cannot have both perfect equality and perfect efficiency, however, they must choose how much of one to sacrifice for the other" (The Economist). In this concept, he named it as the Opportunity cost of foregoing the comfort of having equal wealth by all residents of a state. To date, most economists hold on to this view prompting further research into the economic costs arising from these income inequalities within the economy. Income inequality does impair economic growth, especially where individuals or countries with low incomes are affected by poor health which leads to low productivity. Another factor that may contribute to the existence of this gap is the fact that the working population in some countries is too little compared to the dependent population, thereby bringing the productivity of the country down. Moreover, income inequality threatens the public confidence and financial security in handling in growth-boosting policies like free trade, entrepreneurship risks among others. Also, income inequality leads to economic and fiscal instability within affected countries. Most governments, however, respond to the concern of income disparities by enabling credit flow to poor households such that these individuals are empowered to engage in money generating startups that improve their level or standards of living. Recent research reveals that most American households borrowed heavily in anticipation of the financial crisis in a bid to prop up their consumption. Economic gurus such as Ben Bernanke and Larry Summers argue that income inequality may also contribute to the world's "savings glut," since the rich are less likely to spend an additional dollar compared to the poor. Therefore, as savings grow, there is a progressive interest rate fall which boosts asset prices and positively encourages borrowing which makes the work of Central banks complicated in their earnest effort to manage the economies.
In the 21st Century, the relationship between income distribution and economic growth has become significantly intertwined and inseparable. Most world economies are majorly dependent and run by their earnings generated inside or outside the countries' borders by the citizens or investments. The relationship between the aggregate output and income generated is quite central in macroeconomics and determines the external business environment of entities within a country. However, in the new millennium the crest of the globalization age it has been characterized by several economic crises and recessions, which greatly have implications on income inequality. Therefore, it is necessary to conduct a thorough analysis of the link between income inequalities as related to the economic growth. Furthermore, the existing and documented empirical evidence does not explicitly clarify the shared relationship between these two phenomena; income inequality and economic growth. While it is evident that relationship between the income inequality and growth has changed with time significantly. This research study attempts to determine whether the determinants of economic growth and those of income inequality have changed with time.
Literature Review
The relationship between income inequality and economic growth is not conclusive. Studies conducted by economists over time reveal that there exist adverse effects on economic growth through income inequality. Income disparities within the United States have grown rapidly over time demanding considerable attention from economists, scholars, and policy and decision. However, despite the fact that America enjoys the rapid economic growth compared to other large industrialized economies, inequalities in the distribution of income have grown faster and are evidenced by the quality and standards of living in the United States. Moreover, with productivity, the economic growth is at a significant high while the levels of income inequalities among the American workers are seen to reap no meaningful benefit from the economic expansion. However, there are disparities among the top earners and bottom earners within the American society which saw the levels of income inequalities increase.
Income poverty can be considered as the phenomena of two significant reasons that are; the average income level and the distribution of the income among the participating families and individuals. Therefore, holding the income levels constant, poverty generally will be more severe when earnings are distributed unevenly (Kanbur, 2005). The outcomes of poverty incidences and the depth of the incidence vary from country to country. The countries that have comparable incomes have major differences in the outcome. The level of average income has huge impacts on the economic growth. The economic growth works as the determiner for the mean income.
The initial distribution of all incomes provides equal and better platform to decrease the poverty and inequality inside a country. The economic growth also plays an important role in this case when the money obtained are shared equally with the public and used for further improvement of the country resulting in long-term returns from the capital.
Analysis
Survey:
The survey is one of the important parts of conducting any research. The survey part consists of collecting information about the subject and continue to analyze and draw results. The data collection always requires the correct data in order to perform an analysis that should be accepted and will be able to provide better results from the conducted survey.
