INCOME GAP

By 16A01C: Foo Jun Kit, Ho Han Fan, Lai Zhen Zhang, Zhao Xingyu
What is Income Gap?
In terms of an economy, an income gap usually means the gap in the income of the
rich and the poor.
The rich are usually defined as the top quintile of income earners, while the poor are
the bottom quintile.
It can be measured in terms of absolute income gap or relatively income gap.
The absolute income gap measures the difference in actual income, while the relative
income gap measures the ratio of income share in the economy.
Measurement of Income Gap
The most common way to measure the Income Gap of an economy is via the Gini
Coefficient.
The Gini Coefficient measure inequality using the Lorenz curve via the different
levels of income.
Singapore Income Gap

Causes of Income Gap

Globalisation and Trade
o Influx of cheaper and more efficient goods and services which relies on
unskilled labour. Unskilled workers are no longer as demanded, causing low
wage competition.
Technological Change
o Technological advancements leads to substitution of unskilled and semiskilled labour by information technologies and mechanisation.
o However, it is beneficial for skilled workers, especially abstract and analytical
workers.
o Overall polarisation of job opportunities, and thus affecting income
distribution.
o In addition, technological advancement also creates more winner takes all
markets, which promotes meritocracy and increases the one-sided income
distribution.
Government Policies
o The pre-existing income inequality causes the government to not be able to
effectively and efficiently decrease the income inequality.
o Excessively liberal foreign talent policies, which increases wage stagnation
and income inequality.
o The prioritisation of the government on the pursuit to be a Global City. This
leads to a meritocratic based economy, with agglomeration effects on the
higher end of the labour market.
Consequences of Income Gap
Pros:
Income inequality creates a meritocratic society, which incentivises people to put in
extra effort. This will in turn boost productivity and increase the national output.
It encourages entrepreneurs to set up new businesses and innovate.
The Trickle Down effect from entrepreneurship.
Cons:

Diminishing marginal utility of income.

A higher income inequality will often lead to a higher index of health and social
problems.
Unemployment and eventual increase in poverty rates.
Increasing wealth inequality, and inherited wealth which gives future generations an
unfair advantage.

Responsibility of Government to Tackle the Income Gap

Adam Smith, Wealth of Nations:
o

State intervention is required to regulate against the concentration of

wealth.The rich, he claimed, should be taxed something more than in
proportion to their wealth. The inequality of the worst kind was when taxes
must fall much heavier upon the poor than upon the rich.