Income inequality get the attention of everyone involved in the challenging task of designing and implementing effective policies to reduce inequality.
The implications of inequality goes beyond the scope of economics , it also deal with sociology, anthropology and politics , which means that inequality arise and stay on because a variety of factors. Thus, inequality matters because :
a.- It diminish the legitimacy of economic growth . A recent report of the International Development Organization , (IDO)March 2014),shows that 85 of the wealthiest people in the world, own as much wealth as the poorest 50% of total world population.
b.- It make weaker, the social contract and democratic values ,that any community need to get along within diversity and usually biased opportunities. From the politicians point of view, inequality imply voters willing to support policies which they would not be willing to support otherwise (lower inequality). Thus, inequality allows voters to get captured which is also a threat to democracy.-
c.- It is a cause for instability, as long as social issues becomes in charge of the inefficient State to be solved. Most of the countries with higher inequality( Gini coefficient above 0,5, leaving aside Africa, (IDO report ),) are from Latin America,(11 countries) where the inefficient State, is still considered to be part of the solution for this problem. Thus, it is also a threat for economic freedom and growth.-
d.- The increase in inequality in the last 30 years , has been driven by the top1% of wage incomes,(The Equality Trust Research Digest: trends & Measures, (ETRD)2011),who get the highest return on their human capital endowment. This means, that there is an additional explanation for inequality, dealing the quality of education and the access to it when it is restricted only to a few.
What is the best approach to solve inequality?. Given that inequality may move up or down overtime, empirical evidence suggest that:
a.- Countries with more economic freedom have lower inequality(Western and Eastern European countries, USA ,Canada and Japan) ,but those with lower economic freedom , have higher inequality. This is the situation in the majority of Latin America economies. It follows, that more economic freedom is a necessary condition to reduce inequality.
b.- Although a necessary condition, economic freedom seem to be insufficient to solve by itself inequality. Economic growth may create jobs, but it does not guarantee that all of them to be the “better pay kind of jobs”. Efficient Complementary policies are also relevant. UK income inequality, increased by 32% , and in the USA increased by 23% between 1960 and 2005 ,however for the same period, decreased by 12% in Sweden which applied such complementary policies. (ETRD)2011).However, the same study show that after 1980, all three countries experienced increases in inequality. So , those policies also requires evaluations.-
c.- The first best approach to reduce inequality is better quality of education, coupled with wider access to such a quality ,to all qualified students( Japan, Finland), because it helps to reduces the loopholes between growth and good quality jobs.-