The purpose of this paper was to find out about income inequality and economic growth. Different countries are picked to be used as subjects of this research. The paper should look at the GINI and other data of the countries to determine the inequality levels. The GINI coefficient describes the level of inequality that exists in a country. The GINI coefficient works as the indicator of inequality. It has some rules of measuring inequality. It takes the average income, number of people under minimum wage, the number of poor people and many other economic details into consideration to get the results. The paper focuses on a total of 20 countries. The result should be delivered from the GINI index of the 20 selected countries. It will also include some other important factors that will be used to determine a better income.
The research process began by browsing the country lists at the early stage. The country lists were viewed by well-developed countries and poor nations. There was a total of 20 samples collected in the process of data collection. The next part of the research has focused on further investigating the economic conditions of the countries. The result would show the inequality levels of the countries. It also focuses on the income growth of the selected countries to generate a better outcome.
Theoretical Analysis:
Over the years, economists have mentioned that inequality in the income level of people in a particular population to be one of the reasons of economics backlog. This is attributed to the rise in vices such as robbery, corruption, and other unmentioned vices that are as a result of the same. Over the years, economists and statisticians have been working to see the equality in the distribution of wealth and incomes in a particular economy to no avail.
Another factor that came out of the study is the fact that some employees are simply content with their current levels of employment and income levels. This is evident in the fact that some of the individuals approached to provide information stated that there is nothing else that can be done apart from allow the employment systems to work the way they were designed by the managers. The gap may be brought about by the value of the professions one chooses to take as well as the amount of knowledge one may be having or may acquire. The means of acquiring wealth, income and earnings have also been diversified by the emergence of numerous industries. On the same note, it’s hard to have equal income levels.
There are no countries that have confirmed and recorded they have attained full equality. The GINI index indicator considers a country as having equal rights when the GINI coefficient is zero. The GINI coefficient varies from 0 to 1 or 100%. 1 is the highest number that indicates greater inequality. Inequality is major issue, and the statistics show that almost every nation has huge difference among poor and rich people.
The sample data for the research picked a total of 20 nations. The countries were selected on a random basis. There consisted of some first world, some 2nd world, and some 3rd world countries. The GDP and GINI are used as the two principal elements to conduct the research. The research paper picked the information about the countries listed and the real world situations of those countries to determine the GDP, net income and inequality rates in these countries. The research has taken the GDP per capita and the GINI index into consideration.
The data collected initially shows that China got the highest rating on the GINI index and Denmark got the lowest rating on the results. The research clearly states that China is in more trouble with the GINI index. The results clearly show that the GDP of a country doesn't have anything to do with income inequality. China has a bigger economy compared to Denmark. China has the world's 3rd largest population. China has numerous big businesses but that does not mean that all China’s citizens are covered. The businesses or other government workflows and expenditures can just contribute to the GDP, but cannot directly add to the citizen's income. However, the increasing amounts of GDP opens up the opportunities of attracting more businesses into the country and provide employment opportunities for the Chinese people. However, inequality will always be there unless all the resources earned are distributed properly and fairly.
Denmark had the lowest income difference in the list. The living standards of the people of Denmark is also far better than that of China. The country also has considerably less population than the other countries. The result indicate that Denmark divides its resources equally among the country’s population. The people receive their fair portion and utilize it to improve their lifestyle. The pay rates for the jobs in this country is higher compared to the pay rates in China.
The collected data clearly shows that the countries that have a less GINI coefficient always earn success while the countries that have a higher GINI coefficient fails to improve the lifestyle of the citizens. There are numerous differences in the income of people at different levels, and that brings many people of the country under the minimum wage. The higher GINI coefficient leads the poor individuals to a poorer lifestyle while the rich become even richer. The economic balance is mandatory in this case to rescue the country from further problems.
There are many countries in Africa and Asia with income inequality, but the developing nations have a higher inequality level. The results show that the poorer nations have a huge number of individuals living under the minimum pay rate, but there are also some individuals who own a significant portion of the capital in the economy. Corruption is the most common practice in these countries. That leads to a less progressive lifestyle to the citizens even after having large improvements on the GDP. The results of GDP can't be an indicator for the lifestyle of the country citizens. It can't be mentioned whether a country has income equality until a well-defined outcome is generated. A country can be said to be moving towards equality only when it progresses on the GINI index. The countries need to share the resources equally among the citizens of the country.
