Image Source: The Economist
Since the COVID-19 Pandemic began in early 2020 there has been a huge increase in economic inequality, surpassing already high levels. To some, this is a huge problem, but to others, this has served as an opportunity.
The recession during the pandemic was the most unequal in US history. Other factors such as inflation, wars and an overall increasing population have also come into play. There are many reasons why income inequality is a problem, ranging from economic – such as people unable to afford basic necessities – to ethical implications, such as increased poverty. To combat this problem many ideas have been suggested, such as increasing the minimum wage. However, all of these ideas have disadvantages that could potentially do more harm than good. I will thus argue why we should implement a variety of policies into the economy in order to mitigate inequality.
Share of the top 1% of Americans in the nation’s wealth
After 2020, the share of wealth owned by the top 1% of Americans increased from 28% to 32% and is still expected to increase. Contrastingly, the bottom 50% of the population owns only 2% of the nation’s wealth. This demonstrates that inequality has increased in the USA since the COVID-19 pandemic, with the richer getting richer, and the poorer getting poorer.
Furthermore, there have been similar increases in inequality in other countries around the world, especially in Newly Emerging Economies such as India, where the majority of wealth is owned by the top 10% of earners.
But why is this a problem?
One reason why inequality is a problem is that it leads to less wealthy people being unable to afford basic necessities. In the UK, income inequality has caused a ‘cost of living crisis’. Due to a fall in real incomes, the majority of people have been limiting their spending and increasing their savings.
The long-term impacts of this could include a large number of businesses collapsing due to not having enough income to be able to provide and produce the goods or services they sell. This effect would lead to another problem, as people would not be able to buy necessities, decreasing their standard and quality of living. This, from an ethical perspective, is unfair as everyone should have the right to have access to basic necessities such as food, water and electricity.
Furthermore, this problem has been exacerbated by the ever-increasing rate of inflation. In the UK, inflation has been on the rise since 2020 with it being at 10.5% in December 2022, far beyond the Bank of England’s target of 2%. From this drastic increase in general prices, people have been able to afford less and less as the months have passed. Additionally, the war in Ukraine and Russia had caused the exports of oil and energy from Russia to the rest of Europe to significantly decrease. This led to a huge rise in energy prices, leading to further increases in prices due to higher energy costs and higher costs of production.
The war and inflation had made the problem of inequality worse, because now poorer people cannot afford necessities, as well as energy and water. This is currently still a huge problem, as not everyone is able to access energy and food, which leaves them in a much worse position than the richer people, who still have lots of money to spare.
Another negative impact of inequality is that it increases the rate of poverty. During the pandemic, the world fell into a deep recession which caused real incomes to drop by 20%, leaving the poor even poorer. The World Economic Forum predicts that the long-term effects of the pandemic could see over half a billion people fall into poverty, earning less than $5.50 a day causing them to fall below the poverty line. This is a problem as it can cause many secondary effects, such as no access to education and healthcare, which are services that everybody should have access to. The possible secondary impacts also include damaged mental health, which to some may be a huge cause for concern, clearly showing why inequality is a problem.
Another huge reason why inequality is a problem is due to it causing an increased crime rate. There is a positive correlation between Income Inequality and homicide and robbery rates, suggesting that income inequality will lead to a higher crime rate. This is because when there is a divide between the upper and lower classes, people have a lower incentive to work as it may be too hard to get to the top, causing the crime rate to increase.
The Metropolitan Police have released the statistic of almost 45000 stops and searches right after the lockdown had started. The positive correlation between the rise of income inequality and the rate of crime suggests that the former causes the latter. This is a problem because it reduces the safety of the general public. Over the past decade, crime rates – especially knife crime rates – have drastically increased, showing the problem is continually being exacerbated. Some people, however, may argue that inequality is good. When there is more inequality, upper-class people become richer, which is ideal from their point of view, but not from the perspective of the majority, who should be given priority under democratic principles. People may also have a higher incentive of working when there is inequality, as people will have a higher reward for investment and risk.
