Thereare many researches made on the relationship between the income inequality andthe growth by economics. Inequality can be considered from many perspectives:economic, social and political perspective. In resolving this problemdistinguish economics used empirical and theoretical overview as well. Lack of regulations and insufficient fundsare just some of the reasons that do affect almost all. Many economic authors clams that it isdifficult to analyze the impact of income inequality on grow when other factorsthat do influence that are not taken under consideration. The purpose of thisresearch is to examine the impact of income inequality on the economic grow andif it can be reduced. The theoreticalstructure of this research analyzes such concepts as economic growth, incomeinequality and the relationship between these two.
Key words:inequality, economic growth, income, finance,innovation, instability, financial crisis, economic recovery, labor force,unemployment, gender wage gap, budget 1 LIST OF FIGURES Figure 1. Figure 1. GINI Index……………………………………9Figure 2 Figure 2. UK GDP increase in2010-2015…………….10 2 1STATEMENT OF THEPROBLEMOn global level, especially after the World War II, income inequalityis most frequent global debate topic. Negative long term influence on theeconomic growth is caused by increasing income inequality.
Therefore, causesand cure channels in resolving this are critical for the financial stabilityand development.2.1 PURPOSE OF THE RESEARCHTo find out and explore how unequal incomeimpact the economic growth and to examine the factors that can lead to theincrease the economic growth,considering social values as well.Literature gap: · Researches made and availableliterature do not provide the clear answer about how significant channelsaffect income inequality (there are many issues that are hard to be measured)and this is still far from resolved issue in the U.
S., Europe and even countriesin transition. · Researchers do not findsolution to remove the inequity and seek total income equality instead it isincreasing by time.· Poverty is mostly increasingand the situation is getting worse instead of getting better and many authors mentiongovernment corruption as a main reason 2.2 RESEARCH QUESTIONS· What is economic inequality andwhat are the causes of it?· Can society do something inorder to significantly decrease income inequality?· To what extend are insufficientrevenue and income affected by equal opportunities, free educational system andskilled labor force itself?· Does different individualincome cause unequal representation in society to which individual belongs to?· Can the balance be obtained byhigher taxation system and what are the key factors in obtaining it? 2.3 RESEARCH APPROACHThe study can be categorized as having adeductive approach; secondary sources of books, peer-reviewed articles,journals and websites were used.2.4 STRUCTURE OF THE ResearchThis research is literature research and itanswers research questions based on theory and empirical researches made.
3 LITERATURE FINDINGS: CRITICALOVERVIEW 3.1 INTRODUCTIONInequality as aterm is used a long ago and has it has roots in history. Individuals oftenrelates it to the diverse opportunities that they have. Furthermore,opportunities can be important concept and it does affect many areas, butcauses of income inequality goes much deeper. Taking under consideration thaton the global image there are more individuals who are poor then rich it showsthat inequality do affect most of the people. When it comes to U.S. since 1970income inequality was growing up and many researches mention the gender wagegap as an important issue.
It’s important to mention that difference betweenperiods recalling the history, differences in countries and individual incomeshelp in examining the determinants of the inequality itself. The US gainedstable level household income in 1950s-1960s, while from 1965- 1979 UK reducedearnings depression. However, the US trend until the 1970s is explained byKuznets’ theory calming that US was one of the highest industrialized countriesin the world. Nowadays, Kuznets’ theory is less relevant because there is focusmore on service industry more than on agriculture and manufacture. Economist AdamSmith in his book Wealth of Nations states that: “A man educated at theexpense of much labor and time to any of those employments which requireextraordinary dexterity and skill…
“. This statement shows the importancein investing in education and human capacity because higher educated individualwith efficient skills are more likely to have higher income then ordinaryones. However, we have to consider thatopportunity to study not every individual have and even if do, having sameopportunity to not guarantee that each of them will have same skills and wouldgraduate indeed. Wageinequalities plays significant role in determining individual’s overall incomeand standard of living in general. On the other hand, wages are the easiest tomeasure, used in many studies and there are many data-set on it. Povertyis mostly increasing and the situation is getting worse instead of gettingbetter and many authors mention government corruption as a main reason. Available data shows that there is highcorrelation between the government corruption and social exclusion whichaffects the income inequality. The interesting fact researches mention is thatsocial exclusion in more relevant predict of corruption than the GDP percapita.
However,when it comes to the gender wage gap, studies show that there are stilldifferences in their wages, stating that women and man do not work and do notoperate in the equal labor market and there might be even difference inoccupation.3.2 Income inequality metricsThere are many theories who do explain thecauses of the income inequality it is important to know how to be measured aswell. Concept of fairness or even the term poverty is different frominequality. Well known economist such us T. Malthus, D.Richard and A. Smith manly focus on considering factors such as the capitallabor and capital in resolving this issue.
