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The Relationship Between Economic Growth and Income Inequality

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There are many researches made on the relationship between the income inequality and the growth by economics. Inequality can be considered from many perspectives: economic, social and political perspective. In resolving this problem distinguish economics used empirical and theoretical overview as well. Lack of regulations and insufficient funds are just some of the reasons that do affect almost all. Many economic authors clam that it is difficult to analyze the impact of income inequality on grow when other factors that do influence that are not taken under consideration. The purpose of this research is to examine the impact of income inequality on the economic grow and if it can be reduced. The theoretical structure of this research analyzes such concepts as economic growth, income inequality and the relationship between the two.

Statement of the Problem

On global level, especially after the World War II, income inequality is most frequent global debate topic. Negative long term influence on the economic growth is caused by increasing income inequality. Therefore, causes and cure channels in resolving this are critical for the financial stability and development.


Inequality as a term is used a long ago and has it has roots in history. Individuals often relate it to the diverse opportunities that they have. Furthermore, opportunities can be important concept and it does affect many areas, but causes of income inequality go much deeper. Taking under consideration that on the global image there are more individuals who are poor then rich it shows that inequality do affect most of the people. When it comes to U.S. since 1970 income inequality was growing up and many researches mention the gender wage gap as an important issue. It’s important to mention that difference between periods recalling the history, differences in countries and individual incomes help in examining the determinants of the inequality itself. The US gained stable level household income in 1950s-1960s, while from 1965- 1979 UK reduced earnings depression. However, the US trend until the 1970s is explained by Kuznets’ theory calming that US was one of the highest industrialized countries in the world. Nowadays, Kuznets’ theory is less relevant because there is focus more on service industry more than on agriculture and manufacture. Economist Adam Smith in his book Wealth of Nations states that: ‘A man educated at the expense of much labor and time to any of those employments which require extraordinary dexterity and skill…’. This statement shows the importance in investing in education and human capacity because higher educated individual with efficient skills are more likely to have higher income then ordinary ones. However, we have to consider that opportunity to study not every individual have and even if do, having same opportunity to not guarantee that each of them will have same skills and would graduate indeed.

Wage inequalities plays significant role in determining individual’s overall income and standard of living in general. On the other hand, wages are the easiest to measure, used in many studies and there are many data-set on it. Poverty is mostly increasing and the situation is getting worse instead of getting better and many authors mention government corruption as a main reason. Available data shows that there is high correlation between the government corruption and social exclusion which affects the income inequality. The interesting fact researches mention is that social exclusion in more relevant predict of corruption than the GDP per capita.

However, when it comes to the gender wage gap, studies show that there are still differences in their wages, stating that women and man do not work and do not operate in the equal labor market and there might be even difference in occupation.

Income Inequality Metrics

There are many theories who do explain the causes of the income inequality it is important to know how to be measured as well. Concept of fairness or even the term poverty is different from inequality. Well known economist such us T. Malthus, D. Richard and A. Smith manly focus on considering factors such as the capital labor and capital in resolving this issue. Modern economist when being compared with the above classical ones focus more on the individual household’s income.

Wage Inequality

There is something common for all society and it is that none of them have equally share and same distribution of wages. Wages distribution was best measured by Gini index. Goods are not equally shared, howeve rthe differences explained by Gini index represents the range from 0 – 100. According to the author Anthony B. Atkinston in his book ‘Inequality’ explains that inequality or Gini coefficient shows that India and China are close to 50 per cent, and above 40 per cent ,which is high, is in Brazil and Mexico, including other Latino American countries. Considering this, next comes US and then UK. When it comes to the comparison based on Gini coefficient Continental Europe have higher income inequality then Nordic countries. From 1962 there was an increasing the wealth from 11 % to 16 % in 1995, in the US. Higher wealth makes people more secure and takes a part in political power as well. Furthermore, the US wealth is not equal distributed among its citizens.

Increase in Real GDP

Increase in the real Gross Domestic Product shows the economic growth and GDP is used to measure National Income (Wages, Interests, Rent, Profit). Researchers showed that increasing economic growth is not guarantee that there will be increase in wages. It can occur that GDP rise while average wage does not change or even decrease. This can be explained due to that profit takes large share of GDP. The other fact is that increasing real GDP cannot be seen when there is rise in population as well. This means that if there is increase in population for 4% and same percentage in real GDP, there will be no change in GDP per capital nor in the real wages. However, a company can gain higher profit but not necessarily share it for employee’s profit.

Total Income Equality and its Consequences

Compering some undeveloped countries, some individuals even live under the poverty line, and the higher inequality is related directly to higher % of individuals living poor. Researchers clams based on survey made that some individuals are for total equality, meaning that everyone will earn the same amount while others are again this saying that too equal distribution of earnings is not best solution. According to Lawrence and Skocpol who made survey on this topic, they stated that Americans easily accept the difference in wealth considering it as the result of individual choice and effort when compared with Europeans. On the other hand, Fligstein and Shin stated that individuals who are considered as poor will not just ear less than others but are more likely to be working under unsafe working conditions as well. A rapid increase in investment is not expected in accordance with the persistently weak credit demand and the deleveraging of many banks. Even with the consumer to keep the household back given the uncertain economic situation and the tense situation on the labor market is still there. After two years of very low growth Southeastern Europe has slipped into another recession. The recession has hit particularly hard the Western Balkans. High unemployment, especially between the youth, is concerned.

Economic differences started making the social status gap more and more which caused many debates on how poor individuals are less useful for the society and community. Income inequality is not just different within the country and one society but mainly it exist across the globe, starting from the U.S., Europe and transition countries as well.

Financial Instability and Decline

Piketty doctrine states that taxes have to be on higher level in order to get by deal with inequality. Not all researchers agree with this doctrine, explaining that the taxes do transfer funds from private to public section and usually private sector is not well known in sharing it. The country that does have high taxation and can be good example of almost equal income distribution but same time do not have positively economic growth is Finland. Although, that this county is consider as rich one, the private sector is not that strong. High taxation in this country does not bring much for the economic grow, but on the other hand in brings free education and healthcare which is advantage for its citizens. This means that the opportunity to study and reach higher level of education is available for every citizen of that country as well as healthcare without any cost in return


Taking under consideration last decades and the effects of globalization, it is important to emphasize that inequality is increasing in developed country but at the same time decrease in poverty across the globe was noticed. Globalization did help people find new jobs and free movement contributed and help them in finding new opportunities. On the other hand, working class does not benefit from it much. It is important to point out and conclude that as GDP is often considered as basic statistics in economy but it is not enough in analyzing the effects on the economic grow. UK paradox mentioned in this paper was good example of it.

Researchers agree about that is better for the county to have economy which is likely to growth even though there might be high level of income inequality rather than having equal distribution of the income and the economy to be stagnating.

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