Policies and their Unintended Effects for Income Inequality

Question: Write about thePolicies and their Unintended Effects for Income Inequality. Answer: Introduction Since past many decades income inequality in countries have been increasing or remaining stagnant. In many countries, top earners occupy a greater share, and for others there is very little rise in incomes. The condition of the low-wage workers is the worst. Income distribution is a bigger economic issue in many developed and developing companies. The need for income equality has urged governments to enter the markets and develop and implement policies that encourage income inequality. Governs have implemented policies like minimum wage policy, which sets a minimum wage for full time workers; social security policy which helps workers to plan for their retirement and gives insurance protection; and tax credit policy, through which the families living in poverty are helped by giving share of earned tax. However, these polices help some families to evade poverty but these policies do have some undesired side effects. The paper provides an overview of thee policies in Singapore and disc uses the side effects of these policies in relevance with Singapore. Minimum Wage Policy Minimum wage policy originated in 1938 by President Franklin Roosevelt, and was then known as the Fair Labour Standards Act (FLSA). Over years the coverage of FLSA was expanded to cover major industries, and the minimum wage rate has also been raised. When a minimum wage is established by the government, the firms are not allowed to pay anything less than the prescribed minimum wage. The long term objective of the minimum wage policy is to evade poverty that exists when it is seen that the earnings obtained from paid work are not able to help people and their families manage a living, and paid workers are unable to come out of poverty. However, there are some negative effects of the minimum wage policy. The policy is said to have detrimental side effects (Hovenga, Naik, Block, 2013). It is said that the policy ends up doing more harm, and the victims of the side effects are the unskilled labourers. The minimum wage policy creates unemployment for the workers whose productivity falls below the minimum wage (Hovenga, Naik, Block, 2013). The consequences of minimum wage policy can be explained using the microeconomics theory of demand and supply elasticity. The following figure explains the consequences using a hypothetical labour market. The demand curve is DD and the supply curve is SS, and as per the theory the intersection of the demand and supply curve will determine the competitive wage Wc, and the employment is Ec. When the minimum wage is set at Wm, employment will be reduced to Em. The reduction is employment is compared with the excess supply of labour (AC). The excess supply in labour leads to reduction in employment because the working hours will be reduced shown by AB. Also, excess supply of labour is characterized by workers who come to market with an aim of earning minimum wage. When the minimum wage is established the unskilled labourers will be removed out of market as their productivity does not match the minimum wage. Source: (Hovenga, Naik, Block, 2013) Moreover, the greater effects of this policy are seen on the youth and teenage labour. Economists suggest that the firms will adapt to the increased minimum wage by making some changes, and the government should be aware that minimum wage policy will not be cost-free and it will affect some part of the workers (Marginean Chenic, 2013). Higher the minimum wage greater the employment loss, and although it is aimed at improving economic well-being, it unemployment effect will be faced disproportionately by the low skilled workers and majorly by the teenagers (Burkhauser, 2015). The teen-agers are the least experienced and lower skilled and they are most likely to accept low wage for a job. Hence, if the minimum wage is set above the average market wage rate, it will reduce employment (Hovenga, Naik, Block, 2013). Tax Credit Policy The earned income tax credit (EITC) is referred as a tax credit policy that aims at reducing poverty and encouraging the workers by rewarding them, either by reducing the taxes and helping boosting the incomes of low-income and moderate-income families. It is one of the biggest cash transfer program adopted by U.S which benefits around 20 million taxpayers (Ault Bucknor, 2014). The EITC scheme is known as a refundable credit policy and according to it, the tax credit increases with every dollar earned by the couple or individual from their work. The tax credit is adjusted based on number of children. When the income of the family reaches the specified level, the family earns maximum credit, and as the income increases, the family receives maximum credit until they qualify for the phase-out. In the phase-out part, a reduction in the credit occurs for every extra dollar earned by the family and the process continues till the credit reaches zero. EITC can be seen as the supplement to t he income of the low and medium range families. Thus, the income-to-poverty ratio will be increased and thereby the income after-tax will also be increased, and hence, the likelihood of such families moving above the poverty line will be increased. EITC has been proved as a successful program, which has helped in raising low-wage families from poverty and encouraging work. The report suggests that in the year 2003, EITC managed to raise around 4.4 million people above the poverty line, and the program helps in significantly raising the children out of poverty. As per the reports of the Annual Social and Economic Supplement, EITC has helped in lowering poverty by 10% (Ault Bucknor, 2014). However, the EITC neglects the workers who dont have children in the household. The tax credit for the low-wage families without children remains significantly smaller, and so small that even the federal taxes for the poverty-line workers cannot be offset. Also, a parent without child, or a non-custodial parent who works full-time, at the federal minimum wage is not considered eligible for EITC, and hence, this group is taxed into deep poverty (CBPP, 2016). Also, EITC