Question

Over recent years, researchers have noticed the effects of skill-biased technical change on wage inequality. In other words, the real wages of the skill-based jobs have risen a lot. But the payment for unskilled jobs has actually been declining. What is a common measurement of income inequality? How to explain the rising inequality? For the explanations, you can present your answers in either one of the three approaches, intuitively, graphically or mathematically.

Answer 1

Inequality is a broad concept as it affects the entire population ie both the rich and the poor.The most common measure of inequality is the Gini coefficient which ranges from 0 which shows perfect equality to 1 which shows perfect inequality . Gini is obtained from the Lorenz curve, which divided the population from  richest to poorest.However the Gini coefficient do not show the sources of inequality.Other measures are Theil'sT and Theil's L.Both help to find inequality in the rural urban income group.Atkinson's measure is rarely used.The ratio of income of the richest divided by the income of the poorest is a very unpopular measure of inequality.

Over the past 30 years income inequality has increased in the United states.More income has gone to the very top in the income ladder.There are three reasons of falling wages and rising inequality in income---technology,trade and institutions.Of the three mentioned  here technology and education is the most important.Workers with high levels of education and skill get more wage.Solution to this is to increase education and training in jobs.Next reason is trade and globalisation. Growing trade has increased imports in US.As a result of this there has been loss of job in industries which originally produced such goods which are imported now.Offshoring has also affected jobs and wages.Solution to this is making exports more competitive .The last cause is government policies which created an institutional framework which increased inequality.Policies like de-unionisation, deregulation,tax changes,federal monetary policies led to reduction in wages and employment.So policy changes should be made to reduce income inequality.