Question

Briefly discuss the major causes of income inequality. What factors have contributed to greater income inequality since 1975?

Answer 1

SOLUTION : -

Inequality of income is a socio-economic problem affecting the majority of the population. Itis a
social problem because it retates to the entire society and affecting their ability of access basic
amenities due to differences in income. Itis an economic problem because it involves income or
teal GOP per capita.

There are multiple reasons for the existence of income inequality. Primarily there are differences
in the ability of the individuals to work and to eam. Skill possessed. education level, training
received, all of these variables affect the income earned by individuals. Secondly, there are
instances of labor market discrimination.

Employers discriminate workers on the basis of gender, statistics, tastes and races. In this
manner, within the same organization and on the same post, there are differences in the income
eamed by workers. Thirdly. there are differences in workers’ preferences towards a particular job.
Different individuals possess wealth that is 3 part of non labor income.

A very unique reason for the differences in income earned is the market power of the worker. A
worker can gradually establish itself in the industry and build a market power. She can then
demand a wage rate according to her reservation regarding a particular job.

The distribution of income is getting unequal since 1975. One of the factors of this observation is
the changes in the structure of the economy. With an increased emphasis of companies on hiring
skilled labor, the focus has shifted on strengthening the human capital.

It was the decade of 1975 and 1985 wheres the labor force experienced the entry of many
young and inexperienced workers which implied, they were earning a lower relative income. This
became a reason for rising income inequality because a new group in the population started
earing a lower than average income.  

There was an increase in the labor force participation of women, especially single mothers wath
relatively lower work skill. This also accounted for a lower income than national average. An
important factor is the tendency of educated men and women to get married. Since both the
‘Spouses are earning well, this results in increasing the income of the people in their populAtion
group.

‘These structural changes has also forced companies to hire only skilled workers. thereby
displacing less skilled workers and force them to find a low income job. Unions have also played
a role in raising the wage rate only for its members, reducing the wage for other workers.

Immigration has reduced the wage rate of many unskilled workers. All these factors are helpful in
signifying the rising income inequality in the economy.