Overall, inequality is a huge problem due to the countless knock-on effects it brings, most of which are not economically nor ethically good. There are many suggestions on how we should combat this issue, but the majority of them have too many disadvantages which may do more harm than good.
How can we solve income inequality?
There have been many proposed ways of solving this economic issue, and I will explore the benefits and the downsides of each method and argue why supporting economic and racial integration may be the most effective method.
Increased minimum wage
One suggested idea is increasing the minimum wage. As of December 2022, the national minimum wage in the United Kingdom is £9.50 per hour for workers of age 23 and above. A rise in this could lead to more equality. In the USA, a higher federal minimum wage of $10.10 per hour would lead to 4.6 million people living above the poverty line. One advantage of this includes decreased poverty. From an ethical perspective a higher minimum wage would be better due to people earning more money, and having more and easier access to necessities. Furthermore, a higher minimum wage may well increase the incentive to work, which could increase the working population and increase the national income and the GDP of the country. Increasing the minimum wage will most likely not have a negative effect on unemployment, as it will only cause more and more people to want to work.
However, this method will also bring many disadvantages. If the workers are paid more on a national scale, it is likely to increase inflation rates due to a higher amount of money flowing into the economy. As a result of this, the workers will ask for a pay rise to keep up with inflation and to ensure that they are the same, or better off than before the increase in inflation. This causes a vicious cycle of inflation and pay rises, and can completely destroy an economy if its inflation rates were to skyrocket. Another downside is that it will cause a chain reaction of increasing demand for pay rises. If the minimum wage rises, people working at just above the minimum wage of $10.30 will ask for a pay rise as they will feel that they aren’t being paid enough, and this will cause everyone to ask for pay rises, which can lead to more inflation if salaries are increased, suggesting that this method will bring more harm than good.
Reform tax measures
One way of fighting this problem is by implementing a higher capital gains tax rate. A higher capital gains tax rate will mean that people who profit from investing in assets that increase in value will be taxed, such as stockholders or real estate owners. Advantages of this include the rich paying more tax. In the eyes of lower-class citizens, this would be seen as a suitable option, as they want more equality, and want the divide in income to be smaller. However, from the perspective of upper-class workers, it is a bad idea as they work hard for their profits and do better than everyone else to achieve what they have done, and they will see it as unfair. As a result of this, fewer people will have an incentive to invest, as they will have to pay more tax on their profits. The increase in tax would bring about many benefits, such as increased government spending, where the money raised from tax can be used to provide benefits or to increase the quality of life in some areas. However, it will lead to less consumer spending, as workers have less disposable income to spend on their satisfaction, which in the end, is the main objective of consumers.
This could suggest that this idea may not be as effective in reducing income inequality, and on top of that it will bring a lot of controversy between the classes of income.
Investment in education
The pandemic severely affected education for children of all ages and investing in education, if successful, will bring higher grades and more job applications, leading to more productivity, higher incentives to work, and also decreased inequality. However, this method has many risks. If the government spends billions on reforming and improving the education system, many people will have better education, but many people will also not be affected by this. This is because the quality of education does not necessarily affect a child’s attitude towards it, which could prove this idea to be a waste of money.
Supporting racial and economic integration
“Higher levels of racial residential segregation within a metropolitan region are strongly correlated with significantly reduced levels of intergenerational upward mobility for all residents of that area”, suggesting that supporting racial integration will bring about more income equality, and will also build a better quality of life. In the USA, there is a strong correlation suggesting that increased racial segregation leads to more income inequality. Supporting racial integration could combat the problem of inequality, and over history, race has been one of the largest factors affecting income and economic inequality, and in the majority of cases is the root cause of income inequality. Furthermore, it will bring economic stability to all, and most importantly, it will most likely have no negative impacts.
If governments invest in this, by implementing ideas such as affordable houses in low-income areas, allowing mixed-income communities, and even things such as social events and communities for mixed races it could build a stronger bond between races and income classes, which could fix the root problem of racial segregation. Finally, it will also lead to the social benefits of less racism and a more accepting community, which can therefore lead to social inequality and in the long term can lead to economic equality.