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What Policies can we Introduce to Reverse Widening Inequality?

Backseat Economist Inequality Parliament Graph going Down

The accelerating problem of inequality exposed by the COVID-19 pandemic hinders our society, and the best ways to mitigate it would be to increase educational and job opportunities for people in lower-income backgrounds, increase inheritance tax and solve the housing crisis.

One consequence of the accelerating inequality in society is falling social mobility – people are now less able to move up or down the social hierarchy from the position they were born into. This has been caused by the growing gaps in the hierarchy and the increasing difficulty closing the gaps. Uncontrollable circumstances at birth giving a greater determination over people’s lives has led to lower life satisfaction and a growing sense of unfairness in the current capitalist system, highlighted by the growing prominence of populist movements as the German populist party AFD has significantly increased their vote share in recent years by exploiting discontent in society and blaming struggles on Islam and immigration, rather than the reality of a lack of opportunity and poor government policies.

Furthermore, it is estimated the UK economy would have grown 6 to 9 percent more in the twenty years prior to the ‘Great Recession’ in 2007 with more equal opportunity given to the least advantaged in society. In contrast, Ireland has seen higher levels of growth by promoting equal opportunity, highlighting the potential for growth with higher equality.

One way of improving the equality of opportunity that people in our society receive is to try to increase the number of people coming from disadvantaged backgrounds with the opportunity to become employed in high-income jobs. One of the main causes of the accelerating inequality that has been emphasized by COVID-19 is the growth of the technology sector, likely to continue in the coming years. Society’s increasing demand for technology has caused a significant rise in the wages available in the sector, whilst the complexity of the jobs means the growth has favoured more educated workers. The ratio of earnings between university and high school graduates have increased from 3:2 in 1980 to almost 2:1 in 2017, highlighting the growing benefits of higher education in an increasingly specialized labor market. This increase in earnings has favoured those coming from more advantaged backgrounds, whose chances of going to university have grown to over 2.4 times that of those coming from less advantaged backgrounds. Therefore, it is clear there is potential to increase the potential earnings of those from lower-income backgrounds by encouraging more to progress to higher education

One way to encourage more higher education would be to subsidize university places that are more likely to be considered by those in the least advantaged backgrounds, hence reducing fees. Students from poorer households are more likely to be put off university by the high cost of student loans despite the benefits; those who attend university earn on average over 20% more after 10 years than people who did not go to university with similar grades. Thus, subsidizing university places more likely to be considered by the least advantaged would increase attendance and would improve future earnings for those coming from the least advantaged backgrounds. Moreover, the significant increase in tax revenue from higher future earnings, thanks to the increased productivity gained from university, would help to recoup most of the government money spent on the policy.

Similarly, the government should also give universities £1000 extra per student. One effect of this policy would be a higher rate of degree completion. This would have a particularly strong effect on those from disadvantaged backgrounds, as they are 40% more likely to drop out of university after a year than those from affluent backgrounds. Another positive effect of this policy would be the expansion of skills for university graduates, which would further increase the average graduate salary. This would in turn increase tax revenue for the government, reducing the net cost of the subsidy. Furthermore, these increasing benefits would encourage more students to go to university, and the effects would be strongest for those coming from lower-income households due to the higher potential for growth in university attendance.

However, whilst higher university spending would help to equalize the opportunity of working in the higher income brackets, mainly in the tertiary sector, there is still a need to increase the salaries of those working in the lower-paying primary and secondary sectors, where university education is less useful. The primary and secondary sectors largely produce necessities and manufactured goods, which are still demanded with economic growth, showing the importance of increasing their pay. However, the UK productivity per worker is significantly lower than most other developed countries, showing the potential for higher efficiency in the UK primary and secondary sectors, which would in turn increase wages.

One cause of the lack of UK productivity has been the deregulation of the labour market. Workers now require fewer qualifications than in other countries for many jobs. A re-introduction of these regulations would encourage firms to employ workers with a better skillset and who could therefore be more productive. This would therefore incentivize more workers to attend courses and programs to improve their abilities in their professions in the primary and secondary sectors. Furthermore, a government program that would give all people working in the primary and secondary sectors a free opportunity to improve their skill set for a year would give workers an easier opportunity to improve their skills than previously, further increasing the uptake in specialist training. The economist Lawrence Katz estimates that this training would improve worker productivity by 20 to 40 per cent. This would significantly increase the wages in the currently lowest earning sectors as each worker would be worth more thanks to their higher efficiency, further reducing income inequality. Moreover, most government money spent on this program would be recovered through the higher tax revenue earned from the increase in wages.

Another key factor in accelerating inequality is the slow growth of lower incomes compared to the rapid growth of higher incomes. The main cause of this is the shift of money going via dividends to wealthy shareholders usually in the top 1% of incomes and away from workers who represent the bottom proportion of the UK income ladder, whose real incomes have not increased since the financial crisis. In contrast, the quantity received in dividends by shareholders has increased to £440 billion, emphasizing how UK growth has favoured the top 1%, having a negative effect on well-being. Trade union power has been weakened since the financi