Analyse the economic and social costs and benefits of inequality in distribution of income in Australia. Income inequality describes the extent to which income is distributed unevenly among residents of an area. High levels of inequality indicate that a small number of people receive most of the total income, and that most people receive only a small share of the total. There are many advantages and disadvantages associated with the inequitable distribution of income. Income inequality can lead to an increase in the productive capacity of resources and so an increase in real GDP per capita.
Economic benefits are mainly derived from the incentive effects of inequality. Firstly, inequality encourages the labour force to increase education and skill levels where, as long as low-income recipients can afford to pay for education and training, income inequality may encourage an increase in the quality of the labour force. Also, inequality makes the labour force more mobile as the use of higher incomes can act as an incentive to encourage labour to move to where it’s most needed. A more mobile labour force will lead to a more efficient allocation of resources and a higher rate of economic growth.
Finally, inequality creates the potential for higher savings and capital formation because greater income inequality should encourage increased savings in the economy because of the greater number of higher income earners. These increased savings should reduce Australia’s reliance upon foreign capital by providing funds for investment. However, there are several economic costs that derive from inequality. Primarily in the fact that it reduces overall utility because people on higher incomes gain less utility from an increase in income than people on lower incomes e. . as more of a good is consumed it will provide progressively less utility to the consumer. On another serious economic cost, inequality can greatly reduce economic growth as low income earners spend a higher proportion of their income than higher income earners since the cost of basic take a higher proportion of their income which means that in an economy with a high level of income inequality, there will be a relatively lower level of consumption and higher level of savings which will lead to lower economic activity, employment e. t. c.
Finally, it creates many poverty and social problems since inequality in the distribution of income cause relative poverty which in turn leads to a reduction in educational opportunities and lowers self-esteem which over time may result in people not working, increasing unemployment and ergo decreasing economic growth. It is difficult to name many social benefits of inequality because the economic system that determines the distribution of income and wealth doesn’t give everyone the same level of opportunity to pursue their income and wealth goals causing only a few social benefits.
One being the fact that not everyone has the same mental and physical attributes and the same potential with regard to the acquisition of income and wealth e. g. some people are more talented at manual work which tends to lead to lower paying jobs than jobs that require analytical skills. On another note, people who acquire wealth through inheritance have a much greater opportunity to build up their wealth through investments, as opposed to those who start with no wealth.
Given that the problem of inequality is opportunity it is generally felt that the social benefits are very limited. There are two major social costs associated with inequality. Social class divisions are the first social cost since the distribution of income and wealth creates class distinctions in modern economies such as between groups broadly described as upper class, middle class and working class. Class divisions can result in tensions between people and different regions.
Wage disputes between workers and employers in which workers try to improve their income levels are a common cause of dispute. These divisions can sometimes lead to social and economic instability. As shown earlier, inequality leads to poverty problems but the facts have not been explored. Australia has a very high level of relative poverty with 12. 2% of Australians living below the poverty line, defined as receiving an income below 50% of the median income level.
Poverty tends to trap families into a vicious cycle of low incomes and limited economic opportunities. High poverty levels also tend to be associated with increased levels of crime, suicide, disease and reduced life expectancy. As you can see, there are many economic and social costs and benefits of inequality in the distribution of income but in general, having high levels of income inequality is bad for an economy and individuals so Australia has continually attempted to have relatively low levels of income inequality.