16. Consequences of inequality

Question 1

Why might Inequality be a good thing?

Answer 1

It could be argued that inequality is a necessary condition for economic progress. Higher rewards and lower taxes at the top, it is claimed, boost enterprise and deliver a larger economic pie.

Venture capitalists

Question 2

What are the 4 reasons for why inequality is a bad thing?

Answer 2

1. Inequality creates economic instability:
   The rich consume a smaller proportion of their income than the poor. They save money which people on lower incomes would spend. This leads to a reduction in aggregate demand, which in turn leads to unemployment.
2. Inequality reduces rates of economic growth:
   More equal societies tend to have lower steady rates of unemployment as well as better productivity and technical progress.
   This is because a more equal wage distribution encourages specialisation in higher value-adding industries, while low wage, low value-adding industries cannot compete.
3. Inequality harms educational standards:
   Inequality reduces performance because of its segregating effects. There is a good deal of evidence that children’s school success depends at least partly on the interests and aspirations of their peers. The influence of peers is greater than any school effects, including teacher quality.
4. Inequality is linked to poor health:
   Research seems to indicate that inequality causes poor health. One possible mechanism for this is through increases in stress, which is a known risk factor for many diseases. Specifically, World Health Organisation research shows that in Europe more unequal countries have poorer mental health outcomes.