Causes Of Income Inequality Essay

1988 words - 8 pages

1. Introduction
In the last few decades, many countries have achieved high rate of economic growth in their development process, which could be explained by the development of industrialization and globalization processes (Jaumotte, Lall & Papageorgiou 2013). However, beside the economic achievement, it is witnessed that the issue of income inequality has persisted, or even increased (IMF 2014). If looking through the World Bank’s statistical table of GINI coefficient index, one of the indicators used in measuring income inequality, income inequality can be seen not only in developing countries, but also in developed countries in recent decades (IMF 2014; World Bank 2014). The increase of ...view middle of the document...

The other causes such as aging, household structure as well as the individual-specific causes such as physical health, personality or innate abilities (Charles-Coll 2011) will not be discussed in this essay. Then, it will discuss further in to details how government, by using fiscal policies, can address the issue of income inequality.
2. Causes of rising income inequality in recent decades
2.1. Effect of globalization process
The relation between globalization and income inequality can be seen through its effects on the wage level of high skilled and low skilled workers, which result from three processes of globalization: trade liberalization, financial openness under the form of FDI and changes of technology (Jaumotte, Lall & Papageorgiou 2013). Charles-Coll (2011) argues that trade liberalization could have potential effect on reducing wages inequality in developing countries, whereas it contributes to the increase in income inequality of the developed countries. In one hand, by opening the market through reducing import tariffs, developing countries could reduce income inequality because they benefit from the reduction in the price of imported technology intensive products while they could gain more foreign capital by exporting low skilled intensive product (for example the agricultural products), which relatively results in the decline of wages and compensation for the skilled workers and the increase of that for low skilled workers (Charles-Coll 2011). However, in the developed countries where high-skill factors are surplus, the imported low-skilled intensive products, with low price competitive advantage, could force them to reduce the prices of their domestic products, then relatively reduce the wages of low-skilled workers (Jaumotte, Lall & Papageorgiou 2013). Therefore, open market can cause income inequality increased in advanced economy (Blanchflower & Slaughter 1999; Jaumotte, Lall & Papageorgiou 2013).
However, in turn, the advanced countries tend to increase their financial investment and transferring technology to the underdeveloped countries because of the cheap labor cost at these countries (Jaumotte, Lall & Papageorgiou 2013). FDI and technological changes are considered the major causes of both economic growing and of rising income inequality, especially in the countries with labor-intensive economy (Ragayah 2008). The effect of modern technologies on income disparity can be investigated under the perspective of labor demand (Charles-Coll 2011). Firstly, although modern technologies could support for economic growth by increasing the productivities of the manufacturing industries because of the automatic production process, it also means that less labor forces will be used to produce the same volume of products (Slamecka 1985). Consequently, a number of workers becomes redundant and unemployed (Slamecka 1985). Under unemployed condition, the income of those people has considerably decreased even if they may receive...

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