It consists of earnings, self-employment and capital income and public cash transfers; income taxes and social security contributions paid by households are deducted. Thus, in Fig. Thus, the degree of consumption or income inequality in India in the year 1999-2000 as measured by Kuznets’ ratio was 2.04 which is quite high. How is income distributed within the remaining range of income distribution is not considered by Kuznets’ ratio. It may be noted that the methods of collecting data, degree of coverage of income or consumption data differ from country to country. It is argued that a certain income distribution cannot be settled once and for all through redistribution because income distribution is a continuous process as production of goods and services goes on year after year and rewards for those who contribute to the production of goods and services are distributed every year. Also we will critically examine how much inequality is justified on the basis of incentives to work more, to acquire skills and education and to promote more saving for increasing the rate of economic growth. Income inequality among individuals is measured here by five indicators. This is taken from Liberati, P. (2013) – The World Distribution of Income And Its Inequality, 1970–2009. Some of these assets, such as shares and government bonds, give rise to income. Each individual is the product of society. In the late 1970s, the top 10 percent of the U.S. population, ranked by income, received about one-third of total U.S. income. Unemployment, Poverty, and Income Inequality . In the second part we critically examine the rationale for social acceptance of some degree of income inequality. Due to their extremely low income they suffer from undernourishment, have inadequate clothing, shelter and healthcare. Milanovic, B (2017a), “Increasing Capital Income Share and its Effect on Personal Income Inequality”, in H Boushey, J Bradford DeLong and M Steinbaum (eds) After Piketty. From mid-1970s to late 1990s, there was a sharp reversal in income inequality, especially the top 1% saw a marked increase in the share of overall income. High inequality can be detrimental for macroeconomic stability and for sustained long-term growth. The poorest 10% of Americans went from having zero assets to being $1,000 in debt, Families in the top 10% had more than five times the prior wealth, Families in the top 1% had more than seven times their prior wealth. Income inequality refers to the extent to which income is distributed in an uneven manner among a population. The degree of inequality in India is also revealed by Gini index of 33.6 (Note that Gini index is Gini Coefficient multiplied by 100). Other influences upon man come from environment in which he grows up. When the income-factor concentration index is close to one (maximal value), compositional inequality is high, and a society can be … The economic development requires a faster and more inclusive growth in GDP. With a different income distribution, there will be different Pareto optimum. This promotes capital formation and economic growth which in turn raise the levels of living of the people. In 2010, its Gini index was 41.0 which is quite high and in it while the top 20 per cent of population received 46 per cent of income, the bottom 20 per cent had only 4.7 per cent share in national income. Why economic growth may not reduce income inequality. There are many ways to measure income inequality, and expert economists continue to debate which metric is the best. Essay type Research . Capital formation is the key to economic growth. They were able to achieve high rates of economic growth with active participation of Government in their economies. Two things must be noted about this view of Late Prof. Tendulkar. According to a study of 2017 income numbers by the Institute for Women's Studies, women of all races and ethnicities were paid an average 81.8% of the salaries paid to men. The greater the inequality in the distribution of wealth or assets, the greater will be the inequality in income distribution. The global trend towards extreme wealth and income concentration has dramatically strengthened the economic and political power of those individuals — overwhelmingly male — at the top. To compare income inequality across countries, the OECD uses the Gini coefficient , a commonly used measure ranging from 0, or perfect equality, to 1, or complete inequality. Recently, a view has been expressed about the conditions or circumstances in which income inequalities can be socially tolerated. Theoretical and empirical justifications . Therefore, the question arises if inequality in distribution of income or rewards for the services is reduced, it may adversely affect the incentives to work hard and invest and as a result the production of goods and services may decline, that is, GDP or economic growth will be hurt. Thus standard deviation (σ) is given by –, On dividing this standard deviation by the mean we have the following value of coefficient of variation –. The opposite is case in Lorenz curve B in Fig. 65.3, according to Lorenz curve A in the households at the bottom of income distribution there is more equality and in households with higher income levels the income distribution is more unequal. 