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Differentiation of incomes is the existing differences in the level of income of the population that largely predetermine social differentiation in the society and the nature of its structure. The causes of income inequality are the differences in the physical and mental abilities of people in education and training, family status, the possession of the property, etc. Broader and equal distribution of income is more appropriate in terms of economic development since it facilitates more stable total demand. There is every reason to believe that the more unequally income is distributed, the lower functional load it bears. According to experts, the increase in population differentiation halves the average annual rate of GDP by 18-22%. There is an opinion that anyone can succeed provided he or she works hard; meanwhile, facts prove the opposite. Only a few people managed to get rich through their own entrepreneurial abilities (about 10%). This paper will examine the causes of income inequality and suggest a possible solution to the issue in reaction paper definition.
Background of the issue
Differentiation of income lies in the real differences in the level of income of the population which largely predetermine social differentiation in the society, the nature of its social structure. In countries with developed market economies, the level of income is one of the most important signs that construe a person’s social position (along with property, attitude to power, etc.). A society with efficient and relatively uniform differentiation of income is the most stable due to the large middle class. It has intense social mobility, strong incentives towards social advancement and professional growth.
People get income either by setting up their own business (becoming entrepreneurs) or providing factors of production (their labor, capital, and land) to other people or companies, who use them for the production of goods. This mechanism of formation of income initially involves the possibility of inequality. The amount of income is closely linked to the wealth and well-being of families. Interconnection between income and wealth is direct (income level determines the amount of wealth) and reverse (the higher the wealth, the higher the income from it).
Differentiation of income is formed under the influence of various factors related to personal achievements, or independent factors, and those having economic, demographic, socio- or political nature. In addition, excessive income inequality negatively affects the quality of formation of public welfare and does damage to the society. It complicates health issues and education. Additionally, it contributes to the spread of crime and threatens political stability of a country since an increasing number of people are not satisfied with their position in the society. Moreover, it reduces the effectiveness of market methods of economic regulation.
Income inequality can have various causes, particularly differences in physical and intellectual abilities, education and skill differences, professional initiative and risk appetite. First, physical and mental abilities of people vary; moreover, there are some differences in temperament. These personal differences can contribute to understanding economic inequality. Physical and psychological characteristics determine the field or employment that a person chooses. Additionally, people differ in their intellectual, physical, creative and other abilities. These features form different susceptibility of people to effective performance of certain types of work. In such a way, this factor explains the difference in people’s earnings.
Hard work and motivation can be considered the next cause of income inequality. Thus, people can work in different ways. Workaholics spend 70 hours a week at work; they never take a vacation and tend to retire later. An average person will work as much as he or she needs to pay for the bare necessities. As a result, the difference in income can be great due to different efforts invested by people in their work. At the same time, no one can say that their economic opportunities are not equal.
One of the major causes of income inequality is the field of professional activity as well as differences in qualifications and experience. At the base of the income pyramid, there are domestic servants, fast food restaurants staff and other unskilled workers. Restaurant McDonald's employees or car washers working full time can earn $9,000 per year. At the top of the income pyramid, highly paid professionals are located. Furthermore, people have different levels of education and different experiences in the implementation of certain activities. A more complex work requires a higher level of education, thus reducing the number of applicants who can do the job. As a consequence, in a stable society, a person who is able to deal with more complex tasks usually receives higher income.
Also, differences in the willingness and ability to work under special conditions cause income inequality. For example, the work of miners is associated with greater risk and a high degree of physical intensity. The work at nuclear power plants is associated with responsibility. Here, a very complex technological system is applied, violations of which can bring great damage. The work in business requires willingness to take risks and perform a lot of intensive work.
Possession of property is another important point contributing to income inequality. Since the beginning of the 1990s, the number of people receiving income from the ownership of corporate securities increased significantly. Among them, there are those involved in entrepreneurial activity, possess capital, shares and other assets, which are all factors that cause differentiation of income. Moreover, the biggest differences in income are due to differences in inherited or acquired wealth. People on the top of the income pyramid tend to get most of their money from income from the property. Poor people possess a few material goods and therefore do not receive any income from non-existent wealth.
Effects of the issue of income difference should also be discussed. Income stratification of the society leads to the most negative consequences. It results in the creation of a class of people living below the poverty line, which is unacceptable in a developed society. In addition, it causes moral separation of the society into "us" and "them" while the common goals and interests are lost. As a result of the division of the society, public regions, and individuals into the rich and the poor, interregional and even inter-ethnic conflicts occur.
Also, there is an outflow of qualified workers abroad to areas that do not require relevant knowledge. As a result of deterioration of educational and professional potential of the society, knowledge-intensive industries degrade. Consequently, the low standard of living results in reduced labor activity of the population. Moreover, sharp differences in income are related to health deterioration and decreased fertility, which might lead to demographic crises.
The government is intended to mitigate the disparity in income of people in order to prevent excessive polarization and tension in the society. The main goal of social policy is to reduce stratification of the society and equalize living standards across the country. In a market economy, state influence on the level of income acquires the nature of mediation; therefore, the task of a great importance for a state is to create conditions for rising income with the help of economic policy. Among the methods of direct impact on income levels and its distribution, the core one is the statutory minimum level of wages. It must be related to the cost of living and, at least, be equal to it. In this case, it will serve as a reliable basis for building a system of remuneration. In an inflationary environment, a periodic review of the value of the minimum wage will be able to compensate the rise in prices. In a market economy, the state affects the standard of living through wage employment in the public sector. The wage of workers in the health care and culture sector as well as civil servants must be substantially increased and aligned with qualification. Moreover, due to the lack of budget, this increase should be considered as a long-term policy of maintaining social and control systems . One should also avoid delays in state payments earned by the population and enterprises with a view to triggering inflation. This practice leads to destabilization of production and potential bankruptcy of efficient enterprises, creating an explosive social situation.
Differentiation of income of the population is objectively caused by differences in the level of income of individuals and social groups as well differences in wages and social benefits, capabilities and property status. Cash income includes wages, social transfers, business income, dividends and other property income as well as the total cost of production. Income is distributed unevenly across population groups. The problem of inequality is closely related to the issue of poverty of the population. For a definition of poverty, a minimum standard of living - normative standards of living established by law and ensuring a minimum level of basic needs - should be developed. Low living standards of the majority block economic development and exacerbate social and political instability of the state. To improve the well-being and alleviate poverty, it is necessary to develop a systematic approach. Measures on social protection of the population should be determined not only as the support of the poor but also include protection of the working class, first of all, guarantee statutory minimum wage, which should be linked to the calculated the cost of living.