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Economic Inequality

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Economic inequality refers to a situation when there is an unequal distribution of income and opportunity between different groups in a society. Economic inequalities are apparent characteristics of society due to income disparities between people holding different positions within the economic distribution in terms of income and wealth.

 People’s economic positions also depend on many factors, including physical and intellectual capability, social and ethnic background, and even gender. Income inequality is a significant aspect of economic inequality, which indicates an uneven income distribution among the people in society. Economic inequality manifests in the income gap between the well-off and the less well-off in the overall economic distribution. The income of the fewer well-offs varies year-to-year without any significant increase, whereas the income of more well-offs keeps increasing, thereby increasing economic inequality. 

Types of Inequality:

Three main types of inequality can contribute to economic inequality in a society. These are as follows:

Income Inequality:

Income refers to all the money received as wages, employment benefits, investments, interest on savings and dividends, pensions, rent, etc. The business profits of proprietorship firms also contribute to income. The people who earn more are from the high-income group, far more well-off than low-income groups, which causes income disparity due to the accumulation of money within a particular group. 

Pay Inequality:

A person’s pay refers to payment from employment only. Pay inequality, therefore, arises from the difference between pay received by individuals and groups. This difference may be within one company, organizations of the same sector, or across different occupational fields. Pay inequality is also caused due to differences in pay structure between men and women. 

Wealth Inequality:

Wealth refers to the total amount of assets an individual or household holds. This may include financial assets, properties, gold, etc. Wealth inequality is caused by unequal possession of assets between different groups of people.

Factors of Economic Inequality:

Several global and national factors can contribute to economic inequality. Global factors influencing economic inequality include technological progress, globalization, and recession. For instance, technological advancement has caused skill mismatch, limiting earning opportunities. Again some unexpected global incidents may lead to economic inequality. The recent Covid-19 pandemic caused massive job loss and pay cuts in most organizations worldwide. It has led to major income reduction, especially for the salaried class, which caused economic inequality. 

Country-specific factors are related to a country’s economic development and stability and government policies, including fiscal policies, liberalization, and regulation of labour and product markets. Global inequality has been under control over the last few years, but domestic inequalities have increased recently, especially in advanced economies.

Impacts of Economic Inequality:

Economists have different opinions on the effect of economic inequality, which can be both positive and negative. Some economists conclude economic inequality stimulates growth, improves living standards, and facilitates social progress. Other experts believe that economic inequality causes wealth accumulation in the hands of few people, exploitation of disadvantaged populations, and hinders economic growth. The advantages and disadvantages of economic inequality are explained as follows: 

Positive Impact:

Economic inequality drives growth in a variety of ways. In this condition, motivation is higher for innovation and entrepreneurship, which offers incentives for growth and higher income. The low-income groups of society put more effort, are involved in new ventures, or explore new avenues for growth opportunities to become members of the high-income group. 

Negative Impact:

High levels of economic inequality cause unequal income distribution and poverty. It affects the affordability of health and education facilities, causes limited employment opportunities, and increases associated crimes.  Income inequality may lead to political instability, increase the risk of corruption, and discourages capital accumulation. Fewer individuals have funds and become privileged to access more facilities, whereas deprived sections of society engage in illegal and unsocial activities in an economically unbalanced society.

Means to Address Inequality:

There is a need to take deliberate actions to address inequalities. The administration and people with resources should invest a significant portion to uplift the condition of people, such as women, young people, persons with disability, older persons, etc., who have been marginalized due to income inequality. The higher economic disparity may also open some opportunities that need to be made accessible to poorer sections of society. 

Government policies to reduce income inequalities can bring effective changes in the condition of women, young people, and other groups who have capabilities but are deprived of resources and facilities. Policies that lower the cost of building assets and encourage higher savings can address the problem of unequal wealth distribution. Such initiatives can benefit working and middle-class households and provide them with better economic security.

Challenges in Reducing Inequality:

There are many challenges in implementing measures for reducing economic inequality. Many such measures often fail to deliver the desired results. Women workers are still engaged in the lowest-paid and most insecure jobs, and there is a lack of serious actions to ensure that women are paid the same amount as men for the same job, which can reduce income disparity. An increase in minimum wages also can’t address the root cause of inequality. 

Despite having several schemes in many developing countries, the actual benefit of reaching the poor is questionable in many developing countries, including India. Another challenge is deciding the appropriate parameters to distinguish the poor and needy from the well-off. A fundamental challenge to fight against inequalities is the structure of organizations and production patterns that reduce the investment in the workforce and focus more on cost-cutting. Low-income groups’ lack of opportunities for learning and skill development further accelerates inequalities. 

Government Initiatives to Face Challenges:

The Government of India has taken several initiatives to face the challenges of reducing inequality. The Indian government has taken important measures to empower the marginalized sections of society to reduce economic inequalities. Some of the initiatives taken are as follows: 

  • The government is providing maximum livelihood opportunities in the rural areas by spending more on livelihood, agriculture and allied activities and the construction of rural infrastructure.
  • The government has implemented strategies including promoting labour-intensive sectors by encouraging agro-based industries and small and micro enterprises. 
  • The government has taken initiatives to expand the social security network through a national health protection scheme and institutional credit support, which is expected to cover poor and vulnerable families.

Important Data on Economic Inequality:

  • India faces extreme income inequalities, with the top 10% of the country’s population accounting for 57% of the national income, of which 22% is held by the top 1% of the population. 
  • Conversely, the poorer section of India’s population struggles for a mere 4.1% of national wealth. 
  • As per IMF, if women’s participation in the workforce increases to match the men’s, India could grow its GDP by 27%. 
  • As per the World Bank, agricultural reforms can help reduce poverty for 80% of the world’s poorer population who work mainly in farming.

Way Forward:

There have been various initiatives taken by international forums to address income inequality.  The action plans are mainly influenced by programs supported by the International Monetary Fund (IMF). The experience and efforts of the IMF have led to initiatives for integrating social security with business functions and regularizing access to essential public services like health and education to larger sections of people. 

It is essential to modify the taxing structure so that the wealthiest in society need to pay more and the low-earning groups are spared. Inequality can be reduced if these tax revenues are invested in public services. Lack of early education and school facilities are the important components contributing to persistent inequality across generations. Investing in healthcare, education, and social protection can help significantly to reduce inequality.

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Last Updated : 12 Dec, 2022
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