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macro / ch 12

12.4The impact of income and wealth inequality

2 min read · 3 sections

Economic growth

  • reasons why inequality leads to lower growth
    • Lower investment in human capital
      • Poor households spend less on education and healthcare.
      • Lower human capital → lower productivity → lower economic growth.
    • Inequality of opportunity
      • Children from low-income families may have worse access to education.
      • This can pass low income from one generation to the next.
    • Lower consumption
      • Rich households spend a smaller proportion of their income.
      • This can reduce aggregate demand and economic growth (real).
    • Capital outflow
      • Savings of high-income groups may be invested abroad.
      • This reduces funds available for domestic investment.
    • Political influence of the rich
      • Wealthy groups may influence policies to protect their own interests.
      • This may reduce redistribution or public investment.
    • Less provision of merit goods
      • Lower spending on education, healthcare and infrastructure reduces human capital and productivity (also the future earning potential).
    • Limited access to credit
      • Poor households may lack collateral and cannot borrow easily.
      • This limits investment in education, health and businesses.
    • Political Stability
      • More equal income distribution → greater political stability
      • High inequality → social dissatisfaction and unrest
      • Political instability can reduce investment, confidence, and economic activity
      • Therefore, growth may fall

Low living standards

  • Poor health and nutrition
    • Low income can lead to poor nutrition, stress and worse health.
    • This reduces productivity and future earning ability (potential).
  • Lack of access to healthcare and education
    • Less access → lower(poorer) human capital → lower productivity → lower income.
    • This can create a poverty cycle.
  • Higher infant, child and maternal mortality
    • Poor healthcare and nutrition due to low disposable income may increase preventable deaths.
  • More preventable diseases
    • Poor hygiene and nutrition make illness more common. Does not have the equal access to healthcare (eg. vaccine)
  • Social problems
    • Higher crime, drug use, family breakdown and homelessness may occur.
  • Failure to reach full potential
    • Poor people may not develop their skills and abilities fully (low human capital/productivity).
    • This wastes human talent and can reduce economic growth.

Social and political stability

  • High inequality → social division
    • Society becomes more polarised between rich and poor groups.
    • Trust and social solidarity may fall.
  • Economic inequality → political inequality
    • Wealthy groups may gain more political influence.
    • They may influence tax, benefits, and other policies in ways that protect their own interests.
  • Vicious cycle
    • More wealth → more political power → policies favouring the wealthy → even greater economic inequality.