Understanding the Wealth Gap: Who is to Blame?

As you look to reduce over-dependence on short-term loans like payday loans and start building wealth, it’s important to understand the wealth gap or wealth inequality. To do this, you must understand how wealth is calculated.

What is wealth?

You can calculate your wealth by summing up your total assets (such as cash on hand, savings, investments, etc.) and subtracting your liabilities (outstanding credit cards, mortgage loan, car loan, etc.)

Wealth inequality can be defined as the difference in wealth between the richest and poorest individuals in a country. There are many reasons why inequality (the wealth gap) keeps rising for generations. Here are some of the main reasons;

Technological advancement

Technological advancements are partly to blame for the widening wealth gap for the past two decades. While technological improvements have raised income over the past twenty years, the increase has been uneven. Highly educated workers have been the sole beneficiaries of technological advancements. The increasing inequality is an indication of slowing progress in the education sector over the past two decades despite the growth of the technology industry globally.

Immigration

Immigration can also be blamed for increasing inequality. Importation of low-skilled labour to do low-paying jobs tends to increase measured income inequality as immigrants are willing to work for much less rendering a majority of low-skilled citizens jobless. Immigration is to blame for approximately 5% of the overall rise inequality according to economist, David Card. [1] As immigrants lower the wages for low-skilled workers, the earnings for the wealthy increase in the long term.

Slaking labour unions

Labour unions globally aren’t as active as they were decades ago. Unions have been playing a crucial role in reducing inequality by raising wages for low- income earners and constraining those of high-income earners. In America alone, declined labour union activity is responsible for 20-33% of the total rise in inequality. [2] Wages for British workers have stagnated for years now despite increasing costs of living. Vibrant unions are the best-suited institutions for addressing wage imbalances which leads to wealth inequality in the long-term.

Increasing trade with low-wage countries

Global trade between developed countries and China has also had the same impact, if not a larger impact than immigration. As jobs from developed countries are transferred to China, the effect has been a reducing wage share nationally while boosting incomes for wealthy individuals with significant stock holdings. Increasing global trade has robbed many low-wage workers in developed countries and rewarded the rich who own the companies outsourcing jobs to China.

The nature of capitalism

Capitalism is also to blame according to French economist, Thomas Piketty. In his latest book titled “Capital in the 21st Century”, Piketty argues that high levels of inequality are part of the fundamental nature of market economies. He states that state capitalism such as what is practised in Britain eventually produces an economy that ultimately benefits individuals born into wealth (those lucky enough to inherit wealth). He goes ahead and suggests that the best solution to dealing with inequality is taxing wealth.

Solution

Most economists agree with Thomas Piketty, i.e., a coordinated global effort to tax the rich more will reduce the wealth gap significantly. Developed countries with the highest wealth disparities are guilty of charging the rich very little taxes. As a result, there is room to tackle wealth disparity via taxation. However, some critics argue that increasing taxes for the rich would be counterproductive since many wealthy individuals would transfer their capital to more tax-friendly countries and stifle the local economy. This highlights the importance of taking a globally coordinated approach to taxing wealth.

Policies friendlier to labour unions would also go a long way in reducing inequality. The same applies to increasing the number of skilled immigrant workers that enter the labour force. Improving the education sector would also help the labour force evolve with the times and churn out more job creators than workers. However, the above measures only address the wealth disparity between the top 10 – 20%. What about the gap between the wealthiest (top 1%) and the rest?

Since taxation hasn’t worked to reduce inequality for decades, targeting the sources of income of the wealthiest individuals directly can help. This would mean;more stringent regulations in the financial sector with the aim of weakening protections that shield the wealthiest from paying their fair share.

Referencespage4image37841408

[1] http://www.nber.org/papers/w14683

[2] http://scholar.harvard.edu/files/brucewestern/files/american_sociological_review-2011-western-513-37.pdf

Is the Company Director of Swift Money Limited.
He oversees all day to day operations of the company and actively participates in providing information regarding the payday/short term loan industry.

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