Causes of Inequality and Redistribution of Income

Topics: Tax, Employment, Income Pages: 5 (1469 words) Published: December 2, 2012
Question 3
Explain the causes of inequality and redistribution of income?

Inequality of incomes is clearly not good as well if it results from government privileges. With the inequality, it can sets up perverse incentives. Inequality also arises from unequal labour market outcomes and from unequal ownership of capital driven by differences in human capital and discrimination. A Gino ratio can used to measure the level of inequality. When the Gino ratio increases, it means the income inequality has also increases, and the situation is vice versa.

The causes of inequality in human capital
* Demand, supply, and wage rates
As the differences in the earnings, it will arise from differences in human capital. For example, a manager handles many tasks and works that his employee cannot perform. In the other words, the tasks that the manager had performed are valued highly or known as high value of marginal product, by their clients who are willing to pay for the services, than the works done by the employee to them. As the value of marginal product of labour determines the demand for labour, thus the manager also has a high demand on his services. Due to the human capital is costly to acquired, so the supply of manager services is smaller compared to the employee’s. The demand for and supply of labour determine the wage rates that earns. By this way, the manager earns a higher wage rate than the employee because the demand for manager is greater and his supply is smaller. The gap between the wage rates reflects the higher value of marginal product of manager which refer to the demand, and the cost of acquiring human capital which means the supply. By this, the inequality occurred. * Education and training

Human capital had added more to the earning power generally and on average. Rates of return on higher education have been estimated up to 10 percent after allowing for inflation. When there is a high demand for workers, it will create high wages for those with this education. With human capital differences, it helps to explain the inequality that can be observed. Human capital differences are correlated with household characteristics. The education was designed to equip students with necessary skill that sets for performing at work. The lower education standards will decrease in wages caused a period of compression and decreased inequality between skilled and unskilled workers. * Trade and technology.

Technology also increases inequality. It has replaced many workers at factory jobs, while those who have training in technology can obtain higher paid jobs. Trade and technology increasingly shifted demand away from low-skilled workers while compared with high-skilled workers. The information technology and low-skilled workers are substitutes while the information technology and high-skilled workers are complements. Thus, the marginal product and demand also has change with the skills of workers. These technology has lowered both of it for the low-skilled workers, and vice versa. * Expanded markets and globalization.

With improved communications and transportation, people increasingly functioned in national rather than local markets. In broader markets, high-skilled workers will command particularly high salaries. The entry of developing countries into the global economy has lowered the manufacture prices. Lower prices for firm’s output lowers the value of marginal product of workers and decreases the demand for workers. Thus, growing global economy increases the demand for high-skilled worker services, value of marginal product and demand for high-skilled workers. As the wage rate rises, the employment opportunities for high-skilled workers will be also expanded.

The causes of inequality in discrimination
* Counteracting Forces
Many people disagree with the prejudice will causes wage differentials and one line of reasoning implies that it does not. If a firm discriminates against women and...
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