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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 financial crisis and workers’ voices have been silenced, whereas shareholders have had a greater say on the direction of businesses. This demonstrates a lack of regulation on the management of businesses by the government has accentuated growing inequality, shifting income from workers to shareholders.

To combat the diminishing voice of increasingly powerless workers, it should be a requirement for companies with over 300 staff members to have at least a quarter of their board represented or elected by workers. This will give workers their say in the direction of businesses that they have been significantly lacking over the past decade and will shift the rewards of business growth towards those who are responsible for it. Countries who have given a greater say in company management have seen greater pay equality, highlighting the effectiveness of the voice of the worker.


Furthermore, to target those at the bottom of income distribution and to increase long-term employment, the UK minimum wage should rise to £12 an hour. The main argument against a higher minimum wage is that firms will immediately shift production away from labor, decreasing employment and the availability of attainable jobs for many. However, research has demonstrated that whilst this is true for sharp rises, there is little to no effect on short-term unemployment. This rise would therefore further narrow the gap between the growth of dividends and wages and would shift more money into the hands of the poorest in society, further decreasing income inequality. In addition, more people are likely to look for employment in the long- term with a greater incentive, further reducing those unwilling to work and, hence increasing long-term employment.

Finally, another big cause of the accelerating inequality has been the vast increase in the price of housing, accentuated by the COVID-19 pandemic. The average house price has almost increased 10 times between 1980 and 2021 – from £23,300 to £231,000. In contrast, the median household income has only doubled between 1980 and 2021, increasing from £16,000 to £32,000. This demonstrates that households must spend roughly five times more on housing than they have done previously. This rise in house prices has hit people on lower incomes the hardest, as they spend the greatest proportion of their income on housing. In contrast, people from wealthier backgrounds have benefitted from this increase as they have been able to inherit a greater sum of money from relatives, hence becoming richer.


To reduce the increasing advantage that people born into wealthier families gain through no actions of their own, caused by rising house prices, the government should restructure the inheritance tax. Currently, inheritance tax is only 40% of the value of a house above £325,000. This allows people to split their estates up into various parts below £325,000 and therefore avoid inheritance tax if it is distributed to different people. Furthermore, this means that people get to keep the vast majority of the unfair advantage that people gain from wealthy relatives, further increasing inequality. The table below suggests putting the tax into tiers, with each tier paying a higher level of tax on the value of the estate above £100,000. This ensures that people find it harder to avoid the tax by splitting their estate up and will reduce the advantage that people have from being born into wealthy families.

Estate Band

Tax Rate

Up to £100,000

0%

£100,001 to £250,000

25%

£250,001 to £500,000

40%

Over £500,000

55%

To further reduce the equality caused by rising house prices, the revenue earned from the rise in inheritance tax should be used to build more affordable housing. This would increase the supply of cheaper houses, subsequently reducing the price of houses and allowing more people to own a house. This fall would particularly give families on lower incomes more purchasing power as it would reduce the higher percentage of income spent on housing in comparison to others.


In addition to increased government supply of new housing, a shift from shareholder to community and cooperative banks would further increase the supply of new housing and reduce house prices. In Germany, where there has not been the same sharp rise in house prices and 60% of banks are cooperatively or community owned, meaning they are less focused on short-term shareholder profit and place greater emphasis on loaning credit to building companies to encourage greater construction of homes. In greater detail, the banks build a close relationship with the building companies, often putting their chairs on the boards of the banks, meaning the banks can better understand and therefore de-risk loans. Consequently, there has been a greater supply of new homes in Germany, which has stabilized house prices and has meant that more people have been able to afford a home.


In conclusion, the accelerating inequality exposed by COVID-19 has been caused by a lack of equal opportunity, rising house prices and shifting distribution of income towards the top 1% and away from workers. Increasing university attendance and graduation amongst lower-income households and increasing job training would increase opportunity and would therefore help to grow our economy. A higher minimum wage and a greater voice for workers would shift money back into workers’ hands, decreasing social dissatisfaction and mistrust in capitalism. Finally, an increase in supply and a decrease in the price of housing would give more money to the poorest in society, further increasing life satisfaction and living conditions.

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