Question: Evaluate the causes of inequality.
One cause of inequality is unemployment. Anyone who is unemployed earns no wage, people who are employed earn a wage, so the employed get richer while the unemployed do not, income inequality increases and the Gini coefficient rises.
Although, the tax system should make income distribution more even. If the tax system is progressive then the rich get taxed a higher proportion of their income than the poor do, so the distribution of income becomes more even and the Gini falls.
Another cause of unemployment is the education system. Rich people can afford a better education and private tutors, develop better human capital, better skills and receive a higher paid job. Poor people cannot afford as good an education and remain on low paid jobs. So the rich get richer faster than the poor get richer, income inequality increases and the Gini rises.
But, a person who is motivated to work and study should achieve high grades no matter what school they go to.
An important cause of inequality is inheritance. Rich families remain rich because they pass their wealth down to their kids. Poor families remain poor because they have no wealth to pass on. So rich families get richer faster than poor families get richer, income inequality increases and the Gini rises. Between 1988-2000 in the UK, the wealthiest 1% have increased their share of the UK’s wealth from 17% to 23% and the Gini increased from 65 to 69.
On the other hand, inheritance tax may mean that less wealth is passed on to kids, so the income gap between the rich and poor may not widen that much.
Lastly, another cause of inequality is the uneven access to capital markets. Rich people have more assets and thus more collateral than poor people, so it is easier for the rich to obtain bank loans because the rich are less risky. This means the rich can take out large loans and help develop their businesses and human capital whilst the poor cannot, so income inequality rises and the Gini rises.
However, the development of microfinance means it is now easier for the poor to obtain small loans and close the income gap.