INCOME INEQUALITY TRENDS: CAUSES AND CONSEQUENCES

Abstract

Economic inequalities are found in all societies and as such seem inevitable and necessary for economic and social development. Most research on inequalities focused on inequalities arising from income distribution (implies the way in which the income generated in economy is distributed to households. The method of calculating this indicator is most often at the household level, by adding up the incomes of all members households and then weighted by the number of members household and their age). The reason for the above is that total wealth is more difficult measure accurately (in some countries, income inequality is not great, however, wealth inequality is increasing in last years. Wealth is generally more unevenly distributed compared to income due to the possibility of inheritance and rising real estate prices.). The aim of this paper was to examine the causes and consequences of economic inequalities. Several broad factors are identified as drivers of rising income inequality: technological change, globalization and trade, labor market institutions and policies, concentration of capital and rents, demographic and social factors. Economic inequalities lead to a number of negative social, economic and other consequences: it erodes middle class share, reduces mobility, and can weaken political and social cohesion. Due to the consequences of economic inequalities, addressing this problem has become increasingly important in recent years. The constant, inevitable, downward phases of economic cycles have reversed long term trends in convergence of living standards, and have significantly burdened social protection systems. Inequality is thus generally increasing in most EU member states, but also in other countries in the world, raising concerns about the sustainability of growth and social cohesion. The possibility of inclusive growth has also been called into question. Namely, if the income of a country (measured on the basis of GDP) grows faster than the income of households in that country, then the conclusion is that growth is not inclusive, i.e. the benefits of growth are not felt by all households in the country under consideration. For example, official statistics show that GDP growth in the USA in recent years has almost exclusively benefited households with the highest incomes. Also, too much inequality can threaten growth. The above applies in particular to inequality which cause is the increase in poverty at the bottom of the income distribution scale. Namely, if people at the bottom of the income distribution scale do not have enough funds to invest in their education and skill development, then such people will probably not be able to realize their full potential, which further threatens overall growth. Another way in which too much inequality threatens growth is that redistribution of income can encourage demand in the economy, and households as a rule, those with low incomes spend more.