The country's economic growth is significantly impacted by economic inequality. The countries that lack equality fail to keep the trend of GDP growth in the long term. The population that grows under inequality brings significant problems for the country in the future in this type of scenario. The policy makers need to get to work and find solutions. This poses huge challenges for the country in future. The civil wars in the world are also caused by inequality and different initiatives taken to keep the people in darkness by revoking their fundamental rights. The countries that have provided equality are living in a more peaceful environment and share a common vision with the citizens to achieve some long term success goals while the countries with inequality look for ways of tackling the ongoing problems. It clearly indicates that equality is a much-needed factor for the economic growth of a country.
This paper will use the Solow model as the appropriate model to explain the economic growth dynamics. The model is a production function model that is primarily used to study the problems associated economic growth.
Extended Solow Model
The extended Solow model recognizes conditional convergence. It adds human capital to the core design. Human capital opens policies aimed at upgrading the education level of individuals which is ultimately beneficial to the overall growth of the economy. It also helps create higher productivity of the workforce in a country.
In the context of the Solow model constant saving has a central role in macroeconomics. It is, therefore, important to analyze the effect of income distribution on the general economy. The Solow model can be used to explain that income distribution is affected by the accumulation of wealth by some individuals. It helps us understand the essential basics of capital accumulation and the dynamics of income and wealth distribution. The model also assumes that income makes up a particular fixed fraction of a country's gross income. The model is also relevant in this case as it will help in determining whether income distribution affects the prices and value of capital goods in the economy.
The following equation applies to the model; y*=A(sKn+d+g)α1-α-β (sHn+d+g)β1-α-β
Where sK and sH represent the physical and the human capital respectively, while n, d, and g represent the rate of growth of the population and the rate of depreciation of the human and physical capital and the rate of technology growth. It indicates that increasing n, d, and, g leads to decreasing GDP per capita in the steady state level. In the steady state level, the equation indicates that increasing the human and physical capital, the population growth rate and the depreciation rate would result in a decrease in the Gross Domestic Product. On the other hand, increasing the physical and human capital results in an increase in the Gross Domestic Product.
Steady State Analysis
For the purpose of this paper, the extended Solow model will be modified to include an additional factor- income inequality (I). The following is the resulting equation;
Y= KαHβRγ(AL)1-α-β-γ α+β+γ<1
Y- Output
K- Physical capital
H-Human capital
R- Research Capital
A- Technology, and
L- Labor.
Looking at the equation the total output is determined by the different levels of research and development, physical and human capital. After converting the equation into logarithmic form the following is the resulting equation to be used for the regression analysis;
Log y*=logA+α1-α-β-γlogsK+β1-α-β-γ logsH+γ1-α-β-γ log sR-(α+β+γ1-α-β-γ ) logn+d+g
An increase in y* is as a result of the decrease in the sK, sH, and sR variables and the vice versa would also be true; a reduction would mean the variables have assumed a higher value.
logy*=α+ β1 logsK+β2logsH+β3log sR+β4 logn+d+g
Where;
α- intercept,
β1, β2, β3, and β4- Coefficients for each of the variables.
Data Analysis
Economic growth and economic equality are two different constructs that formulate different aspects of a country. The hypothesis for this analysis was that economic inequality will postulate delayed economic growth. The economic inequality was tested here via Gini index. We aimed at finding a measurement of economic growth unified across different countries. We decided to go with GDP per capita measured in USD.
This stage involved manual and computer-based analysis using Microsoft Excel and SPSS V16. Data received from the survey was processed in three stages:
1. Entering data - initial data was captured immediately after the field work.
2. Checking data which included: A visual examination of completed questionnaire forms; Arithmetic and logical data check during data entry; Arithmetic, logical and statistical verification of data in the array; and Check of calculated values of indicators.
