Cause Of Income Inequality

1791 Words 8 Pages
Inequality is increasingly at the forefront of public debate. After seven years, global economies today continue to struggle for recovery from the 2007-2009 Great Recession. Rising inequality is not a new issue, yet the subject and its distribution has been continuously marginalized in the field of mainstream economics. Perhaps it is due to inconsistent views of what economic inequality is, its level of economic consequences, and when inequality becomes unjustified. As a famous economic historian, Richard Tawney once noted: “What thoughtful rich people call the problem of poverty, thoughtful poor people call with equal justice a problem of the riches” [2]. Income inequality has been rising for almost four decades now [3]. This paper aims to …show more content…
Advanced economies, such as the U.S. face strong competition from countries with cheaper unskilled labour, such as Bangladesh and Cambodia since domestic jobs are lost or outsourced to these countries. Conversely, there is a shift of demand for more skilled (and educated) labour. Under the simplifying assumption that all workers (both skilled and unskilled) are paid the same wage, the demand for higher-educated workers is expected to rise, resulting a higher wage premium, which Atkinson defines as, “the excess of the skilled wage over the unskilled wage…” [1]. He goes further to referencing Heckscher-Ohlin’s standard international trade model to arrive at the conclusion that “if globalisation has meant that a country can import basic manufactured goods more cheaply, paid for by exporting more valuable high-tech services, then the skilled wage rises relative to the unskilled wage. The market-clearing wage ratio tilts against the unskilled workers” [1]. This explains the stagnant wage growth seen around 1970s; relative labour costs increased as the U.S. economy began to implement various policies that reduced trade barriers by entering political agreements such as the World Trade Organization and other multi-nation trading blocs …show more content…
In other words, they claim that skilled workers have greater productive capacity than unskilled workers, thus labeling technology as “skill-biased.” While per unit of labour may be cheaper for the employer that hires the higher skilled worker, it largely depends on the elasticity of substitution between skilled and unskilled workers. For example, when elasticity is greater than 1, it implies that skilled workers are relatively more substitutable for unskilled workers (i.e. demand for skilled workers rises) [1]. However, Thomas Piketty and Saez are critical of this explanation for rising income inequality. They assert that both the globalization and technological skill-biased stories cannot fully explain the phenomenon since it only appeared that the U.S. experienced extreme increases of income inequality. The other developed nations that were subject to similar forces experienced more modest (if any) increases of inequality such as in the UK (see Figure 1.2) [3]. Noble prize economist Joseph Stiglitz also

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