3. In many cases of economic inequality, wealth flows disproportionately towards a small number of already financially well-off individuals. However, according to Tendulkar, equity would be achieved in the normal course of market functioning without government intervention for reducing inequalities if technological changes reduce the relative price of one or more necessities of life or by enhancing the supply and consumption of necessities like food. From the viewpoint of economic growth, a forceful argument advanced to justify income inequalities is that inequality in the distribution of income promotes savings and capital formation. As a matter of fact, nobody, not even the socialists, seeks to establish perfect or absolute equality of incomes. The Gini coefficient is based on the comparison of cumulative proportions of the population against cumulative proportions of income they receive, and it ranges between 0 in the case of perfect equality and 1 in the case of perfect inequality. Share Your PPT File. The Urban Institute is one source for insight on income inequality. The Gini Index was developed by Italian statistician Corrado Gini in the early 1900s to help quantify and more easily compare income inequality levels across countries of the world. Income disparities are so pronounced that America’s top 10 percent now average more than nine times as much income as the bottom 90 percent, according to data analyzed by UC Berkeley economist Emmanuel Saez. The almost same situation regarding income distribution exists in Norway. Wealth is a stock of assets which have a financial value. Income inequality is how unevenly income is distributed throughout a population. It is the policy of privatisation and liberalisation of the economy that is responsible for the current large inequalities of income in China. Income inequality - Income inequality - Reducing inequality: The extreme income (and other) inequalities in the United States and the world are not inevitable. The results show that income […] According to him, in the US the people in top income-groups save a lot and relatively spend little, whereas the people in low and middle income groups save very little and spend all or most part of their incomes. In the first part we explain the meaning and concept of economic inequality and the methods of its measurement. The shaded area between the line of perfect equality and the actually obtained Lorenz Curve such as OD represents the observed distribution of income, that is, inequality in a society. The Index can range from 0 to 100 with a higher level showing greater income inequality among a country’s population and vice versa. There has also been an undeniable increase in wealth inequality, which often leads to income inequality. Besides, the present large income inequalities found in the free market economies are quite unrelated to the differential capabilities of the individuals and are mainly based on extraneous factors such as ownership of property or assets, the existence of certain economic and social institutions. It may be true that in a capitalist system large savings are made possible by the huge incomes accruing to the few rich people. This shows that there exists a large inequality of income/consumption despite the aim of the first Six Five Year Plans (1951 to 1990) to reduce inequalities of income. Economic Inequality refers to the inequality in terms of wealth distribution and opportunities among people belonging to different groups, communities or countries. However, In time series data which indicates that increasing income inequality is likely to spur higher levels of GDP, For example, Shahbaz,( 2010) employed a time series data on Pakistan for the period 1971-2005, Using ARDL bound test approach, to determine the relationship between income inequality and economic growth in Pakistan. The wealth consists of land and other non-renewable natural resources, tangible capital assets such as machines, equipment, buildings and financial assets belonging to households. Economics, Economic Growth, Income Inequality and Economic Growth. As a result, productive efficiency of the economy will decline which will lower economic growth of the country, which it is argued is a necessary condition for improving the levels of living of the population. … The Gini Index is a popular way to compare income inequalities universally across the globe. In Table 65.2, the worst developing country from the viewpoint of inequality is Brazil where Gini Coefficient in 2012 is 52.7 which is very high. Income inequality among individuals is measured here by five indicators. In many cases of economic inequality, wealth flows disproportionately towards a small number of already financially well-off individuals. 1- Introduction: Why do we care about inequality? Besides, to ensure relative equality, adequate employment opportunities are to be generated to ensure earnings from work to labourers. Inequalities in earnings from work or labour services arise either from paid employment (i.e., wages and salaries) or earnings of individuals from self-employment in various types of economic activities. Governments acted as catalyst which helped markets by providing the requisite physical and institutional infrastructure, by remedying market failures and by promoting saving and technology.”, Further, Stiglitz writes, contrary to what has happened in India, “East Asian countries proved that the initial stages of development did not have to be associated with an increase in inequality. The rich man saves because he is able to satisfy all his wants and then have some left over. The reasonable inequalities of incomes are those that are just sufficient to furnish or maintain the incentives. This is a difficult