3. Refining data which consisted of correcting any errors and inconsistencies that existed after checking the data entered. The data was tabulated and analyzed, and frequency counts, and cross tabulations were made for every question to confirm data accuracy.
[Table 1]: Summary Of The Income Owed By The Top 1% And The Annual Growth Rate Of The Top One Percent And The Annual Growth Rate Of The Top 1% Income Share
Above are the data and the results of the analysis
The data in the table above has a zero correlation coefficient, and this means the correlation is not perfect. The regression equation is simplified by the formula shown below:
Y=Bx-a
Considering that the data has a zero correlation, the regression of the data is found to be 3.1477. It can be seen from the results that there is not a significant correlation between economic inequality and GDP per capita.
[Figure 1]: Comparison of the GDP per Capita
Making a comparison of the GDP per capita amongst the countries produces the graph. This leaves USA having the highest GDP, therefore, showing a strong economy at the same time.
A comparison of the Gini report of all the countries also produces a graph that is skewed to the opposite direction as that of the GDP per capita. This is shown in the following graph.
[Figure 2]: Summary of the Comparison of the Gini Report of all Countries
OLS Regression Analysis
OLS Regression Analysis in Steady State Level
Again, the primary purpose of this paper is to investigate how the equality in the income of all the citizens of a particular economic zone would affect the economy of the area. Therefore, the sake of this analysis, this paper recalls the equation for OLS Regression Analysis:
logy*=α+ β1 logsK+β2logsH+β3logsR+β4 logn+d+g
The dependent variable for this equation is average GDP per working population between with four independent variables: sK, sH, sR, and, n+d+g. For this analysis, this paper makes the assumption that 34 OECD countries and 23 non-OECD countries reach the steady state level and that the countries are currently operating in a state of inequality of the incomes of all the state citizens and residents.
The question is here, why were there no associations between both? It could be argued that the GDP per capita is not an accurate representation of the economic growth. However, the more relevant one could be the fact that economies can be driven by a small group of wealthy owners without distributing economic benefits equally across the population.
The table below attempts to make an analysis of the question and come up with an answer based on the regression analysis.
[Table 2]: Summary of the Results of Regression Analysis
There seem to be several reasons for inequality. The main one could be the inaccessibility to economic growth opportunities by low SES members. One way of removing inequality is providing programs that allow impoverished members of society to not only work in low skilled jobs, but gain access to entrepreneurship opportunities. It will also require to get the skilled people from those SES members under the same place.
Reliability of statistics and figures is another crucial element in deciding whether this correlation is an accurate representation of the proposed relationship or not. Further analysis is needed with bigger samples. The investigation is completed here by taking a little number of samples to show some initial research results. The analysis with bigger data size and areas can be helpful to deliver much accurate indication.
Last but not least, we need more on ground organizations that work with economic empowerment mindset, providing accessibility to the market for their community members. They can help the community members to learn more about the necessity of economic equality and provide them the ways of obtaining that goal. They can work with the people of rural areas and help them to improve their lifestyle. The rural areas are the most concerned areas of a country that have a lower amount of income. The government programs and programs organized by NGO to improve the lifestyle of people can help to ensure equality.
Conclusion
In any given society, Inequality in the income of the population poses a challenge to the socio-economic aspect of life as a whole. This is because the generations will always come up knowing of an existent economic gap that will never end. The inequality is one of the common problems of many societies. It is essential to take the proper care of it by ensuring the resources are allocated to the every person in a country. It needs to be ensured that peoples are not eliminated from their fundamental rights, and every human right is ensured. Resource allocation in the economy may be one of the solutions that may be taken in order to achieve part if not total equality in the division of resources in an economy. The research shows that inequality is a major problem for countries in the world. It is the time to take steps and make equality for further progress of the country. The government of a country is the primary concerned institution to make the first move in this case. The awareness of government is mandatory in order to achieve the desired goals. It is expected that the government supports and voluntary works can be helpful to a great extent to increase the equality rate. The research concludes that GDP of a country don't drive the inequality rate as inequality depends on other factors too. The inequality can bring dangerous future for a country, and it is a necessity to ensure equality for a smooth move to be a more developed nation.
