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AVIRAL JAIN
Okay, before you read on, I would like to clarify that income inequality is by no means an objective or something that society or the government should aspire to achieve. However, not all bad things are completely terrible, as there are always some pros hidden in the cons; today I want to explore the potential positives in income inequality, despite its general appearance as negative. Nevertheless, if you are really intrigued by the outweighing negative nature of inequality, some related research is linked at the bottom of the page for your perusal.
Let’s start with clarifying any doubts or misconceptions in definitions. There is no set definition of income inequality, but for now, consider income as a flow of money, including the wages and salaries paid to people from their jobs. Inequality refers to the idea of an uneven distribution of something, for example housing or wealth. So what is income inequality? This is how unevenly income is distributed throughout a population. Economics defines the population as the number of people living in a specific place. With these definitions sorted, let’s begin discussing why income inequality might not be as bad as we think.
Firstly, it is often argued that happiness and satisfaction in life are more valuable than money. In a society where one can follow one's passion and do whatever one wants in life to maximise access to the state of well-being, should a six figure job in a global bank be everyone's goal? Some people find happiness and the ability to achieve a satisfactory quality of life through helping others and spending time doing charity work, to fill their heart not their pocket, instead of a job that buys them a bigger house and faster car. This shows that while someone may be earning a quarter of the salary of someone with a respected position in a global, established firm, they may have the same, if not a better, standard of well-being. This is because your quality of life is far from depending exclusively on the numbers in your bank account, but is crucially influenced by how happy you are with what you are doing. A global study conducted by consultancy firm Gallup discovered that out of one billion full-time workers, only 15% of people are happy and engaged at work. Therefore, an astronomical 85% of people are unhappy in their jobs. Researchers claim that giving to others not only makes us happier but can help lower blood pressure, which can suggest that those who focus on charity tend to be happier and healthier; the two biggest components to a great standard of living.
Think to yourself… would you rather work at a place you enjoy, follow your passion and be able to truly say that you are not only satisfied, but in love with what you get out of bed to do, or would you rather wake up every morning travelling to a place that brings you down but your bank account up? Do you really want to prioritise your money over your mental well-being and happiness? It's clear that there are reasons why those on a lower income might have a better standard of living than those earning more. Maybe, therefore, it's not such a problem that some are earning less.
Furthermore, those with a lower income are able to understand the struggle of others in society. Those who are wealthier may unconsciously become ignorant of the plight of those in difficult financial situations, and lack compassion towards them. Such criticisms have recently been highlighted of the Chancellor, Rishi Sunak. While we can never completely eliminate high-flyers in a capitalist civilisation, there's an argument for saying that we need more people who can identify with the everyday members of society to help it function better.
Not only this, but those not well off may, through income inequality, be given a greater incentive to work and move their way up the social hierarchy. Seeing the contrast between their earnings and those above them, they could feel a bigger motivation to work. Economics gives us the law of diminishing marginal utility, which tells us that the greatest gains in utility for a given increase in income happen at lower incomes. Using the diagram below it is clear that when a wealthy person earns more, they will gain less utility, compared to someone with a lower income, who, through the same increase in earnings, has a greater increase in utility.
Nevertheless, if the rich get richer, then although it may not impact their standard of living, it can indirectly improve the lives of others lower down in the social hierarchy. This process of widening the gap between the highest and lowest earners is consistently viewed as problematic, but if a wealthy person earns more, and spends their extra income on investment in their own business, they can gain benefits for others on lower incomes. They will expand their business, and over time require more workers, and increase the pay for lower skilled workers (due to supply and demand of workers), with these workers tending to be at the lower side of the income inequality gap. So not only do the rich benefit, but so too do those on lower incomes. This theory is recognised as the trickle down effect, where if individuals with a high income gain an increase in salary, then everyone in the economy will benefit too.
Moreover, income inequality is known to be a catalyst for economic growth. A few years prior to the 2008 financial crisis, the United States went through a time of economic growth. During this period, we remark that there was an expansion in the income inequality gap. Then as the financial crisis hit the economy, we saw a recession and a decrease in income inequality. As the economy recovered, income inequality rose. This is, at least in part, because of the incentives discussed in the previous paragraph. When there is inequality, people want to work harder, earn more, get richer. This in turn benefits the economy, through economic growth. Even if income inequality is not a direct cause of economic growth, the two are clearly strongly correlated, and hence if we recognise the importance of growth, we may have to accept an increase in inequality.
Overall, it is clear that even though income inequality is often recognised to be associated with poor social conditions, such as high crime rates, a lack of public health, and a lack of education, we can see it may actually help to drive growth, increase incentives to work, and is not always a cause of a low standard of living.
Do you agree with the arguments raised in this article? Do you think any important aspects of the topic have been missed out? We'd love to debate this in the comments section below.