The Costs and Benefits of Inequality
Economic inequality refers to the unequal access to wealth and distribution of income among groups in an economy. The Lorenz curve is a graphical representation of wealth distribution, where a straight diagonal line represents perfect equality, while the Lorenz curve lies beneath it, illustrating the reality of wealth distribution. The Gini coefficient measures the level of inequality, where a coefficient of 0 represents perfect equality while a coefficient closer to 1 indicates high levels of inequality. Australia’s Gini coefficient is 0.334, above the Organisation for Economic Cooperation and Development (OECD) average of 0.32. There are both social and economic costs and benefits of inequality. A moderate level of inequality has incentive benefits that can increase labour productivity and encourage risk taking among entrepreneurs. However, inequality also causes poverty, reduces consumption and investment and creates social class divisions that may lead to economic instability.
Inequality provides an incentive that can overall increase the productive capacity of resources as it encourages the labour force to work longer and harder. The potential to earn higher incomes acts as an incentive for workers to work longer hours or overtime, which may enhance economic growth. Improved labour productivity may also be achieved if increased output is rewarded through higher pay, as workers will develop methods for a more efficient allocation of resources. Without the incentive effects derived from inequality, workers would not care about producing quality goods. For example, the creation of the Trabant car reflects the need for some inequality in an economy as its poor features were a result of the workers having no incentive to improve the design quality. Thus, a moderate level of inequality may be beneficial to the economy as it improves the productivity of the labour force.
On the other hand, inequality causes relative poverty and other social issues. The underclass of low-income earners may have limited access to educational opportunities or health problems that can reduce their ability to participate in the labour force. About 2.5 million Australians live below the poverty line, possibly resulting in a self-perpetuating cycle of disadvantage that lowers self-esteem and prevents people from working to their full capacity. Therefore, a major cost of inequality is poverty and social issues.
A moderate amount of inequality can be beneficial for the economy as it makes the labour force more mobile and encourages them to increase skill levels. Higher incomes act as an incentive to encourage labour to move to where it is most needed. A more mobile labour force results in a more efficient allocation of resources and higher rate of economic growth. Moreover, if higher qualifications