How Economic Inequality Affects Societies

Economic growth (or GDP growth) should not be considered the only barometer to gauge the well-being of a state. How much wealth a society generates is no longer the only important parameter. How this wealth is distributed amongst the different strata of the population is also equally important, if not more!

The question of distribution of wealth has been present since the time of Adam Smith himself. However, during that time there wasn’t enough data available to understand the magnitude of problems that social inequality causes. The data and tools for analysis have been made available to the economists of late. The results have only affirmed that social equality is a desirable characteristic of an economy. This feature is a fundamental ingredient in creating a society which provides a good standard of living to its individuals.

Societal Goals Change

Various studies have been conducted with the help of data collected by the United Nations, IMF and other such organizations. One of the biggest findings is that amongst the developed nations, higher GDP does not mean a better quality of life.

Many developed countries such as Japan, South Korea, US, UK, Denmark, Norway, Singapore, etc. were listed down. Their GDP growth rate was listed down. Also, the income of the top 20% was divided by the income of the bottom 20% to come up with a measure of social equality. It turned out that countries which had a lower inequality coefficient, i.e., the variation in incomes was not very large were more productive societies which provided better standards of living. Countries like Norway and Denmark were rated as being happier than countries like the United States and Singapore.

Hence, the argument was made that societal goals change depending upon their stage of development. Till the economies are in the developing stage, they require a higher growth rate number to fuel more employment and opportunities. However, once the economy becomes a developed economy, higher and higher GDP growth number become meaningless. Instead, the focus should be on reducing the wealth gap amongst different segments of the society.

Different Methods of Achieving Equality

Another significant finding of the study was the fact that it did not matter how societies gained equality. If the income gap reduced, the quality of life improved automatically. Some countries like Japan had a lower income gap, to begin with. On the other hand, countries like Denmark have a vast income gap, and they create a level playing field using progressive taxation. Even though the methods used by both the countries have been very different, the results that they have obtained are the same.

Less Developed Human Resources: One of the most significant pitfalls of having high social inequality is that the human resource of the country suffers. Once again, the list of developed countries was ranked on the basis of their social equality. It was concluded that the countries with lower levels of inequality had a better workforce. The workforce of these nations also had higher social mobility. They were more likely to be educated and possess job skills. Hence, there were lower levels of addictions and all the health hazards that come with it as well.

Financial Stability: Many eminent economists such as Joseph Stieglitz believe that there is a correlation between social inequality and financial stability. They think that if there is higher income inequality, it is demonstrated in housing prices. This causes the average worker to pick up more and more leverage. As a result, the economy as a whole becomes highly levered. This exposes it to high amounts of risk and destabilizes the economy. Economies where income levels do not vary that much, don’t have high asset prices and as such leverage is not required.

Crime Rate and Rehabilitation

It is no mystery that countries with more unequal societies tend to have a higher crime rate and more violence. This is even true is a smaller set up like neighborhoods. Cities where the income gap is not too much tend to be peaceful. On the other hand, cities with wide variations in income are home to criminals who try to steal from the rich and make a living. From a national perspective, these criminals are a drain on the society. Firstly, the state has to pay money to keep their activities in check. If they are caught, the state has to pay to imprison and rehabilitate them. Lastly, the state never earns taxes from these people. Hence, if social inequality is reduced, a lot of wasteful expenditure done by the state is reduced. This is why societies like Norway spend less on crime per capita than the United States. They spend more money on providing education and employment. Hence, there is no need to spend on prisons later!

The income equality statistics have undergone a sea of change in the past couple of decades. Countries like the United States which are seeing their jobs being shipped overseas are facing rising levels of inequality. On the other hand, countries like India which are on the receiving end of these jobs are seeing social inequality decline.

Globalization is also an essential factor and hence must be considered while planning to make all economies in the world as equal as possible. It is essential to understand that equality of opportunity is a fundamental right, not equality of outcome. Equality of outcome is what happens in socialistic societies, and we all know how successful those societies have been.


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