Positive and Negative Impacts of Inequality

The positive social impacts of income inequality on New Zealand is

•  the incentive this creates to show innovation, invention, entrepreneurship, and more efficient use of resources.
• Investment finance becomes available due to the savings or surplus income from the top decile households.
• Some of these households also donate to charities and public assets.
• There is also the economic argument that some income inequality is necessary for efficiency in a free market economy. The trade-off for all these government provisions may be disincentives for people to work if they are receiving substantial transfer payments (benefits), to take risks (entrepreneurs), an increase in compliance costs, no clear price signals for resource allocation, and disequilibrium in the labour market. 

The negative impacts of income inequality are poverty and lack of opportunities like tertiary education.

• Increasing social division between those you have a lot of income / wealth and those who do not, this can lead to crime and social unrest.
• Poor health often shown by the outbreak of diseases in low income areas. This was seen in NZ with the outbreak of infectious diseases in low income areas.
• There can be a feeling of political isolation because low income earners don’t have the income to create a loud voice in the media.
• When a country has a large discrepancy in household income distribution we see some households (top 20 to 40 percent deciles) with substantial assets and wealth and others (lowest 20 to 40 percent deciles) with few assets and no wealth. This can lead to anti-social behaviour like crime and domestic violence.
• A poverty cycle can develop where low incomes lead to poor health and lack of education and therefore poor employment opportunities which means low paying jobs.

The diagram on the left shows that there is a connection between Inequality and the level of health and social problems. In general the more unequal a society is the greater the health and social problems it is likely to have. The table below also shows this correlation for NZ. Source: Paul Barber - National Equality panel, policy quarterly article. Volume 7, issue 4, 2011