From Mid-19th Century to Current Economy: Increase in Income Inequality - Term Paper Example

From Mid 19TH Century to Current Economy: Increase in Income Inequality Economic changes have accompanied evolution and civilization of political and social institutions across the world. Current literature postulate existence of profound economic disparities within modern societies. These disparities came from change in economic conditions associated with wealth generation and distribution within a given nation. In addition, economic inequality results from movement of economic power from one sovereign nation or region to another. This is the reason why there has been significant change of economic situations since the mid nineteenth century. Nineteenth century witnessed collapse of pre-modern empires like the Roman Empire (Mokyr 40). As a result, new political entities, including the British and German empires came into existence. These changes created corresponding dynamics within economic sectors in affected regions. Since then, the world continues to experience shifts in economic dynamics from one region to another. Numerous theories strive to explain causes and consequences associated with these economic shifts. In order to understand what really happens, it is appropriate to look back at history and identify what caused economic changes at those times. Subsequently, we will be able to explain current economic inequality witnessed in modern societies across the world. Introduction In this context, political and social changes that took place during industrial revolution makes 19th Century the starting point of contemporary economic disparities. This period saw the rise of European powers into leading advancement in explorations and social modernization. Great Britain championed industrial revolution, which totally changed productivity and wealth creation across the globe. It was during this time that scientists came up with numerous breakthroughs in the field s of mathematics, electricity, chemistry and metallurgy (Mokyr 43). As a result, Great Britain and other European nations resolved to engage in industrial production of goods and mining activities. In this case, new resources that were not discovered and exploited in earlier empires came into existence. Improvement of transport networks through railway lines and establishment of urban settlements changed ways of living. On the other hand, Japan, Germany, and Portugal embarked on programs meant to spark modernization within their economic sectors. Great Britain led the world into abolition of slave trade in Europe, America, and Brazil. As a result, adoption and application of Liberalism started prevailing in modern government systems. Liberalism translated into the economic system of capitalism, which advocated for liberalized pursuit of economic goals by individuals within the society. Therefore, those who had access to key raw materials could utilize them for profit and wealth generation (Mokyr 44). On the other hand, poor citizens of these empires were employed in mines and industries as casual laborers. In this regard, integration of Liberalism and Capitalism marked inception of economic and income inequalities. In addition, globalization derives its roots from this period when economic performance of one nation could influence performance in another related country. Colonization spread into Africa and Asia where colonizers acquired additional wealth from unexploited territories. As a result, the scramble and partition of Africa by European’s major powers influenced economic changes through wealth acquisition from the colonies. All these economic changes resulted in advancement and increase of economic distribution and income inequality in the world. Income Inequality: Definition In this context, income inequality or economic inequality refers to distribution of assets and factors of production within a given economic region under consideration. Factors of economic production include major assets like land, capital, and labor. Income inequality changes depending on the period of time and economic factors prevailing within a given society. One society or nation can be experiencing difficult economic times while another enjoys substantial boom in wealth generation and distribution. However, cumulative wealth generation in a nation does not guarantee income equality. In essence, economic inequality is measured at individual and household level (Cowell and Champernowne 28). It manifests in aspects like amount of economic assets received by individuals over a certain period of time. In this case, some individuals could receive twice of more assets over a period of one year compared to what others receive over a period of ten years. World Bank statistics in 2000 showed that 1% of the richest world’s population own cumulatively 40% of total wealth (Cowell and Champernowne 31). This means that the other 99% are left to share the remaining 60%. In this case, poorest people receive infinite portions of economic resources while others own portions represented in percentage form by integers. Disparities of income distribution across the globe changed since the mid nineteenth century. In 1830, London had a population of approximately 1 million. 100 years later, its population had risen to 5 million. 1830 marked the peak of industrial revolution in Britain. Most people living in London during that time were employed in mines and industries (Mokyr 56). Government institutions and noble individuals started venturing into wealth creation and accumulations. At that time, there was significantly smaller inequality in terms of wealth distribution. Land, which is a factor of production, was in plenty; given the fact that European’s population was still small. However, distribution of the same factor changed over the 100-years period when London’s population grew by 500%. Individuals who had secured large tracks of land passed them from one generation to the other. On the other hand, immigrants from other European cities who could not own land in London had nothing to pass to subsequent generations. At this juncture, rich people got richer while poor member of the society continued receiving diminishing economic assets (Mokyr 61). Access to factors