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Myths or realities: what do we know about income and wealth inequalities?

Jerome De Henau and Jonquil Lowe are educators on The Open University’s free online course, “Inequalities in Personal Finance: the Baby Boom Legacy.” In this post, they discuss some of the myths and realities that surround these inequalities.

A scale with pennies on one side and a stack of bank notes on the other, representing financial inequalities

As the gap between rich and poor, young and old, and the haves and have-nots appears to grow ever wider, there are heated debates about what types of inequality we mean, how they come about and what to do about them.

Our course addresses these issues, teases out the controversies and scrutinises a number of popular myths. Here are a few of them:

1. Income inequalities are good for economic growth

Growing differences in income between rich and poor help boost economic activity and thus growth, because when rich people get richer, they invest in new businesses and hire people. This also reflects the popular acceptance that earnings differences stimulate aspiration and hard work, thereby fuelling economic performance.

2. A growing gap between rich and poor in each country is an inevitable effect of globalisation

Competition from emerging countries, such as China, India and Brazil, pushes market prices down and makes it harder for less skilled workers in affluent countries to get by. There is an inevitable downward pressure on their wages, to try to keep businesses in these countries afloat.

3. Wealth will always trickle down

As rich people get richer, they will consume more goods and use the paid services of a number of other people, thereby spending their wealth for other people to benefit from. They will also invest more of their money in lucrative businesses, boosting employment and earnings as a result.

4. Private pensions are the best way to provide financial security in old age

Giving people the choice of their financial security is more effective in guaranteeing their future than providing them with a state pension. People know best what sort of lifestyle they want to have, and the circumstances and life events they will face.

5. The only way to tackle housing inequality is to provide financial support for buyers

In many countries house prices have risen sharply, even after the financial crisis that started in 2008. If people who currently live in private rental accommodation aspire to buy their own home, government support with the cost of buying could prove very effective for them.

6. Income differences are justified as long as there is equality of opportunity

The problem is not inequality in outcomes (how rich or poor one has become), as this reflect choices people have made during their lifetime, as well as some luck. Tackling inequality of opportunities (the chances a person has of success in their lifetime) is the issue that those worried about growing income differences should focus on.

So, do you agree with these statements? Do you think they should be challenged? Leave your comments below or join “Inequalities in Personal Finance: the Baby Boom Legacy” to explore the debate further.

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