is having more costs than benefits due to frauds. It is found that due to misleading and false information about the income levels and the improper rate is as high as 25% which rounds off to around $6 billion per year as overpayments or false payments (Meyer, 2010). Moreover, EITC also makes higher earners pay more tax for these refundable credits, thus creating inequality (Edwards Rugy, 2015). Social Security Policy Social Security policy is an important federal program which is aimed at promoting income stability for the low-wage households. A steady income is given to the households as a part of this policy and replaces the wages lost as a result of retirement, death of the earner or any physical disability (Koenig Myles, 2013). Social security is said to largely benefit the retirees, however, it is said to have a positive impact on the economy. The report identifies that the impact of social security on economy is greater than the benefit payments; this is because ultimately, the receivers of the social security wont save the money but spend it on the goods and services, and thus the money is pumped back into the economy (Koenig Myles, 2013). Hence, as per the report, Social Security Policy in America benefitted more than 21.4 million people to move out of poverty (Koenig Myles, 2013). Although social security is helping the people get rid of poverty, but at the same time the rules of the social security payroll tax has negative effects on the high earners. As per the rules of the social security payroll tax, higher the income of the worker, lower is the return he/she gets on the payroll tax. Moreover, the mandatory participation requirement is even more expensive for the workers with higher income as the maximum amount for the wages that are subject to the social security payroll tax increases per year, and the payroll tax used to contribute to Medicare is again an additional cost (Bandow, 2009). Hence, social security policy does have some unintended effects. Scenario in Singapore Despite being one of the most open economies of the world, Singapore faces issues like wage stagnation majorly due to technological advancements, globalisation and competition from developing economies like China and India (Keong, 2007). Singapore is also facing income inequality. Hence, it is seen that the gap between the earnings of the low-wage and high-wage workers is increasing and the income of the low-wage workers is remaining stagnant. Singapore government has also included some policies for reducing poverty. Currently, Singapore is not having a minimum wage policy and an earned income tax credit policy in place, but It has a impressive social security policy. The social security policy was adopted in Singapore in 1955 and is more commonly known as the provident fund policy. There is a Central Provident Fund which has four account types, known as the special account, Retirement account, and Medisave Account. The policy covers local employees, and the policy coverage for public-sector employees is different (Dhamani, 2008). As per the social security policy of Singapore, every person who is employed is supposed to pay a specific amount of their earnings into the above mentioned funds, and the contribution depends on the income and the age of the worker (Poh, 2007). The amount in the ordinary account can be withdrawn by the workers specifically for home buying or for supporting their childs education, the special account funds can be used to invest in the venture funds, and the retirement account can be used for retirement benefits after the age of 65. Despite the social security system, Singapore is facing major issues of wage stagnation and income inequality which leads to poverty. Hence, a better social security system needs to be devised, so that there is a better alternative to poverty alleviation rather than just working long hours and working even harder (Keong, 2007). Singapore is currently working towards Workfare policy which is a subsidy policy that gives subsidy to workers, which is the best microeconomic policy which can be used to redistribute the income caused due to skill-biased growth, and help the workers that are at the bottom of the income pyramid (Keong, 2007). Hence, it can be said that, despite a better social security policy in place in Singapore, the country faces wage-stagnation, income inequality and poverty, and social security policy is not limiting the problems and causing a wage-gap, hence, it is important to reform the social security policies in Singapore. Conclusion Globalisation, technological advancements and wage stagnation have created income disparities and increase in poverty in many developed as well as developing countries. Poverty and labour market issues are faced by many countries. Many developed nations like U.S, U.K, Europe, Australia, and China have adopted some policies that are aimed towards reducing poverty. Minimum wage policies, earned income tax credit policies and social security policies. Review of the available literature and the reports which determine the effects of these policies have shown that despite contributing largely towards reducing poverty, these policies have some unintended effects. Minimum wage policy creates unemployment for the low-skilled workers. Similarly, the tax credit policy which is aimed at reducing poverty by giving credits to low-wage workers has actually become a burden for the high earners, as they pay more taxes so as to provide credits to the low-wage workers. Also, the households without chi ldren are given very less tax credits. Moreover, the social security policy is also proving a bad idea for the higher income workers. In Singapore, currently only the social security policy is in place and the policy is not able to reduce poverty, and moreover, Singapore is also facing wage-stagnation and income inequality issues. Singapore should to reform the social security policy for alleviating poverty. References Ault, M., Bucknor, C. (2014). Poverty and the Earned Income Tax Credit. The Public Purpose , 12, 1-16. Bandow, D. (2009). Social Securitys Coming Crash: The Certain End of Entitlement. CATO Institute. Burkhauser, R. (2015). 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