ECO204 Assignments Week 5 - Final Paper- EDUCATION AND INCOME INEQUALITY

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ECO 204 Principles of Microeconomics

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December 16, 2019

Relationship Between Education and Income Inequality

Income inequality occurs in virtually all societies due to differences in age, colour, gender, country, and other aspects. It can affect a society’s different areas such as offence, financial sector, and public health measurement. Besides, the effects of income inequality would be addressed in the United States financial position, including economic development and work shortages. In conjunction, the space between a graduate degree and an individual with a weak or no education will be analyzed; moreover, a justification for the widening of this gap will be discussed. This research will also demonstrate whether or not it should help to reduce income disparity by giving individuals with masters or doctorate more opportunities. Finally, recommendations will be presented on how to minimize education-based income disparity.

Several methods have been utilized to measure income inequality. A common way of measuring inequality is by ranking households by income, from the highest earners to the lowest, then dividing the household classes into quintiles containing five groups containing an equal number of individuals. The computation allows evaluating the distribution of income amongst the groups in comparison to the total, where the initial quarter is the lowest while the 2nd is the second-lowest. Moreover, the Gini Index shows a summary of the statistic of dispersion of income where each individual has a similar income (Amacher & Pate, 2019). The United States income Gini has been rising over the past decades. However, some economists indicate that income statistics is not as reliable as a key factor in determining inequality measure. The primary reason is that income-related inequality measures have many flaws because it does not account factors such as social securities and benefits issued to the unemployed population that are factored to reduce the inequality gap. Moreover, the income of a household can vary significantly throughout the year and cannot be dependent on the availability of resources, including the accumulated wealth of a family.

There are various datasets used for measuring economic inequality. The first dataset is the Internal Revenue Service’s Statistics of Income (SOI), which describes income as the cash conveyed on tax methods or as the market income. The cash stated on the types of tax originate from the capital income, salaries and wages, businesses' profits, and discovered capital gains. However, market income omits benefits that are non-cashable like health insurance. SOI is more accurate on measuring the top of the income distribution and less accurate on measuring the bottom because it is not necessary for the low-class individuals to file income taxes.

The second dataset is the Census Bureau’s Current Population Survey (CPS), which provides poverty and income data every year. CPS explains income as money income that takes account of market income but omits the non-cash profits. CPS is efficient in providing low and medium-income data and not accurate in calculating high-income data.  Another dataset is the Congressional Budget Office (CBO) that obtains low-income data from CPS and high-income data from SOI. The CBO states the market income before and after the tax income. The income percentiles are the tools used by economists to sort the population when measuring inequality. Quantiles are also used to divide the population distribution into five sets, although they are not used in top of income circulation because the 98th and 99th percentiles are large. Gini coefficient is also used by economists to review the inequality through the whole distribution. Gini coefficient provides the measurements of income concentration in every percentile of the provided population.

There is also a statistically significant compromised correlation between the rate of unemployment and the level of variability in the share of national income. There is a correlation between the rate of unemployment and disparity: unemployment is the source, and the consequence is inequality. This means that it creates poverty as unemployment tends to exist over consecutive periods. Several studies have shown that poverty in a large number of developing or less developed countries in the world is by far the most significant cause of financial sector inequality.

Most economists agree that the lack of regulation in terms of job opportunities and economic shifts are the leading causes of unemployment and inequalities. The use of more software contributed to a lack of jobs which added to the question of bias. In this context, the problem of the income gap that becomes the explanation for global inequality within various areas of society is essential to address. The employment gap is the product of a considerable wage difference between the poor and the wealth (Amadeo, 2018).

Increase in income inequality is one of the challenges that the U.S. is facing today.

Increased level of income inequality decreases the intermediate GDP per capita growth. Inequality in income reduces the rate of variation of the real GDP. The rise in income inequality change rate leads to a decreased rate of variation in the real GDP. The non-improving income of the middle and low-income individuals and the increasing influence of the upper-class people have a significant impact on long-term and short-term growth. The rise in income inequality causes low growth rate due to the occurrence of the credit limitations. Increase in growth increases with a rise in investment in human capital and vice versa. It is hard for poor individuals to obtain or provide education to their children because of lack of school fees. This suggests that income inequality has a negative impact on growth because it rises the number of individuals lacking the ability to practice human capital investment.

Research indicates that people living in highly unequal states in the U.S. have a high probability of engaging in criminal activities that can disrupt society. The high rate of income inequality leads to increased poverty level that is related to rise in criminal activities, poor or lack of education, and lack of proper health care that can lead to newborn mortality, mental health problems, obesity, and reduced life expectancy. All these impacts are a burden to the United States' economy. There are many ways that health issues can impact economic growth, which include demographic structures, saving and investment, and labour productivity. Healthy people are more productive and have the energy to work, save, and invest; hence contributing to economic growth. Rise in income inequality limits low- and middle-income individuals from accessing quality and affordable health-care; thereby, impacting on economic growth.

The International Monetary Fund economists have conducted a report on assessing the findings and explanations for increasing inequality. According to economists, while bias may be the cause for different issues, the government needs to be particularly concerned about its effect on economic growth. Research shows that poverty reduces the levels of economic growth.

Inequality also contributes to several social concerns (Hershbein, Kearney & Summers, 2015). As per a study was done, the explanation for an increased level of offensive behaviour is an increased level of inequality (such as the one found in the U.S.). Such impacts will contribute to the elimination of the chunk from wage checks. Economists believe that substantive tests on wealth as well as the fairness of income, are required to increase revenue and prosperity for everyone. The growing inequality halted nearly five per cent of the aggregate gross domestic prduct per head from 1990 to 2010.