of production means one has control on wealth creation. Those who had no share of production assets had to depend on commercial activities and employment as the main source of aliving. In this context, the papers focus on income inequality received by members of a given society. These income assets basically involve monetary values, and they continue to differ among members living in different nations (Slottje and Keun 78). The industrial revolution period utilized unskilled labor in performing basic duties in factories. As industrial revolution progresses, there was need to train factory workers through education systems. Consequently, educated employees started receiving higher wages compared to uneducated casual laborers. On the other hand, those with access to opportunities ventured into commercial activities. These activities created wealth and income for those individuals. On the contrary, lack of opportunities including access to capital led to increase of low income earners within commercial sectors. Currently, income inequality features even in developed economies like United States. 25% of American employees earn under $10 per hour. According to economic and wages standards, this percentage falls below America’s poverty line. As if that is not enough, statistics indicate an increase in the number of those below poverty line. In a period of five years from 2000-2006, the number of Americans in poverty rose by 16% (Slottje and Keun 93). This was during the period when America experienced a significant economic boom. This means that after the 2008 depression, the number of poor Americans rose substantially. On the other hand, similar statistics indicate that the top 1% of American labor market earn more income than the cumulative total of what the bottom 40% earns at any given period (Moroney 36). This serves as an indication that income inequality increases dramatically over time. The case does not only apply in America. Developing economies like China and Brazil also experience the same economic problems. In this context, we will evaluate probable causes of economic disparities both in the past and at present economic environments. Causes of income inequality Before embarking to evaluate roots of income disparities and the causes propagating widening of income gap, we will appraise wealth distribution around the world. In a broad perspective, economic distribution not only materializes in domestic and at individual level. When we assume countries to act as individuals, we will realize that some nations are wealthier than others. In this case, global wealth generation differs from one economic region to another. In 2008, World Bank figures highlighted that 25% of the total global wealth is owned and managed by United States alone (Blanchflower and Jon 121). This means that America receives a larger share of world’s income into their economic system than other nations. On the other hand, China controls approximately 8% of world’s total wealth. The entire European Union has 30% of world’s wealth. With respect to distribution at domestic levels, China comprises of 23% of the entire world’s population. This huge number shares 8% of the total wealth; while America, which comprise of 3.5% of the world’s population shares 25% of the global wealth (Slottje and Keun 143). This shows that both global and domestic factors contribute to increasing income inequality in modern societies. Global Causes Shift in Global Economy From a global perspective, one major cause of income inequality is the shift of global economy from one region to another. In the mid nineteenth century Great Britain and its allies enjoyed economic boom through industrial revolution and colonialism. France was at the fore front of championing modernization of industries through scientific projects and exploration (Mokyr 70). As a result, British and other European markets became competitive and attractive. More people were employed and salary disparities remained minimal. However, abolition of slave trade and industrialization of America shifted economic power from Europe to United States. British markets started collapsing as the world focused on America. For the better part of 20th Century, America dominated world markets as an economic power. This was during the two World Wars. European countries, especially France suffered economic blows from the two wars. As a result, income inequality prevailed within European’s population in the 20th Century. Industries collapsed, assets were destroyed and national revenues were excessively spent in financing wars. In the long run, there was lack of employment among the poor citizens. Educated individuals and veteran soldiers received priorities in job market and higher wages. Currently, global economy seems to be headed towards a new direction. Emerging markets like Brazil, India and China are experiencing an increase in their national incomes as result of improved productivity and political governance (Moroney 43). Consequently, individual income levels will rise in these emerging markets while economic inequality increases in America. Mobility of Labor Market The other global factor causing income inequality is change within the labor market. Labor is one of the key factors of production. Business environments needs employees to perform various duties directed towards profit generation. Within the economics of labor, industrial managers will always strive to minimize labor cost in production. In this case, companies will acquire employees with minimum wage needs to perform respective duties. In the mid 19th Century, London attracted numerous immigrants in search of employment opportunities. Global labor market shifted to Europe during industrial revolution. This led to increase in workers’ population. Consequently, companies will hire immigrant workers because they are willing to perform duties for less, compared to domestic labor force (Mokyr 136). In the US, the labor market is filled with immigrants from Mexico and other West Indian nations. Immigrants ask for minimal wages in order to secure employment. As a result, they end up earning substandard income. When this income is compared with those in formal employment, one obtains a huge disparity. Therefore, dynamics