Production function

Question 3: Income Inequality Hypothesis

Income inequality hypothesis is based on the premise that there exists a parity in the distribution of wealth among the members of the population. Income inequality leads to the classification of the population into high income earners and low income earners. The higher the extent to which income is unevenly distributed among the population, the higher the level of income inequality. Income in this case refers to benefits derived in form of wages, salaries, interest incomes, dividends, and rental income. The level of income is affected by the level of production. Production output on the other hand is a factor of the quantities and qualities of the input functions. It can be illustrated as follows;

production function

Where Q is the production output and X1, X2, X3, Xn are the factors of production such as labour, capital, land and raw materials. Taking for instance labour, income inequality develops as producers strive for more efficient and cheaper labour. Machines and automations through use of robots is one such way of achieving cheaper and more efficient labour. However, it means that the low income individuals whose income stems from provision of such labour would lose their income. On the other hand, the owners of the company be it private or the government, would experience increased income due to efficiency in production. This therefore results to income inequality. The labour income is however redistributed into capital as illustrated below;

production function 1

Figure 1: Elastic substitution of labour for capital

This particular model therefore implies that as the producers strive for cheaper means of production, they opt for means that result in uneven income distribution in the long run. Technological advancement has served to replace cheap labour without providing alternatives to the workers who lose their jobs as a results of this efficiency driven model.

References

Coburn, D., 2004. Beyond the income inequality hypothesis: class, neo-liberalism, and health inequalities. Social science & medicine, 58(1), pp.41-56.

De Maio, F.G., 2014. Income Inequality Hypothesis. The Wiley Blackwell Encyclopedia of Health, Illness, Behavior, and Society.