question which cannot be answered unambiguously as this depends on value judgements of a society which can differ from one individual to another. It is argued that if the national income is equally distributed, that is, if income equality is brought about, average rate of saving will fall. A very popular method of measuring income inequality is Kuznets’ Curve which graphically measures inequality in income distribution. Income disparities are so pronounced that America’s top 10 percent now average more than nine times as much income as the bottom 90 percent, according to data analyzed by UC Berkeley economist Emmanuel Saez. It's nothing new: Last year the Census Bureau found income inequality was at its highest level in 50 years. Historically, that's the narrowest that the gap has ever been. An increase in income inequality arising, say, from substantial rewards to risky entrepreneurship and innovation, could boost economic growth. Income inequality, in economics, significant disparity in the distribution of income between individuals, groups, populations, social classes, or countries. Economic indicators are pieces of economic … Income inequality facts show that the top 1% earns forty times more than the bottom 90%. The different types of income segmentations studied when analyzing income inequality may include distributions for: There are several prominent case studies and analysis reports providing insight on income inequality, income disparity, and income distributions in the U.S. and across the world. The Lorenz curve is a graphical representation of wealth or income distribution. Category Income Inequality. Income distributions by demographic segmentation form the basis for studying income inequality and income disparity. Income inequality is a major dimension of social stratification and social class. Thus, Nobel Laureate Joseph E. Stieglitz in his recent book, “The Price of Inequality” points out that there is clear association between inequality and economic instability. 3. In this case of income distribution share of income accruing to certain sections of the population is lower and others higher in one situation than in the other. In our view, this is an indirect argument for a free market economy established by the policy of liberalisation and privatisation adopted under the structural adjustment reforms. Inequality is a big, big subject. Instead the new prosperity was widely shared among the population and millions were lifted out of poverty. For example, in Malaysia and Thailand, the incidence of poverty declined from almost 50 per cent in the 1960s to less than 20 per cent by the end of the century.”. Income disparity has varied however among workers ages 25 to 34. This gives us Kuznets’ ratio to be equal to 43.3/21.2 = 2.04. Economic development means economic growth plus more desirable changes that must occur to raise the levels of living of the people at large. High income inequalities also promote rent seeking by the rich people who through excessive lobbying, providing large donations to the political parties, bribing the ministers and bureaucrats succeed in getting licenses and permits as happened in India in case of allotment of 2G spectrum and coal blocks. “The economy is on inequality autopilot right now,” said Chuck Collins, IPS director, who called the situation “grotesque”. This shaded area is therefore generally described as ‘the region of inequality’. According to inverted U -hypothesis, as developing countries start growing in the initial stage inequalities of income will increase. Don’t miss a chance to chat with experts. Some forces work before his birth. This has shown reductions or new automation takeovers in other functions, pushing down wages for workers in less competitive jobs. How can individuals or workers are induced to acquire higher skills and education to become more productive or entrepreneurs to innovate if they are to receive no more than the ordinary unskilled workers. The labor force participation rate is a measure of an economy’s active workforce. This is also revealed by Gini Coefficient which was 36.8 in 2005 compared to 32.5 in 1999-2000. Populations can be divided up in different ways to show different levels and forms of income inequality such as income inequality by sex or race. Some of these assets, such as shares and government bonds, give rise to income. Of course, functional distribution of income affects the size distribution of income. It may be noted that transfer of income from government to individuals or households is essential in a welfare state and widely accepted as the function of the modern government in a democratic country. Experts, who have been trying to sound the alarm on the growing economic inequality in the United States for the past few decades, are seeing … N. Kaldor and J.R. Hicks provided a welfare criterion according to which if as a result of government policy those who gain can compensate the loss and still remain better off, the new situation would represent an improvement over the existing one. Forbes counted 2,095 And those differences can be great. Words 1017 (4 pages) Views 339. The choice between such income distribution patterns represented by two Lorenz curves intersecting each other requires the resolution of conflict situations over which agreement regarding extent of inequality of income distribution may not be possible. Such a saving, in other words, is residual after luxurious consumption. 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