Industrial Relations

Prepared by:
Dr. Arindam Bhattacharjee
• What Is Income Inequality?
• Income inequality refers to how unevenly income is distributed
throughout a population. The less equal the distribution, the greater
the income inequality. Income inequality is often accompanied by
wealth inequality, which is the uneven distribution of wealth.
• Populations can be divided up in different ways to show different
levels and forms of income inequality, such as income inequality by
gender or race. Different measures, such as the Gini index, can be
used to analyze the level of income inequality in a population.
• Understanding Income Inequality
• Income inequality, or the imbalance of income earned by a group
people, exists in countries throughout the world. In the U.S., these
differences in income have become pronounced over the past fifty
years. Income inequality is not the same as wealth inequality; the
former involves salaries/wages while the latter involves net worth.
• Causes of Income Inequality/Sources of Income Inequality:
• Globalization: The increase in trade among nations resulted in the
move of manufacturing and other jobs by corporations in the U.S. to
countries where labor costs were cheaper. For working-class and
middle-class Americans, this meant that secure, even generational,
jobs and income disappeared.

• Advances in Technology: While a boon in many ways, certain

workplace technological advancements, such as automation, have led
to the loss of jobs for blue-collar workers and lower wages for less
educated workers.
• Gender and Race Bias: Income disparities have always been clearly
visible for women and people of color. It's widely acknowledged
that, for example, male employees typically earn more than female
employees in the same job positions. Likewise, white males earn
more than non-white males.
• Education: Workers with less than a high-school education
experience less growth in wages than those with college educations
and post graduate degrees. The announcements of multi-million
dollar salaries and bonuses (even in troubling economic times)
going to C-Suite executives drives this income disparity home.
• Economic Conditions: When economic conditions weaken, financial
turmoil, unemployment, slowing business investment, and more
can affect incomes.
• Consequences of Income Inequality
• Some degree of income inequality is to be expected because of
basic differences in talent, effort, and simple chance. However,
according to the too much income inequality could "erode social
cohesion, lead to political polarization, and ultimately lower
economic growth."
• Political upheaval and the disappearance of social, educational, and
economic opportunities to improve standards of living and financial
futures can also be consequences of income disparity.
• Analysis of Income Inequality
• Income inequality and income disparity can be analyzed through a variety of
segmentations. Income distributions by demographic segmentation form the
basis for studying income inequality and income disparity.
• The different types of income segmentations studied when analyzing income
inequality may include:
• Gender
• Ethnicity
• Geographic location
• Occupation
• Historical income
• How to Measure Income Inequality
• One way to measure income inequality is to compare the income of
a large group of high earners (for example, the top 10%) to the
national median or average.
• Another approach compares the income of a lower-earning group
(say, the bottom 10%) to the median or average.
• Other researchers have begun looking at tax records of those with
the highest incomes to draw conclusions about these most affluent
slices of society.
• A frequently used tool for measuring income inequality is the Gini
Index. It was developed by Italian statistician Corrado Gini in the
early 1900s to help quantify and more easily compare income
inequality levels across countries of the world. The index can range
from 0 to 100, with a higher level indicating greater income
inequality among a country’s population and a lower level
indicating less.
• The latest available data from the World Bank shows South Africa
reporting one of the highest income inequality dispersions with a
Gini Index level of 63.0. The United States has a Gini Index level of
39.7. The Slovak Republic has the World Bank’s lowest Gini Index
reading at 23.2.
• The causes of income inequality: two case studies
• There are global and country-specific factors that drive income
inequality. To get a clearer idea of the causes, let’s look at two
countries as examples: South Africa and the United States.
• South Africa: The long shadow of apartheid and land ownership
• Based on the Gini index, South Africa has the world’s highest income inequality
at 63.0. Apartheid is a big reason why. For almost 50 years, this formalized
racial segregation restricted the activities and movements of Black South
Africans, who made up most of the population. Black Africans couldn’t marry
white people, travel without passbooks, or start businesses in white areas.
