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Income Inequality

What is an income? Income is the revenue that comes from wages salaries interest on investment, dividends and profits from selling items.
Income inequality is a situation in the economy where there is not an equal distribution of income or reserves among the population of a country. In a capitalist economy where the pie is there for one to take it rather than equally distributing it among all. Income inequality fuels social discontent and increases socio-political instability.
In the 1970 when the management level was very much diverse and big the income levels varied gradually from the bottom of the labour pyramid to the top level. It was also seen that the lower level incomes rose faster rather than the incomes at top levels. During the 1993 crisis industries changed their structure. It was realised that with advent of technology the middle management has become redundant. There was a rise in unemployment. Reduced investment as a certain segment of the population, where there was no discretionary income left, could not invest. Income inequality and investment is inversely related. The 1900’s globalisation regulatory reforms enabled India’s economy to grow very rapidly. There have been two aspects to it.  The middle class have tried to accumulate wealth but the poor have been not able to. According to reports income inequality has nearly doubled in India since the early 1990s.
Economists think that market forces will rectify the income gap. Pickety, the author of “Capital in the 21st century, argues that the fundamental law of capitalism is that wealth will grow more concentrated if there is an absence of global events like Wars. His solution was a global tax on capital that can help Governments better understand how wealth is distributed.
But let us see what Bill Gates has to say. Bill says that there are three types of wealthy people in the world. One type spends the money on himself, the second invest to starts a business and the third gives it in charity. The first case breeds inequality and the other three help normalise income gap.
In 2004 average Indian household earned Rs27000. More than half of all earned even less and less than half earned more. Also a small section earned much more. The mean is very high compared to the median of income. Northern states have higher income as compared to the central states.
The accuracy of this data is quite not verified as many Indian households receive income from indirect sources.
What determines the income is the education. Families with higher education are more likely to land up better paying jobs as compares to the less ones. There is a direct proportionality.
India’s economy is one of the fastest-growing emerging economies in the world. But other countries have better addressed income inequality.
The Gini coefficient – a measure of income inequality – between early 1990s and late 2000s increased from 30.8 to 33.9 in India .The Gini coefficient is a measure of statistical dispersion intended to represent the income distribution of a nation’s residents, and is the most commonly used measure of inequality.
EDUCATIONThe major causes of economic inequality in India are because of problems like lack of educational opportunities. Illiteracy is one of the factors that have been keeping the citizens of India ignorant for centuries. These people have problems in earning money. There exists an increasing gap between rich and poor. Rich people are able to increase their resources by earning huge profits while income of poor people has not increased. This has widened gap between them.  The law of inheritance is very interesting. Some people will inherit their parental property and assets whereas some will inherit family debt and increased family burden. This concatenates the inequality.  There is a vast rural inequality in land holdings for agriculture. Rich farmers have large lands while the farmers have uneconomic land holdings. Increasing unemployment, under­employment and disguised unemployment are re­sponsible for inequalities of income.
THE COLONIAL REASONColonial history is a major explanatory factor behind today’s large differences in inequality among the world’s countries. There is no contradiction whatsoever between the fact that Settler colonies became highly unequal and that these same colonies achieved a higher level of production per capita than Peasant ones. This relative economic success was precisely the result of the European settlers’ growth record. By their cultural background they were able to put at least partially in place the technology and institutions that made the economic superiority of Europe.
LABOR MARKET A major cause of economic inequality within modern market economies is the determination of wages by the market. Some small part of economic inequality is caused by the differences in the supply and demand for different types of work. However, where competition is imperfect; information unevenly distributed; opportunities to acquire education and skills unequal; and since many such imperfect conditions exist in virtually every market, there is in fact little presumption that markets are in general efficient. This means that there is an enormous potential role for government to correct these market failures.
In a purely capitalist mode of production (i.e. where professional and labour organizations cannot limit the number of workers) the workers wages will not be controlled by these organizations, or by the employer, but rather by the market. Wages work in the same way as prices for any other good. Thus, wages can be considered as a function of market price of skill. And therefore, inequality is driven by this price. Under the law of supply and demand, the price of skill is determined by a race between the demand for the skilled worker and the supply of the skilled worker. “On the other hand, markets can also concentrate wealth, pass environmental costs on to society, and abuse workers and consumers.” “Markets, by themselves, even when they are stable, often lead to high levels of inequality, outcomes that are widely viewed as unfair. Employers who offer a below market wage will find that their business is chronically understaffed. Their competitors will take advantage of the situation by offering a higher wage to snatch up the best of their labour. For a businessman who has the profit motive as the prime interest, it is a losing proposition to offer below or above market wages to workers.
A job where there are many workers willing to work a large amount of time (high supply) competing for a job that few require (low demand) will result in a low wage for that job. This is because competition between workers drives down the wage. An example of this would be jobs such as dishwashing or customer service. Competition amongst workers tends to drive down wages due to the expendable nature of the worker in relation to his or her particular job. A job where there are few able or willing workers (low supply), but a large need for the positions (high demand), will result in high wages for that job. This is because competition between employers for employees will drive up the wage. Examples of this would include jobs that require highly developed skills, rare abilities, or a high level of risk.
Banks do not have a major role to play. It is the Government that has to leverage this gap. The government has undertaken various measures to curb income gap. The Gove has been trying to level down the incomes of the few at the top and levelling up the large group at the bottom.
How does levelling down work?
 Taxation. Higher taxes on luxury items and higher taxes on higher salaries. This is aimed at reducing the concentration of wealth in one particular group.  For rural areas, a ceiling on land has been defined as in how much land area one person is eligible to hold. There are countless policies under way to reduce this situation.
Levelling up schemes try to transfer assets and incomes to the poor. The Jan-Dhan Bank accounts are a new measure to curb corruption as well as the income equality.
Economists frequently cite economic growth as the surest way out of poverty for the developing world. In this context, China is an often mentioned example, where double-digit growth has brought over 300 million people out of extreme poverty over the past few decades. But closely tied to growth is the question of equality – of growing the pie, as opposed to distributing it.
In discussions on equality, India usually does better in comparison to China. Proponents of India’s path to development often point out that income inequality in India has historically been relatively low.
Now examine the effects of the 1992 income tax law change that eliminated the double taxation of wages paid to partners in partnership firms. This tax law change provides a unique opportunity to identify the effects of tax policy changes on firm behaviour in a developing country context. Since the change provided incentives for shifting income from wages to profits, it also has important implications for certain measures of wage inequality. We find an immediate and pervasive response by partnership firms to the tax law change, reflected in a significant shifting of income from profits to managerial wages. Since about 50 per cent of registered manufacturing plants are incorporated in the form of partnerships (including most family-run businesses), income shifting by these firms could have a significant impact on measured wage inequality. We find a sizeable jump in the mean and median relative wage of skilled workers (which includes managers and partners) following the tax law change in 1992. This sudden increase in measured wage inequality follows major trade liberalization and deregulation reforms announced earlier (in July 1991). We find that the income shifting induced by the tax law change explains almost all of the observed increase in measured wage inequality following these reforms. This finding is robust to inclusion of controls for a number of other potential sources of post-liberalization increases in wage inequality. Our results show that firms respond strongly to tax incentives for income shifting, and highlight the need to control for the potential effects of tax incentives in studies of wage inequality.
The obvious question to ask, of course, is if income inequality is even important? After all, if absolute poverty is dropping, relative inequality may be acceptable? Not so, because relative inequality manifests itself in many ways – most of all by reinforcing patterns of social exclusion.
One example of this is healthcare. The rate at which India achieved improvements in life expectancy slowed considerably in the post-reform era. A similar trend was evident in China.  Two reasons for this inverse correlation with economic growth:

