Policy Solution to Income Inequality in The UK

Income inequality can be described simply as the income gap between the richest and the rest. It has increased in the UK over the past 30 years and has been concerned as an economic problem, which brings economic instability instead of growth and social problems. According to current research, trade is largely pointed as the cause of rising income inequality and this policy brief will then recommend a policy to solve the income inequality. Gini coefficient is a commonly-used measure of income inequality for a country nowadays, showing higher the number, greater the degree of income inequality. The diagram shows Gini coefficients for original, gross and disposable income, UK, 1977 to financial year ending 2018. The whole data has an increasing trend, meaning that income inequality in the UK increased slightly from 31.4% to 32.5%. That is to say the difference between the highest wage earners and the lowest wage earners in the UK becomes larger.

An old adage says “Rich get richer while the poor stay poor”. Income inequality is a vicious cycle. Rich people have resources to invest which creates new wealth so they have more chances than the poor to earn higher income. And sometimes this inequality prevents economics from growing in the UK according to OECD research. In the limited economy, it is impossible to pursuit of higher returns for the already wealthy forever. This shows that economic growth via income inequality is ineffective and unsustainable. Also, income inequality can lead to social friction. It can be a factor in precipitating higher crime levels and lead to all social members losing out. In general, income inequality may negatively affect the UK economy and society. That is why Minister Jones said ‘The government must do more to reduce inequality.’ As to the cause of income inequality, trade contributes to this. Growing trade between UK and other countries has increased the number of imports so that fewer products are needed to produce in UK industries and then making a job loss as well. In this case, unskilled or semi-skilled workers suffer badly. Industries no more need so many workers as before and fire them. As a result, income inequality may become larger between unskilled workers and skilled workers. It is clear that this trade phenomena leads to declining employment, falling labor force participation and also increasing income inequality finally in the UK.

The possible policy solution for this trend is to make the exports more competitive in the market. I propose to depreciate the U.K. pound by decreasing interest rate in order to increase exports and decrease imports. However, when depreciating more than 10%, the interest rate will stop decreasing. Otherwise, serious economic recession is likely to occur. Decreasing interest rate will lead both domestic and foreign people saving less money in the UK banks. As a result, the demand for pounds decreases and depreciation exists. When the relative money value of pounds decreases compared to other countries, less real money residents hold. Then the demand for imports in the UK will decrease and for domestic goods will increase. Meanwhile, other countries’ people have more real money to buy imports from UK due to appreciation. Since the main cause of income inequality is high unemployment rate due to trade, the proposed policy will increase the demand for domestic goods by changing the interest rate in the UK. In this case, domestic industries in the UK will employ more workers to produce goods or not fire unskilled or semi-skilled workers so that rising the employment rate. More proportion of people in UK gain wage will decrease the income inequality. Obviously, this policy will be beneficial for domestic industries, which can produce more products and earn more profits as well as unskilled or semi-skilled workers, which can keep working and earn wage. However, some people might oppose this policy since depreciation will cause demand-pull inflation, keeping price level higher in the long run than other countries. Also, relative low pound value will restrict economic growth in the UK though controlling to keep low depreciation rate.

Pierre‐Richard Agénor made a model for the linkages between income inequality and exchange rate in 2004, proving that real exchange-rate depreciation increases the welfare of the poor. Meantime, similar policy had been used in Turkey (in 2018). The lira, lost more than 40% of its value against the USD between January and August 2018. Turkey's central bank finally increased interest rates in September 2018 from 17.75% to 24% to stabilize its currency. Overall, income inequality has increased in the UK over 30 years and brings the UK economy ineffective and unsustainable. One proposed policy to reduce income inequality is to depreciate the U.K. pound by decreasing interest rate and stop changing it when depreciation rate is high.

References

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