Society was structured to uplift white people while trampling Black South
Africans. When apartheid ended in the 1990s, inequality remained baked into
the country’s foundation. South Africa has struggled to make progress on
ending inequality. According to a 2022 World Bank report, the top 10% of South
Africa’s population holds 71% of all income. Living in or near cities increases job
opportunities, but South Africa’s growth has stalled and failed to create enough
jobs. High unemployment is a significant driver of inequality, especially for
young people.
• Gender, race, and land ownership are three other main causes.
In South Africa, women earn 38% less than men even when
they have similar education levels. When race gets added to
inequality analyses, it contributes 41% to income inequality. The
World Bank report also studied land ownership, which is vital for
addressing inequality among poor people in rural areas.
Because of apartheid, there’s a long history of unequal land
distribution which hasn’t been remedied yet. COVID-19 made
all these factors worse.
• The United States: The legacy of slavery and stagnant wages
• The United States isn’t among the top most unequal countries in the
world, but it has a much higher Gini coefficient when compared to similar
economies. According to Statista, the top 10% of earners in the United
States (in the third quarter of 2022) held 68% of the country’s total
wealth. The lowest 50% held just 3.3.%. Like South Africa, the United
States’ history of racial segregation plays a big role. Slavery made it
impossible for Black people to build wealth, but even after emancipation,
Jim Crow laws severely restricted economic opportunities. The effects
resonate to this day. A 2018 analysis of incomes and wealth found that
over the past 70 years, there’s been no progress in reducing income and
wealth inequalities between Black and white households.
• Inequality is also driven by the fact that wages haven’t kept
pace with inflation. In June 2022, consumer prices hit 9.1%
higher than the year before. This made it the largest annual
increase since 1981. Wages have been going up, but they’ve
been consistently at 4.5%. The federal minimum wage hasn’t
increased since 2009: it’s just $7.25. A study found that in 91%
of U.S. counties, a full-time minimum wage worker doesn’t
make enough to afford a one-bedroom apartment rental.
• What are the five main facts everyone should know about income equality?
• There’s a lot to sift through when it comes to income and wealth
inequality, but here are five of the most important facts to know:
• Inequalities within countries are getting worse
• While global inequalities between countries are lowering, the gaps within
countries are increasing. According to the World Inequality Database’s
2022 report, the gap between the average incomes of the bottom 50%
and the top 10% of individuals has nearly doubled in the past two
decades. The World Inequality Database frames it this way: “global
inequalities seem to be about as great today as they were at the peak of
Western imperialism in the early 20th century.”
• #2. COVID-19 is erasing progress
• According to groups like the IMF, COVID-19 is worsening
inequalities within countries (the poor were hit harder than the
rich), but also between countries. Wealthier countries had more
resources to deal with the pandemic and could recover faster.
According to the World Bank, progress was set back by about a
decade.
• Inequality hits already-disenfranchised people the hardest
• Income inequality is an intersectional issue. It affects
disenfranchised groups like women, young people, informal
industry workers, the elderly, and disabled people the most. As
income inequality worsened in the UK, the disposable income
for the poorest ⅕ of the population dropped by 3.8%. The
average income for retired households also went down from
£26,300 to £25,900.
• #4. Over the last decade, the world’s richest 1% have gotten 54% of
new wealth – and they’re getting richer
• According to an Oxfam report, the world’s richest 1% captured
$42 trillion of the new wealth created between December 2019-
December 2021. $16 trillion got distributed to the bottom 99%.
While the pandemic hit the poor the hardest, the world’s richest
actually gained wealth. There was a slight dip in 2022, but in
2023, their wealth is increasing yet again.
• Income inequality is linked to climate change
• Every year, humans emit around 6.6 tonnes of carbon dioxide
equivalent per capita. However, the top 10% of emitters are
releasing around 50% of all emissions. The bottom 50% are
producing just 12%. Why does this matter to income inequality?