APPENDIX 1: QUESTIONNAIRE
THE STUDY QUESTIONNAIRE
The aim of this questionnaire is to conduct an analysis of the current state of the economy in your state and to assess the equality in income of each member of the population. The questionnaire also aims at evaluating the challenges faced by the communities in the economic chain and to establish a means of achieving equilibrium in the distribution of wealth in the state. In a nutshell, the questionnaire seeks to analyze the opportunity cost control needs for the successful establishment of the equilibrium in the economy and distribution of incomes.
QUESTIONS FOR STAKEHOLDERS IN THE ECONOMY OF THE STATE
Thank you for taking your time to take this interview. I would like to assure you that your response to the questions will be kept confidential, and your feedback will only be used for research purposes. Please answer all questions by ticking where the answer is appropriate.
DEMOGRAPHICS
1. Where among the following classes does your age fall?
15-20 years
21- 25 years
25- 31 years
31-35 years
Above 35 years
2. For how long have you been working in your current industry/ firm/ organization?
0-3 years
3-6 years
5-8 years
8-11 years
More than 11 years
RESEARCH QUESTIONS
3. Where would you classify your income as compared to all other workers who you work with in the firm/ organization you currently work for?
Peanuts/ very low
Medium earnings
Not little not much
Cannot complain
Enough
More than necessary
4. What is your current position in your company?
Senior management
Sales person
Technician/ machine operator
Research and product development
Other (please state) .
5. Is there any notable difference in the lifestyle you live as compared to the other employees you work with at different job levels earning different salaries?
Yes
No
Other (please give a brief description) .
6. In your opinion what is your most preferred level of income and work that you would love to achieve?
Management
Laborer
Accounting
Manufacturing/ operations
Transport and logistics
Not sure
Other (please state) .
7. What measures can be takes by your firm/ employer in order to reduce these discriminative measures that exist in the different job groups and to ensure equal treatment in incomes and in lifestyles?
Introduce new systems of management
Using information systems and computerized systems (eg. Cameras)
Reducing the number of employees
Having a fixed and strict budget for financial years
Nothing can be done
Others (state)
8. What is your level of satisfaction on a scale of 10 with your current level of income and your current level of employment?
Where 10 is very satisfied and 1 is completely dissatisfied
1 10
Thank you for taking part in this study. I would like to ensure you that the questions and your answers will only be used for study purposes. Your name and details will remain confidential to the study only.
****** End of interview ********
References
Bernstein, J. (2013).The Impact of Inequality on Growth. Washington DC. Sage Publications.
Ahluwlia, M.(1976). Income Distribution and Development: Some Stylized Facts. American
Economic Review, 66.
Bradshaw, Y., Tshandu, Z. (1980). Foreign Capital Penetration, State Intervention, and Development in Sub-Saharan Africa. International Studies Quarterly, 34.
Chenery, H., and Syrquin,M (1975). Patterns of Development 1950-1970, London: Oxford University Press.
Cromwell, J. (1977). The Size Distribution of Income: An International Comparison. Review of Income and Wealth, 23.
Hicks, N., and Streeten, P (1979). Indicators of Development: The Search for a Basic Needs Yardstick. World Development, 7.
Isaacs, L. (1981). Comparative Economic Inequality. International Journal of Comparative Sociology, 22.
Knight, J. (1976). Explaining Income Distribution in Less Developed Countries: A Framework and an Agenda. Oxford Bulletin of Economics and Statistics, 39.
Kuznets, S. (1963). Economic Growth and Income Inequality,” American Economic Review, 40.
