The Role of Technology in Income Inequality in the UK
The U.K has faced income inequality in the labour market through wage discrimination and deunionization. Initially, economist has suspected the decreasing number of labour union as the chief reason of income inequality because of their negotiation power with the entrepreneur (Acemoglu, Aglion and Violante 2001). However, after analysing some real incidence, they have considered that the impact of labour union is not strong.
The chief reason behind this inequality is skill of workers and technological changes. Based on wage structure, the labour market in U.K has been divided chiefly into two parts, which are high-wage occupations and low-wage occupations. Due to technological improvement, labours of middle-wage occupations have lost their jobs, which in turn, have almost abolished this occupational segment from the job market, which implies declination of routine jobs (McIntosh 2013). Thus, technological changes based on skills, are the chief reason behind this changes in occupational pattern, or in other words, income inequality. By applying the modern technology in a production process, a producer can produce more outputs with higher quality. For instance, robot can perform any routine job quickly and more efficiently along with good quality. Hence, robot is substituted with a routine-job worker (Manning 2013). In this context, it is important to describe the concept “technology” and its relation with work. The pattern of technological requirement is based on job criteria, where some jobs use technology as complementary factor of production and for some other types of jobs, this modern method of production acts as substitute factor by deunionizing labour (Acemoglu, Aglion and Violante 2001). It can be stated from the practical scenario of U.K job market that technological substitution has occurred mainly in routine jobs, for instance, middle wage occupations, while this substitution has not occurred in the non-routine sectors, that is, high and low wage occupations.
Economists have measured income inequality with the help of Gini coefficient. The value of this coefficient lies between 0 and 100. When there is no income inequality among the people of a country, that means, everyone earning same amount of remuneration, then, the value of coefficient becomes 0. On the other hand, if a single person earns entire income of a country, then the value of coefficient becomes 100 (Milanovic 2011). If a country’s Gini coefficient shows a closer value with 100 then it can be said that the income inequality is existed over there (Jaumotte and Bultron 2015). This shows a sharp increase of income inequality in the U.K.
Measuring Income Inequality with Gini Coefficient
Thus, the above discussion has showed that the economy has faced income inequality in the field of labour market, where technology has played a vital role. In high and low-wage occupations, the share of occupation have increased, which in turn, has helped to increase the income inequality in the U.K. By applying Gini coefficient, economists are trying to measure income inequality.
- b) Since 1980s, inequality has occurred as a major issue in various countries, especially in developed countries, where people with higher wage have enjoyed major concentration of income (Jaumotte and Bultron 2015). Due to technological changes, this inequality has occurred in most of the countries. However, for U.K, institutional changes have also occurred as one of the major issues along with the previous one to boost up this inequality.
Initially, economists have assumed that income inequality has occurred due to the decreasing number of trade unions, who have the wage negotiation powers through the process of redistribution and bargaining (Jaumotte and Bultron 2015). However, this assumption has refused by various economists, after analysing the income inequality scenario of the U.K, the U.S and Canada. Moreover, excessive power of trade union as the cause of unemployment has not strongly supported by many economists. Hence, the next important explanation regarding the wage inequality has analysed as technological changes. The workers have faced wage differentiation, based on their skills. With upgraded technologies, worldwide demand for skilled workers have increased, which in turn, have benefitted workers of high-wage occupations to earn more, for instance, engineers and doctors (Machin 2008). However, from the perspective of development and growth of a country, technology and globalisation have played a vital role to enhance the economic condition of a country. Thus, those instruments are essential for every economy and policy makers cannot control the growing trend of those instruments (Jaumotte and Bultron 2015). In this context, it is essential to mention that there are various countries, where technological changes and income inequalities have occurred with different magnitudes (Manning 2013). With suitable examples, the situation can be described appropriately, where along with modern technologies; producers have replaced workers from their routine jobs with machineries, which can perform the same task more efficiently along with higher quality within a limited time.
At present, economists have tried to find out another cause, which also have great influence on income inequality. The impact of institutional changes with decreasing income tax of higher income group people and financial deregulation has caused to raise the income inequality among people (Power and Stacey 2014). Hence, it is beneficial to state that income inequality has occurred due to the combined impact of technological changes based on skills and institutional changes that can influence labour market (Machin 2008). Thus, to implement a long-term policy for human capital, reformation in labour market is essential, where policymakers can incorporate trade union and minimum wage.