Modern economist when being comparedwith the above classical ones focus more on the individual household’s income.In this research Gini index is mentioned as one of the measurement forinequality and this are some other: · 20:20 Ratio· Palma ratio· Hoover index· Coefficient of variation· Wage share· Theil index 4 WAGE INEQUALITY There is something common for allsociety and it is that none of them have equally share and same distribution ofwages. Wages distribution was best measured by Gini index.Goodsare not equally shared, howeverthe differences explained by Gini index represents the range from 0 – 100.
Forbetter undurestanding the Figure 1, high level of unequally present 100 while perfect equality presents 0. Figure 1.GINI Index According to the authorAnthony B. Atkinston in his book “Inequality”explains that inequality or Gini coefficient shows that India and China areclose to 50 per cent, and above 40 per cent ,which is high, is in Brazil and Mexico, including otherLatino American countries.
Considering this, next comes US and then UK. When it comes to the comparison based on Ginicoefficient Continental Europe have higher income inequality then Nordiccountries. From 1962 there was anincreasing the wealth from 11 % to 16 % in 1995, in the US. Higher wealth makespeople more secure and takes a part in political power as well.
Furthermore,the US wealth is not equal distributed among its citizens. 4.1 MEASURING WAGE When it comes to measuring incomeinequality, its critical to mention that wages have two dimensions and thoseare: dispersion and the extend to whichis wage positively distributed.
Ginicoefficient do measure the dispersion and compares shape.4 INCREASE IN REAL GDPIncrease in the real Gross Domestic Productshows the economic growth and GDP is used to measure National Income (Wages,Interests, Rent, Profit). Researchers showed that increasing economic growth isnot guarantee that there will be increase in wages. It can occur that GDP risewhile average wage does not change or even decrease. This can be explained dueto that profit takes large share of GDP. The other fact is that increasing real GDP cannotbe seen when there is rise in population as well. This means that if there isincrease in population for 4% and same percentage in real GDP, there will be nochange in GDP per capital nor in the real wages. However, a company can gainhigher profit but not necessarily share it for employee’s profit.
The Figure 2 shows the increase in real GDPin the period 2010-2015 in UK which brought economic growth while average wagesdecreased. Figure 2. UK GDP increase in 2010-2015 5 TOTAL INCOME EQUALITY AND ITSCONSEQUENCES Compering some undevelopedcountries, some individuals even live under the poverty line, and the higher inequality is related directlyto higher % of individuals living poor. Researchers clams based on survey madethat some individuals are for total equality, meaning that everyone will earnthe same amount while others are again this saying that too equal distributionof earnings is not best solution. According to Lawrence and Skocpol who madesurvey on this topic, they stated that Americans easily accept the differencein wealth considering it as the result of individual choice and effort whencompared with Europeans. On the other hand, Fligstein and Shin stated thatindividuals who are considered as poor will not just ear less then others butare more likely to be working under unsafe working conditions as well.
A rapid increase in investment is not expectedin accordance with the persistently weak credit demand and the deleveraging ofmany banks. Even with the consumer to keep the household back given theuncertain economic situation and the tense situation on the labor market isstill there. After two years of very low growth Southeastern Europe has slippedinto another recession. The recession has hit particularly hard the WesternBalkans. High unemployment, especially between the youth, is concerned. Economic differences started makingthe social status gap more and morewhich caused many debates on how poor individuals are less useful for thesociety and community. Income inequality is not just different within thecountry and one society but mainly it exist across the globe, starting from theU.
S., Europe and transition countries as well. 6 FINANTIAL INSTABILITY ANDDICLINE Pikettydoctrine states that taxes have to be on higher level in order to get by dealwith inequality.
Not all researchers agree with this doctrine, explaining thatthe taxes do transfer funds from private to public section and usually privatesector is not well known in sharing it. The country that do have high taxationand can be good example of almost equal income distribution but same time donot have positively economic growth is Finland. Although, that this county isconsider as rich one, the private sector is not that strong. High taxation inthis country do not bring much for the economic grow, but on the other hand inbrings free education and healthcare which is advantage for its citizens. Thismeans that the opportunity to study and reach higher level of education isavailable for every citizen of that country as well as healthcare without anycost in return.
7 CONCLUSIONTaking under consideration last decades andthe effects of globalization, it is important to emphasize that inequality isincreasing in developed country but at the same time decrease in poverty acrossthe globe was noticed. Globalization did help people find new jobs and freemovement contributed and help them in finding new opportunities. On the otherhand, working class do not benefit from it much. It is important to point outand conclude that as GDP is often considered as basic statistics in economy butit is not enough in analyzing the effects on the economic grow.
UK paradoxmentioned in this paper was good example of it. Researchersagree about that is better for the county to have economy which is likely togrowth even though there might be high level of income inequality rather than having equal distribution of theincome and the economy to be stagnating.