  1. As GNP rises, the resulting income inequality may be negatively impacting overall life expectancy. As fewer people earn more the GNP rises, but the large majority that gets relatively poorer are worse off.
  2. Another ugly truth may well be that a market-oriented India and China provide far less for their people than did socialist India and China. Under the guise of reform, governments in both countries­ are not only withdrawing from the market but also from public services.

The correlation between GNP growth and income inequality seems to support both these reasons. But there is one final reason to believe income inequality negatively impacts health. A study of seven African countries, published by the WORLD HEALTH ORGANISATION, 2000 concluded that it is the wealthier citizens – not the poorest – that benefit most from public healthcare, because health facilities are better in rich, urban areas. In Ghana the richest quintile directed almost 60% of its health spending to the public sector. In all countries, except South Africa, the best-off groups mainly used publicly subsidized health care, while the poor – less likely to seek medical help anyway – generally turned to the private sector simply because it was more accessible, though also more expensive.
A correlation between growth and inequality does not by itself disprove the need for economic growth. Growth may well be a necessary condition for reducing poverty, and in India it has indeed brought millions out of poverty. But surely, bringing people out of absolute poverty cannot be the ultimate goal and the only barometer of development. What India must strive for is to improve the quality of life of people – which means providing better health, education, and other services to the poor and the rich. In this objective, income inequality matters in very tangible ways, and insofar as economic growth increases inequality it may make many worse off. Now if only the economists could come up with a solution for that conundrum.

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