Factors that Contribute to Income Inequality

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Abstract

This paper aims to take a deep, analytical dive into the factors that contribute to income inequality. Inequality has been a major issue across the world for centuries and has continued to puzzle economists with some reaching the conclusion that it is an inevitable by-product of a free market. Growing inequality in the last few decades has fueled various policy debates around possible solutions to this issue affecting millions of people.

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The Gini is a reliable measure of inequality developed by Italian statistician Corrado Gini and it ranges between both extremes represented by 0 and 1; with 0 being perfect equality and 1 being total inequality. With a score of 0.41, the United States, for example, is considered to be moderately unequal compared to the rest of the world. Several factors are thought to cause inequality in a particular economy such as tax policies and public education; but this paper seeks to understand the correlation between income inequality and the average life expectancy of a population. The purpose of this research is to be able to identify policy directions that countries can take in order to reduce income inequality.

Introduction

All governments are faced with the challenge of distributing income in an equitable way; as a means to reduce inequality. Virtually every country has an issue with income disparity, with some being more adversely affected than others. Some have argued that inequality is not entirely bad as it increases welfare for most citizens, however, the consensus seems to be that less inequality is the ideal state of any economy. The question of income inequality is more than just a moral one with several studies pointing to economic benefits brought about by higher wages for working class people. The argument is that high wages for the low and middle class families has a positive effect on consumption and aggregate demand in an economy.

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