Why Do Rich Get Richer and Poor Get Poorer?

Readers Question: Why Do The Rich Get Richer and the Poor Get Poorer?

It is an interesting question, but, not entirely true. In the past 100 years, the living standards of the poorest 10% of the population has increased dramatically. Real incomes have increased, but, there has also been a reduction in relative poverty ( a reduction in the gap between rich and poor). This is a combination of rising real wages, better education and the introduction of government welfare support which guarantees a certain minimum standard of living.

In the post war period, the UK, US and other European countries generally had a reduction in income inequality. This was helped by periods of full employment, rising real wages and progressive tax and benefit systems.

However, since the early 1980s there has generally been a reversal of this trend. The rich have got richer, and the poor have become relatively poorer. (Inequality in US). (Inequality in UK) It is not that the real incomes of the lowest paid has fallen (though in some cases real incomes have been stagnant) but, they have fallen behind higher income earners. The gap between the highest paid and lowest paid has increased. In the past couple of decades it feels like the ‘rich have got richer and the poor have got poorer’. Why is This?

Reasons for Rising inequality in past 2 decades

Reforms to Welfare State. Governments have sought to retreat from expensive universal benefits. In the UK, benefits have been linked to inflation. This means that benefits have increased at a slower rate than real wages. Therefore, those surviving on state benefits have become worse off. It is also more difficult to get benefits in UK and US

Cut in Income Tax. Both the UK and US have seen cuts in the top rate of income tax, and increases in indirect taxes. This has made the tax system less progressive. (e.g. top rate of income tax in UK used to be 80% now it is 40%.

Importance of Skills in Global Economy. Arguably globalisataion and economic development have changed the nature of the economy. There is now less demand for unskilled manual labour. This is because there has been a shift in manufacturing to the east. Therefore, workers with low skills and qualifications have found it harder to get well paid work. However, those with good qualifications and education have seen significant rises in real pay. There has been a rise in bonuses for top executives.

Growth in Insider / Outsider Economy.

There has been a growth in the insider / outsider model. Basically, there has been an increase in the number of poorly paid, part time, temporary jobs which offer little protection. This is known as the ‘outsider’ economy. The other part of the economy ‘insider’ involves highly paid, secure jobs which are generally well paid.

Wealth.

High income earners have the ability to buy wealth, e.g. house. Therefore, the rich can benefit from rising asset prices, but, the poor cannot. Certainly wealth inequality is much greater than income inequality.

One question worth considering - Does it matter if there is an increase in inequality, as long as the poor become better off in absolute terms? e.g. If poorest section increase incomes by 3% and richest section increase incomes by 12%. Or would it be preferable if both rich and poor increased incomes by 2%?

Rich Countries Poor Countries

Another way to look at this question, is from the perspective of rich countries and poor countries. Poor countries e.g. in Sub Saharan Africa continue to struggle with low or negative economic growth. Rich countries have much higher growth rates. But, in some cases (e.g. China and India) poor countries have been catching up.


Related:

• Poverty, Inequality and Economic Growth