Income equality is the equal distribution of income amongst the different classes and households, and is a main government objective, the fifth one, as well as full Unemployment, price stability, equilibrium of balance of payments, and Economic growth. As there is always some amount of income inequality, this determines the classes in society, with the aim to reduce this benefiting the lower class, the poor, s opposed to the upper class, the wealthy.
Redistribution of income, the method by which the government aims to improve and achieve income equality, is where the government ‘takes’ part of the income earned by the wealthy and ‘gives’ it to the poor, on far lower incomes.
It is realistically impossible to achieve complete income equality, as there will always be some degree of difference in amount of income, based on skills, rank in firm, as otherwise people have no incentive to strive for something more ass they will end up earning the same. Hence, it is difficult to pinpoint the level where the income distribution among households is deemed ‘fair’ and who, if anyone, actually has a final say or the most valued point of view when determining this.
The redistribution of income, as mentioned the main measure to promote greater income equality, is beneficial in a number of ways, which dictate why this should be a key feature of government economic policy. Firstly, the redistribution of income leading to greater income equality, where the effect is greater on LEDC’s as opposed to MEDC’s, as in general, the income inequality is higher in LEDC’s, such as brazil for example, can lead to a significant reduction in poverty, especially absolute poverty where the person lives on less than $1.25 per day, as they will have a higher disposable income, improving their daily living conditions as the amount which is affordable has increased significantly. Next, greater income equality would boost economic growth, as it would boost consumer spending due to a higher number of consumers with sufficient purchasing power, and as consumer spending is a component of aggregate demand, AD would increase as well, perhaps also leading to economic development and an improvement in infrastructure. The greater income equality would largely increase the number of people in education, due to an increase in incomes of those in the lower class; hence education is affordable to many more people.
This would benefit the country in general, due to a significant increase in productivity and efficiency of the economy, due to increased number of people in skilled labour as more have sufficient qualifications. There would be decreased saving amongst the wealthy, as they have a lower amount of funds than previously due to the redistribution of income towards the poor, and there would also be an increase in incentives to work amongst those previously on lower incomes, as they can now earn higher incomes. There would hence be a higher marginal propensity to consume and lower marginal propensity to save, having a positive effect on both the multiplier effect and the economy. In general there would also be an improvement in quality of life and living standards from the redistribution of income, due an increase in the number of people having similar wealth, and this is especially with those in LEDC’s in either absolute or relative poverty, who, from this policy, can improve the way of life dramatically.
There are however a few negative effects of the redistribution of income, primarily the fact that, although there is an increase in incentive to work amongst the lower class, there would be a decrease in incentive to work amongst the wealthy, as portions of their money are given to the poor. In attempting to promote greater income equality, some unemployment may arise from this due some of those on low incomes anyway, would claim unemployment benefits instead. There are also always time lags with these policies, for example when attempting to improve education; it may take 12-18 months for these policies to actually take effect. Higher rate of direct tax, on the rich mainly, also decreases incentives to work as they are earning less and their disposable income is decreased.
A diagram could be used to show the positive effect of redistribution of income (while it could also be used in the opposite sense):
There would be a shift right in the LRAS curve, from LRAS to LRAS1, indicating a decrease in real Y, from Y to Y1, This would also indicate a shift outwards in the ppf curve, due an increase in the quality of labour, as there is a higher number of people with sufficient qualifications for skilled labour, due to the redistribution of income. This should also lead to more economic growth. In conclusion, the redistribution of income to promote greater income equality (the main policy), should certainly be a key aspect of government economic policy, as the advantages outweigh the disadvantages, and it creates a more economically equal and fair society for a number of reasons mentioned before.
Cite this Greater Income Equality Promotion and Government Economic Policy
Greater Income Equality Promotion and Government Economic Policy. (2016, Jun 01). Retrieved from https://graduateway.com/greater-income-equality-promotion-and-government-economic-policy/