• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Why has income inequality in the UK and US increased so rapidly in recent decades?

Extracts from this document...

Introduction

David Bell Caius Part II Mr.M.Roberts Why has income inequality in the UK and US increased so rapidly in recent decades? In the 30 years up to 1979, income inequality in the UK was largely stable, possibly falling slightly. However, the decade after 1979 saw an unprecedented widening of the income distribution, a phenomenon replicated in the US: the ratio of the 90th and the 10th percentile of the in the UK the male wage distribution rose from 2.53 to 3.21 between 1980-90 and in the US from 4.76 to 5.63 over 1980-89. Moreover, at present the bottom decile accounts for just 3% of total income whilst the top decile accounts for 25%, which suggests widespread inequality in the UK. Other OECD countries have also experienced steady rises in income inequality in recent years, but the crucial issue, and one which can help our understanding of the underlying causes of income inequality, is to explain why this process has been so exaggerated in the UK and US elsewhere. One explanation as to why income inequality has risen in recent decades has been the growth in international trade, which Saughter (1998) claims accounts for a positive but small share of rising inequality. This can be demonstrated through the application of the Hecksher-Ohlin model. The assumptions of this model are as follows: firstly, there are two factors (skilled and unskilled labour), two goods (X and Y) ...read more.

Middle

In the US and the UK it is argued that this lead to a fall in the relative wage of unskilled workers and hence a rise in dispersion. This may have occurred firstly because of increased trade liberalization which increases competition from other countries where unskilled labour is abundant, reducing the relative wage of unskilled labour. Other explanations have also been advanced, notably that technological change has been biased towards skilled labour with the introduction of automation and IT. Firstly, it is argued that computer decision making has significantly substituted for human decision making in modest cognitive tasks. Secondly, computers in organisations have been complementary to large bundles of cognitive skills. Thirdly, organizational computing has been complimentary to people skills, raising their return. Fourthly, these changes are assumed to have come at a time and in the industries where organizational computing has had its largest impacts. Hence, demand for skilled labour has risen causing an increased dispersion between skilled and unskilled labour wages. It has been argued that this demand-based argument is too narrow and fails to realize that wage determination is partly affected by interacting as members of a society. One source of social interaction in wage determination in the labour market is through collective bargaining by unions. If it is the case that unions lead to a lower earnings dispersion (and this seems reasonable to propose), then a valid explanation for the rise in dispersion in the UK and US is the decline in union power and coverage. ...read more.

Conclusion

Secondly, the political environment is important because it determines attitudes, and particularly with respect to how much inequality is to be acceptable by society. Both Thatcher and Reagan in the 1980s, through their highly laissez-faire economic policies, reflected in their attitude towards the role of labour institutions and the tax system, fostered a climate in which greater levels of income inequality became socially acceptable. Akerlof (1981) has developed a model in which individuals' utility depends not only on their own income but also on reputation and conformity with the social code. In the 1980s, it may be the case that the social code changed, setting wages at long run equilibria which were seen to be fair rather than the market clearing wage. It may be therefore concluded that the notion of fairness changes allowing for greater dispersions in wages across groups. In conclusion, therefore, it appears as though skill-based technological change arguments and trade-based arguments may help to explain some of the underlying movements in income inequality seen across a number of countries. However, to explain why income inequality rises have been so marked in the US and the UK, factors specific to these countries must be the major cause. This occurred because of a change in the political climate, bringing about a reduction in the equalizing role of labour market institutions, a less progressive tax system and a new notion of what wage differentials society was prepared to accept as fair. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. Free essay

    From an economic perspective should my council do more to recycle a greater proportion ...

    This shows landfill is an example of market failure. Landfills will not be made if it was not needed, so if the need of them is reduced then they will not be made. The need can be reduced by recycling or not using landfill in any other way. One way could be to charge landfill users with taxes.

  2. An Empirical Investigation into the Causes and Effects of Liquidity in Emerging

    To summarise, although there is a demand-side effect of investors shifting to emerging market debt in periods of low money-centre rates as they search for yield, supply-side effects to do with timing of EM issues and borrower's willingness to accept them at any price appears to be dominant in the market.

  1. Organizations are starting to realize that the process of change is continuous and traditional ...

    Similarly, when oil prices dropped from $22 a barrel to $13 in the late 1990s, many oil services went bankrupt. Competition Global economy leads to heightened competition from competitors all over, this means that established organizations need to defend themselves against entrepreneurial firms with innovative offerings.

  2. Living Wage

    poor, it has gone too far and cannot be reversed without radical changes. Does this mean that capitalism is bad for ordinary workers? Not necessarily as Pope Leo, in Rerum Novarum, argued that as a rule, employee and employer should make free agreements.

  1. Retailing In India - A Government Policy Perspective

    2.3 Poor productivity in modern formats Supermarkets in India experience a productivity penalty due to: 1) The fragmented and inefficient supply chain that raises the cost of procurement; 2) The need to maintain competitive price levels vis-�-vis cheaper counter stores.

  2. Inequality in the UK.

    By 2001-02, the Gini coefficient had risen back to its 1990 level. Ultimately the level of income one earns will have a direct effect on the wealth they accumulate. Wealth is considerably less evenly distributed than income. Life cycle effects mean that this will almost always be so: people build

  1. Is residential property in the UK a good investment?

    Investing in property can be implemented in a multitude of different ways - for example one can buy a house with the view to letting it out, this way earning money from the rental income stream. Or one could buy a house with the view to living in it and

  2. Why has the relative pay of more qualified workers risen more strongly in the ...

    Pay differentials by education and age increased. The college/high school wage premium doubled for young workers as the weekly wages of young male college graduates increased by some 30% relative to those with twelve or fewer years of schooling. Wage dispersion increased within demographic and skill groups.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work