The Impact of Institutional Changes on Income Inequality
The wage inequality can be occurred trough the U.K tax system. To maintain income equality, the government needs to maintain a progressive tax pattern. However, according to the recent tax structure, people with lower income group, pay 43% of their total income, while people of higher income group have paid 35% tax of their total income (Power and Stacey 2014). To reduce income inequality, the government of a country can use tax as an important tool. For instance, Finland and Germany has successfully reduced income discrimination by applying an affective tax policy. However, for the U.K, this system has remained unsuccessful to reduce this disparity, which implies that the system is regressive by nature. The country has faced a regressive tax condition in 2001, when people with lowest income have paid tax by the amount 55% of their total income, while that amount of tax for middle income and higher income people have remained at 36% and 34% of their total income, respectively (Holmes and Mayhew 2012). This consequence can be stated from the economic point of view, where people have spent most of their income in indirect taxes (Machin 2008). Due to higher amount of consumption, people of that group comparatively spend higher proportion of their income as an indirect tax.
According to some recent economical data, the income inequality between the riches ten male persons and the poorest ten persons, are large. For this inequality, economists have indentified education as the chief reason, which help people to earn more incentives (Michaels 2010). Higher educational knowledge helps people to perform task more efficiently (Holmes and Mayhew 2012). This educational progress with technological improvement has increased the demand for those workers in the labour market of the U.K.
Figure 1: Net household income on weekly basis at each percentile point in U.K (2015-16)
Source: (Cribb et al. 2017)
The above diagram is representing the weekly basis net household income of the U.K, at every percentile point during 2015-16. The diagram, based on current data, has successfully represented the income inequality, where the 10th percentile is earning almost half of the median income (Cribb et al. 2017). At the same time, 90th percentile is depicting the amount of income, which is almost double of the median one. Thus, it shows that, only 10 % of total population are enjoying maximum amount of income.
To understand the income inequality in this specified country, economists have tried to analyse variation in occupational structure through observing employment shares in different job segments. By analysing this changing pattern of occupations, economists can conclude that which sector is growing rapidly and which sector is going to decrease. For instance, the economist Anderson has measured the value of increasing occupational share of occupational pattern by applying the SOC2000 classification system (Holmes and Mayhew 2012). According to his observation report, employment share has increased in professional, associate professional, customer service, managerial and personal occupations. On the other side, this share has decreased in administrative occupations, elementary, process operatives and skilled trades (Jaumotte and Bultron 2015). However, this analysis has some drawbacks, as it has not considered the routine and non-routine tasks.
Thus, from the above discussion, it can be concluded that, the income inequality in U.K has occurred due to various reasons. Initially, trade union has remained the main factor for this inequality. After that, technological changes have remained one of the chief issues behind this inequality for the U.K and all other countries, worldwide. In addition to this, institutional changes also have played a vital role in the U.K to boost up this inequality. With higher education and skills, the demand of higher wage earners has increased over time, while the demand for routine-job workers has declines. At the same time, indirect tax system has played regressively by curtailing a huge portion of income of the lower and middle income group people.
Reference:
Acemoglu, D., Aghion, P. and Violante, G.L., 2001. December. Deunionization, technical change and inequality. In Carnegie-Rochester conference series on public policy (Vol. 55, No. 1, pp. 229-264). North-Holland.
Cribb, J. Hood, A. Joyce, R. and Keiller, A., 2017. Living Standards, Poverty and Inequality in the UK: 2017. Institute of Fiscal Studies
Holmes, C. and Mayhew, K., 2012. The changing shape of the UK job market and its implications for the bottom half of earners. London: Resolution Foundation.
Jaumotte, F. and Bultron, C., 2015. Power from the People. Finance and Development, March
Lawlor, E. Spratt, S. Shaheen, F. and Beitler, D., 2011. Why the rich are getting richer?. New Economics Foundation
Machin,S., 2008. Big ideas, Rising wage inequality. Centre for Economic Performance, LSEhrd.lse.ac.uk/dps/case/cr/CASEreport60.pdfhttps://sticerd.lse.ac.uk/
Manning, A., 2013. Lovely and Lousy jobs. Centre for Economic Performance, LSE
McIntosh, S., 2013. Hollowing out and the future of the labour Market, BIS Research Paper No.134
Michaels, G., 2010. The shrinking middle: how new technologies are polarizing the labour market, Centre for Economic Performance, LSE
Milanovic, B., 2011. More or Less. Finance and Development, September
Power, M. and Stacey, T., 2014. Unfair and Unclear: The effects and perception of the UK Tax System. The Equality Trust
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