The world’s biggest emitters are rich. While many of the world’s
poorest countries emit significantly less CO2, they’re enduring
the worst climate change effects. Even within rich countries, the
poorest half of the population have already met (or are close to
meeting) the 2030 climate targets set by their nations. It’s the
rich who need to change.
• Compensating differential
• A compensating differential, which is also called a compensating wage
differential or an equalizing difference, is defined as the additional
amount of income that a given worker must be offered in order to
motivate them to accept a given unsafe/undesirable job, relative to
other jobs that worker could perform.
• An example:
• Imagine two job opportunities available in a city: Job A involves
working as a construction worker on skyscrapers, while Job B
involves working as a cashier in a grocery store.
• Job A: Construction Worker
• The job involves working at heights, which poses a risk of falling.
• It requires physical labor and exposure to outdoor weather conditions.
• The work hours may be irregular and include weekends or overtime.
• Job B: Cashier in a Grocery Store
• The job involves working indoors in a climate-controlled
environment.
• It requires minimal physical exertion compared to construction work.
• The work hours are typically regular, with weekends off.
• Now, let's say the wage for Job A is $20 per hour, while the wage for
Job B is $15 per hour.
• Despite the lower wage offered for Job B, many individuals may
prefer it over Job A due to its more favorable working conditions and
lower risk. However, to attract workers to Job A, employers would
need to offer a higher wage to compensate for the risks, discomfort,
and inconvenience associated with the job.
• So, if the wage for Job A increases to $25 per hour, some workers may
be willing to accept the job despite its challenges because the higher
wage compensates them for the less desirable aspects of the work.
This wage premium in Job A reflects the compensating wage
differential.
• In summary, compensating wage differentials ensure that workers are
fairly compensated for the varying levels of desirability and risks
associated with different jobs, ultimately helping to balance supply
and demand in the labor market.
• Human capital and inequality
• Human capital and inequality are closely intertwined in several ways:
1.Access to Education: Human capital refers to the knowledge, skills,
and abilities possessed by individuals, which are typically acquired
through education, training, and experience. Inequality in access to
education can lead to disparities in human capital accumulation. Those
who have greater access to quality education tend to acquire more
human capital, while those with limited access may have fewer
opportunities to develop their skills and knowledge, perpetuating
inequality.
2. Income Disparities: Disparities in human capital often translate into
differences in earning potential. Individuals with higher levels of education
and skills generally command higher wages in the labor market, contributing
to income inequality. This can create a cycle where individuals from
disadvantaged backgrounds struggle to access quality education, limiting
their human capital accumulation and perpetuating income inequality across
generations.
3. Job Opportunities: Disparities in human capital can also affect access to
job opportunities. Employers typically prefer candidates with higher levels of
education and relevant skills, which can disadvantage individuals with lower
levels of human capital. This can further exacerbate inequality by limiting
economic mobility and reinforcing existing disparities in income and wealth.
4. Social Mobility: Human capital plays a crucial role in determining
social mobility—the ability of individuals to move up or down the
socioeconomic ladder. Inequality in access to education and opportunities
for skill development can hinder social mobility, trapping individuals in
poverty or limiting their ability to achieve upward mobility.
5. Health and Well-being: Human capital is not limited to cognitive
skills but also includes factors such as health and well-being. Inequality in
access to healthcare and other resources necessary for maintaining good
health can impact human capital accumulation and perpetuate disparities
in health outcomes, which in turn can affect economic opportunities and
overall well-being.
• Addressing inequality often involves policies and interventions aimed
at reducing disparities in human capital accumulation, such as
improving access to education, training programs, healthcare, and
other resources necessary for individuals to develop their skills and
capabilities. By investing in human capital and promoting equal
opportunities for all individuals to reach their full potential, societies
can work towards reducing inequality and fostering inclusive
economic growth.
Video on Inequality