in world’s labor market causes increase in income inequalities in societies. Technology At the international levels, advancement in technology creates a significant increase in income inequality. Improvement in technology induces mechanisms through which production and sales services can be improved. In the mid 19th Century, most goods and services were distributed across the world markets through ships and railways (Mokyr 85). On the other hand, production processes were basically manual tasks requiring little skills. Workers in production and transport sectors were paid almost similar wages because of similar technologies used in executing their duties. However, improvement in technology led to development of airways, which transport commodities to international markets. In this regard, pilots transporting those commodities are paid more than truck drivers. I addition, technicians operating production machinery are paid more than those involved in packaging of materials. Currently, employees trained in technology earn higher wages than those trained in social works and arts studies (Blanchflower and Jon 54). In this regard, advancement in global technology increases income inequalities. Domestic Causes Government Regulations Apart from these global factors, domestic factors within a nation contribute towards disparities in income earned. One example of domestic factor is government regulations on the required minimum wages for employees. In the period of industrial revolution, use of slaves for production was rampant. In this case, slaves were not compensated for work done. In the period after abolition of slavery and prior to establishment of strict government regulations, companies paid workers according to their productivity. Workers who contributed substantially to realization of profits received higher compensation that those playing insignificant roles like factory cleaners (Mokyr 77). Currently, domestic labor markets subscribes to regulations stipulated by government institutions. In the US and Brazil, government institutions have loosened their grip on labor regulations. As a result, employers set low minimum wages for job seekers. Prior to 2007, ineffective labor regulations by US government allowed employers to adopt a minimum wage of $5 per hour (Blanchflower and Jon 62). When this rate is compared with those of top income earners, it shows a big income disparity. Therefore, unfavorable government regulations on a nation’s labor market increase income disparities among employees. Access to Education Access to education is another determinant in regulating income earning within the labor markets. Industrial revolution utilized services of scientists and engineers in building and running factory productions. As a result, these engineers received higher compensation than factory laborers. Currently, access to education and other training programs prepares youth for employment. Educated individuals have enhanced skill-set that enable them to perform more complex and sophisticated production processes. In this case, professional services offered by educated citizens in industrial production and management are more important than that offered by high school dropout involved in street advertisements (Cowell and Champernowne 96). In this case, opportunities to access education and relevant training programs influence income earned by employees. Governments and social institutions should facilitate easier and economical access to education by the youth. This will lead to production of a skilled and informed workforce, which translate to improved professional services in their respective duties. Race and Gender Social factors like race and gender influence wages within the labor market. Jews, Asian and African laborers performed most production duties during the industrial revolution era. This was the period when racism was embraced by Western nations, especially Germany and Britain. Conversely, the cultural aspect of gender did not allow women to perform more productive duties in industries. This means that women and the minor races working in industries received less compensation compared to European workers within similar workplaces. Currently, American market experience wage disparities caused by race and gender differences. Asian Americans remain as top earners while African Americans fall at the bottom levels. In an interview, a European is more likely to be hired as opposed to an African American, for the same job (Blanchflower and Jon 90). This means that race and gender disparities contribute towards income inequalities in modern economics. Consequences of Income Inequality The world economy and basically American economy have witnessed an increase in the gap between rich and poor income earners. In the recent past, this gap has increased at a dramatic rate. Significant change of economic environment at global level may present additional and worse economic predicaments in terms of economic disparities. Income inequality is not without consequences. When 40% of a nation’s wealth and income is enjoyed by only 10% of its population, this means that the other 90% are going through tough times in trying to secure a portion in the remaining 60% of income earned (Blanchflower and Jon 85). In an event that this disparity increases, rich people will grow richer while poverty levels drown low income earners. Inherently, such changes possess negative effects to a nation’s population. Some of these effects manifest both as consequences at individual level and at national level. Increase in Corruption One impact resulting from increasing income inequality is the element of corruption within the society. Income inequality leaves the poor desperate for financial and economic needs. In this regard, one can willingly participate in any activity in an effort to secure a given monetary value (Blanchflower and Jon 16). Within democratic nations like United States, economic discrepancies can facilitate situations where money can be exchanged with political power. Politicians may secretly approach voters during elections for bribes. Because of economic pressures exerted by income inequalities, even law abiding citizens living below poverty line cannot deny bribes. In this way, politicians