Eilidh Glassey inspects the extensive effects of income gaps.

Income tax

When comparing a country’s GDP with it’s average life expectancy, there is no real relationship. However if we look at the difference in life expectancy between the richest and the poorest within each country, there is a clear positive correlation. Even in the UK, a country with little poverty and a free healthcare system, those with the lowest incomes live to an average age of 71.5 and those with the highest have an average life expectancy of 79.

By using UN data for western countries with successful market democracies to find those with the highest and lowest income gaps it can be seen that from the richest to the poorest 20% in each country there is a 3.5-4% income gap in countries such as Japan, Finland and Norway. In Australia, however, the UK, USA and Singapore, countries with the largest income gap, this is between 7-10%. This is a considerable difference of almost three times as much.

When plotting these income gaps against social problems such as life expectancy, math and literacy rates, homicides, teenage pregnancies, mental illness including drug and alcohol addiction, obesity, imprisonment and infant mortality rates there is a significant positive correlation between these social problems and income inequality. However, when compared with GDP, there is no relationship between the two. This was repeated with data from the 50 American states, and again, similar scatters were found.

Using data from UNICEF also gives the same result. Comparing UNICEF’s index of well being against income inequality shows that children are worse off in those countries with higher income gaps and there is no correlation between well being and GDP. This data suggests that in the developed world, social problems and childrens’ well being is not dependent on the country’s national income or economic growth but on the income difference within the country. Anybody who has taken a statistics module will have had it drilled into them that correlation does not apply causality. Therefore, we cannot imply that it is the income gap that is causing the increase in social problems, however there is a large amount of evidence which points to this.

Some examples of this are mental illness in societies ranging from 8%-26%, imprisonments per thousand ranging from 40-400 and in American states homicides per million range from 30-150, all increasing relatively with income inequality. Social mobility is also thought to be largely effected by income inequality, this means in countries with a larger income gap, you are far less likely to climb the social ladder and earn more than your parents – apparently America is not the place to go to live “The American Dream”.

Japan and Sweden are two countries with very different cultures, yet they both have a very low income gap. Interestingly, they achieve this through the use of different economic policies. Japan has a small income gap before taxation with smaller welfare states and smaller tax, whereas Sweden has a very large differences in earnings and narrows this through high taxation and generous benefit rates. Despite these differences, both countries have similar low rates of social problems showing it is not important how a country generates this low income gap.

The reasons behind this correlation are thought to be psychological. In countries with larger income gaps, those at the lower end of the scale are more sensitive to being looked down on, making them more susceptible to social stress. This is what Richard Wilkinson, a Professor Emeritus of Social Epidemiology at the University of Nottingham, believes is causing worse health, more crime and other social problems. These problems not only affect countries socially but also economically. An increase in the number of health problems experienced by a worker decreases that worker’s efficiency and increases health spending. This increased spending leads to reduced investment, which could have otherwise contributed to national growth.

Although there may be other external reasons contributing to or causing this correlation, there is a large amount of data which links the income gap with negative social aspects and the gap is currently rising.

 

Eilidh Glassey

 

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