The Organization for Economic Cooperation and Development (OECD) has noted that perhaps the useful tool through which poverty influences growth is by decreasing opportunities for children belonging to disadvantaged socio-economic backgrounds to receive an education. Such kids are unable to take advantage of the lucrative educational opportunities that might help them learn new skills. That’s why they turn out to be less productive workers, resulting in low wages, which implies less financial system participation.

Choi (2016) indicates that since 1970, an equality gap between bachelor’s degree or higher workers and individuals without a degree has been increasing significantly. The difference between the income can be explained using a basic demand-supply relationship and relate to technological growth and innovation where the demand for skilled workers in companies has significantly increased while the supply for skilled labour is constant or reduced in other professions. Hence, the widening earning gap between the educated and skilled and none educated and less skilled. Rothwell (2015) indicates that a full-time worker bachelor owner between 25 and 64 years earn approximately $84,000, while individuals who do not have a high school diploma earn about $42,000. There is strong evidence that education is related to high earnings, and education value has grown considerably over the past years relative to a high school diploma. However, not all degrees have been successful, and other fields are more successful including science and technology, engineering (STEM) (Rothwell, 2015)

There is a significant relationship between attaining a high education level and the level wage they earn. People who are not educated well will be sidetracked with little balance between economic collapse and dissatisfaction, while persons who are trained and acquired relevant skills encounter little economic decline and enjoy the money and jobs that will help them grow and thrive (Gould, 2015). Therefore, with less trained workers, there is a growing difference in pay between educated and less qualified employees. Overcoming poverty through education is essential and requires developing institutions to innovate on new skills.  Higher learning institutions play an indispensable role in helping countries boost their social standard of living and production quality.

 The gender difference is another factor that triggers the growth of income equality in the United States. In the period from 1979 to 2005, the earnings gap among females earning less and females receiving averagely increased compared to the men in the same years. The U.S. census report claims that there is no detailed description of the income gap. Gender does, however, play a significant role in income inequality. Differences in cost index growth along with the average time that a person is expected to remain alive between the rich and the poor are also the reasons for wage inequality in the U.S. When cost indexes are rectified, the poor may do better, yet on the other hand, once their health implications are taken into consideration, they do worse. It is further explained that income disparity is growing more rapidly than doctors, even among the top ten per cent of people who earn as chief executives and megastars increase their annual income more than medical physicians.

Nonetheless, the need for innovative training to level the job market occurs whenever the issue of rising wage inequality and ceasing to increase the wages of working people is tried to be addressed. Providing everyone with incentives for successful results will increase, and a good reason will mark all the injustice left. With unequal consequences, wealthy people’s children always have more opportunities than children belonging to lower-income families are unable to reach (Strauss, 2011). Most private and public colleges are searching for pupils to pay fees that are more than their guardians receive every month. As a consequence, there are only two choices left to a learner who is in these conditions. Either he must apply for a high debt-loan, or he must find a job to work as a full-time employee to pay tuition fees. The chance of obtaining a degree can be diminished in both cases. Also, due to the rising costs, most learners have to choose the option of community college because they have limited alternative.

The United States should, therefore, focus on improving the educational attainment of less-skilled individuals and low-income earners since, in the long run, it is an efficient way of improving the poverty levels and improve economic security. Major reforms are required to reduce the number of fees for higher learning institutions for low-income families to access education. Moreover, the federal should strive to develop a law that will ensure university fees are manageable for low-income families instead of student loans.

Conclusion

Income inequality has been an issue for along tie in many countries in both developed and developing countries. Inequality entails a comparison between income distribution. A simple way of establishing inequality in the community involves grouping households such as quintiles then computing the income share for each group. Subsequently, inequality can be measured through the Lorenz curve that compares the income distribution of a household and the cumulative income. Over the past few decades, the income inequality in the U.S. increased significantly, which is highly associated with education level and changing dynamics in household structures involving the number of parents earning wages. The gap is continuously increasing between the educated and non-educated contributed by increasing technology and innovation that creates more demand for skilled and educated workers. 

References

Amacher, R., & Pate, J. (2019). Microeconomics Principles and Policies. San Diego, California:

Bridgepoint Education, Inc. Retrieved from https://content.ashford.edu

Strauss, S. (2011, November 2). The connection between education, income inequality, and unemployment. Retrieved from https://www.huffingtonpost.com/steven-strauss/theconnection-between-ed_b_1066401.html

Fletcher, M. A. (2014, January 24). Income inequality hurts economic growth, researchers say. The Washington Post. Retrieved from

https://www.washingtonpost.com/business/economy/income-inequality-hurts-economicgrowth-researchers-say/2014/01/24/cb6e02a0-83b0-11e3-9dd4e7278db80d86_story.html?noredirect=on&utm_term=.fef6d29b2199

Gould, E. (2015, February 20). Even the most educated workers have declining wages. Retrieved from https://www.epi.org/publication/even-the-most-educated-workers-have-decliningwages/

Rothwell, J. (2015, March 3). Is income inequality really unrelated to education? Retrieved from https://www.brookings.edu/blog/the-avenue/2015/03/03/is-income-inequality-reallyunrelated-to-education/

Hershbein, B., Kearney, M. S., & Summers, L. H. (2015, March 30). Increasing education: What it will and will not do for earnings and earnings inequality. Retrieved from http://www.hamiltonproject.org/assets/legacy/files/downloads_and_links/impact_of_edu_ earnings_inequality_hershbein_kearney_summers.pdf

Choi, K. P. (2016, May 30). Income inequality and the earnings gap between educated and noneducated workers [Blog post]. Retrieved from https://www.ashford.edu/blog/careertips/income-inequality-and-the-earnings-gap-between-educated-and-non-educated

Amadeo, K. (2018, October 10). Income inequality in America: Causes of income inequality.

Retrieved from https://www.thebalance.com/income-inequality-in-america-3306190