will take advantage of unfavorable economic situations to purchase tickets for political offices. In the long run, corruption will effect economic growth and efficient governance. Leadership comprising of wealthy but incompetent individuals at governorship positions may cause ineffective allocation of public funds. This means that poor allocation of capital for development purposes disturbs investment environments (Blanchflower and Jon 12). It may happen in the event that resources for development of requisite infrastructure like roads are not allocated efficiently. This might end up causing economic hitches. Inefficiency in Production In addition, income inequality may cause changes in economic patterns of productions and sales within employer firms. As stated earlier, managers and other senior employees in corporate organizations emerge as top earners. On the other hand, line workers and subordinate managers earn barely enough to take care of their needs. Improvement of revenue of a company will award senior professionals and managers pay increases. On the other hand, the goal of profit maximization requires pay cut for casual laborers (Moroney 71). In this regard, workers will hold on to low wages, and might decide to reduce their productivity. Workers can achieve this through neglect of duties and efforts meant to ensure quality service delivery. This leads to decline in quality and even quantity of goods and services offered by a given employer company. In the long run, the entire efficiency and economic productivity of an organization reduces. In the long run, replication of such economic behaviors across considerable American firms cause decline in national productivity; hence can lead to economic depression (Moroney 69). Heavy Government Spending Prior to the Great Depression, industrial managers in Europe and America knew that wealth distribution within the workforce was necessary to avoid social predicaments. Union revolutions may lead to destruction of industrial property and assets. This means that employee welfare should be considered to avoid development of such situations. In addition, improvement of employees’ welfare through wage increment leads to creation of a health population in a given nation (Blanchflower and Jon 78). America should consider putting measures that ensure wealth and income distribution across its population. Recently, the Obama administration propagated publication of a medical care program. This program was meant to cushion poor and middle-income Americans from health problems. In this case, federal government spends substantial resources financing social security programs. These actions would not be necessary if there was equitable income distribution across American workforce. In the long run, financing of social programs will affect government budgets; hence creating shortage of revenue for other important sectors like security. Social Unrests Income inequality may find its way into influencing development of negative social and political pressures. In modern economic environments like in UK and the US, it is common to hear of striking workers on cases related to minimum wages. Other workers unions are following legitimate and legal processes in presenting their grievances. This means that increase in income inequality may cause social disturbance within the labor market. Employees’ protests may increase tremendously and spill into national political debates. Such cases may present severe and violent actions by angry employees (Blanchflower and Jon 152). Last year, South African police shot and maimed a number of protesting workers in coal mines across the country. These workers were armed and wanted to engage security personnel in violent confrontations when police opened fire. This incident shows that continued increase in income inequality may lead to social unrests; which will in turn hurt a nation’s economy. Economic Incentive for Workers Despite the numerous negative consequences caused by income inequality, nations can reap some positive results out of the same. Economic theories and research indicates that workers will always work hard in order to earn the least wage offered in the market. In this case, minimum wages act as factors motivating job seekers to consider working. In the event that higher wages are offered for little job done, this will create an environment with employees experiencing diminished economic incentive to earn more wages. Therefore, income inequality maintains the required economic incentive for employees to work. In addition, increasing income inequality means the top earners continues to earn more wages than bottom earners (Moroney 25). In this case, top earners accumulate their wealth and invest them in more productive sectors of the economy. Increase in domestic and even international investment leads to creation of more employment opportunities. Bottom earners will always be there to perform duties in the newly established companies. Therefore, increase in income inequality presents economic incentives and opportunities for growth. Now, it is clea that the world is experiencing unprecedented increase in income disparities within the economic sector. These income inequalities were present since the industrial revolution era. However, situations started worsening when global economy moved from Europe to America. In the process, one can acknowledge causes of inequalities both at global and domestic platforms. In addition, these economic differences present consequences that affect social and economic stability in the society. Works Cited Blanchflower, David and Jon, Matthew. The causes and consequences of changing income inequality: w(h)ither the debate?. Washington DC: Centre for Economic Performance, 2008. Print Cowell, Francis and Champernowne, Duncan. Economic Inequality and Income Distribution. Cambridge: Cambridge University Press, 2010. Mokyr, Joel. The Economics of the Industrial Revolution. New York: Government Institutes, 2005. Print Moroney, John. Income inequality: trends and international comparisons. Pittsburgh: Lexington Books, 2009. Print Slottje, Daniel and Keun, Hang. Measuring Trends in U.S. Income Inequality: Theory and Applications. New York: Springer Publishers, 2004. Print Read More