Analytical Dive into the Factors that Contribute to Income Inequality

Inequality has been a major issue across the world for centuries and has continued to puzzle economists with some reaching the conclusion that it is an inevitable by-product of a free market. Growing inequality in the last few decades has fueled various policy debates around possible solutions to this issue affecting millions of people. The Gini is a reliable measure of inequality developed by Italian statistician Corrado Gini and it ranges between both extremes represented by 0 and 1; with 0 being perfect equality and 1 being total inequality. With a score of 0.41, the United States, for example, is considered to be moderately unequal compared to the rest of the world. Several factors are thought to cause inequality in a particular economy such as tax policies and public education; but this paper seeks to understand the correlation between income inequality and the average life expectancy of a population. The purpose of this research is to be able to identify policy directions that countries can take in order to reduce income inequality.

Introduction

All governments are faced with the challenge of distributing income in an equitable way; as a means to reduce inequality. Virtually every country has an issue with income disparity, with some being more adversely affected than others. Some have argued that inequality is not entirely bad as it increases welfare for most citizens, however, the consensus seems to be that less inequality is the ideal state of any economy. The question of income inequality is more than just a moral one with several studies pointing to economic benefits brought about by higher wages for working class people. The argument is that high wages for the low and middle class families has a positive effect on consumption and aggregate demand in an economy. There is a positive direct correlation between reduced inequality and GDP growth which and this gives governments all the more reason to find an optimal strategy for income redistribution. Progressive taxes, for example, ensure that wealthy individuals pay a higher proportion of their income in taxes which means that less of the burden is placed on poor and working class families. Some have however cited the economic benefits of reducing taxes for the wealthy, arguing that it stimulates job growth by creating an enabling environment for business to thrive. Capital, they argue, is attracted by this low tax environment, which means employers are able to create more business opportunities and thus hire more people. A good example of this is the debate on minimum wage that has had some of the largest corporations facing criticism over their hiring practices. Some large corporations have even threatened to replace some of this labor using technology, claiming that higher wages are punitive to business.

This paper, however, focuses on the relationship between age and inequality in an economy. The hypothesis makes the assumption that a higher life expectancy means less inequality for any given country holding all other factors constant. This allows for solutions around health, education and family planning, which could go a long way into reducing inequality for some of the worst hit countries.

Literature review

Most of the literature around the subject of inequality seeks to find the root causes and focuses mostly on the quantifiable economic components of the problem.

Data

The Gini coefficient is one of the key variables used for this research as well as factors affecting life expectancy data. The initial data set, as shown below, has been gotten from the CIA website which breaks down several countries income statistics.

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