Here is a 25 mark model answer written in the style of Edexcel A Economics A Level.
Exam style question
The UK has seen its Gini coefficient for income inequality increase from 0.25 in 1979 to 0.33 in 2022/23.
Question: Evaluate the causes of an increase in income inequality. Refer to a developed economy of your choice.
25 marker plan
Here is an extended plan for each paragraph:
- KAA paragraph 1 – technological progress:
- Software is a substitute for some workers, but benefits workers whose skills complement AI and managers from higher profits.
- Show Lorenz curve shifting.
- Evaluation paragraph 1: technology could enable more online learning:
- Technological progress may reduce income inequality
- E.g. by enabling greater access to education, enabling worker (re)training.
- Link to higher labour demand for low paid workers and occupational mobility.
- KAA paragraph 2 – globalisation:
- Show trade diagram with removal of tariffs.
- Lower profits for domestic producers leading to higher structural unemployment.
- However the financial sector in the UK benefits from specialisation under free trade / exploiting the UK’s comparative advantage.
- Evaluation paragraph 2: non-tradable sectors:
- Some jobs are not exposed to international competition.
- These are so-called “non-tradable” sectors such as hospitality.
- Higher demand for non-tradables could boost wages.
- Conclusion
- Technological progress has the larger effect on income inequality – replaces some workers and benefits others.
- Globalisation has less of an effect due to importance of non tradables.
- However technology could replace highly paid workers too.
Below is a full model answer to the question above on causes of income inequality:
25 marker full model answer on income inequality
Knowledge, application and analysis (KAA) paragraph 1
Technological progress, such as the adoption of software, robots and AI, could increase income inequality. Software can be a substitute for labour in some jobs, such as self-checkout systems in supermarkets like Tesco replacing some cashier jobs. So an increase in the productivity of software leads to supply of software shifting right, leading to lower software prices. This reduces demand for checkout staff, as they are substitutes for software. So the wages of checkout staff fall. Meanwhile, increased use of software is increasing demand for workers whose skills complement software, such as highly paid software engineers, leading to higher equilibrium wages for this group of workers. AI could also make software engineers more productive, as they can find errors in their code more quickly. This boosts labour demand for software engineers and hence increases their wages too. CEOs of companies can reduce their costs of production by firing workers and using cheaper software instead. This increases company profits, leading to higher dividends for shareholders and the manager who may be paid in shares, boosting pay at the top end of the income distribution. This shifts the Lorenz curve for the UK economy downwards from L1 to L2, increasing income inequality. As a partial result of automation, the UK’s Gini coefficient for income inequality has risen from 0.25 in 1979 to 0.33 in 2022/23.
Evaluation paragraph 1
However technological progress could also reduce income inequality. The creation of websites such as Wikipedia and use of AI chatbots such as ChatGPT have made it easier for workers to learn new skills online, by making educational information more accessible and cheaper. 21% of people in the UK engage in some form of online learning, which can reduce the time taken for workers to learn new skills. So even if a worker is replaced by software, the internet makes it easier for workers to learn new skills, increase their productivity and demand for their labour. This leads to higher wages for workers at the lower income end of the distribution as they retrain and learn new skills. This also reduces the occupational immobility of labour, as workers can learn new skills more easily to switch jobs. This increases the supply of labour (and makes labour supply more wage-elastic) in highly paid jobs such as software engineering, which could reduce equilibrium wages in highly paid jobs, bringing down income inequality.
KAA paragraph 2
Globalisation may lead to higher income inequality. Economies have become increasingly interconnected, for instance due to free trade deals between countries that removed tariffs between countries. This made it cheaper for some companies to relocate their production to another country outside of the UK. For example, Marks and Spencer relocated its clothing production from the UK to East Asia, likely due to lower labour costs abroad. This reduced demand for textile workers in the UK, leading to higher rates of structural unemployment in some UK towns and lower wages for those that remained in the sector. Also, the reduction in tariffs from free trade deals shifted world supply down from world supply + tariff to world supply. This increases the amount of imports from (Q2-Q1) to (Q3-Q), increasing the level of international competition for UK producers. This lowers the UK’s supply of cars from q1 to q, reducing the UK car companies’ producer surplus by the shaded area. This fall in profits reduces demand for labour due to lower derived demand, lowering equilibrium wages for UK car workers. This contributed to the failure of British Leyland, with greater competition from foreign producers like Volkswagen and Toyota. Meanwhile, those working in financial services, such as highly paid investment bankers, benefitted from globalisation. This is because the UK economy, under free trade, could exploit its comparative advantage in financial services, leading to higher exports of financial services from the UK to the rest of the world. This boosts the demand for labour in investment banking, as demand for labour is derived from the demand of the good labour produces. This leads to higher wages in investment banking, increasing income inequality.
Evaluation paragraph 2
However a significant proportion of jobs in the UK are in non-tradable sectors. This includes some labour-intensive in-person services such as care, in school teaching and hairdressing, that must be delivered locally and cannot be imported or outsourced. These sectors are not affected by increased international competition from globalisation. Indeed as those in financial services benefit from globalisation and experience higher incomes, they may spend more on local non-tradable services including care, hospitality and cleaning. So labour demand may rise in these local non-tradable sectors, so wages rise for these lower income workers. So globalisation may not lead to increased income inequality.
Conclusion
Overall, technology has been the more significant cause of higher income inequality in the UK. Cheaper, more productive robots and software have replaced some low-paid jobs and have complemented high-paid work. While technology can enable workers to retrain, only a small percentage of the UK population participate in online learning. Globalisation can contribute to higher income inequality, but its contribution is limited because of the importance of non-tradable sectors to the UK economy. However the impact of technology on income inequality depends on which jobs are replaced. With global technology companies having operations in the UK such as Meta and Google, it is possible that AI is replacing or could replace highly paid jobs like software engineers. In this case, income inequality may not rise with technological progress.
Commentary
This answer contains:
- Solid, developed chains of analysis in KAA paragraphs.
- This includes explaining why each cause (technology and globalisation) may lower wages for those on low incomes and increase wages for those on high incomes. As a result, inequality increases.
- Good use of real world examples.
- This includes use of the self-checkout example, technology companies, clothing companies and car companies.
- Good use of appropriate diagrams.
- The Lorenz curve diagram is an excellent diagram to include in inequality essays.
- Other diagrams can be included, but the relevance to income inequality has to be made clear for this question.
- In this case, there is also a tariff reduction diagram. This is relevant as it shows domestic producers facing increased international competition, which could lead to structural unemployment.
- Evaluation points with clear chains of reasoning.
- Each evaluation point explains why the cause of income inequality increasing (technology or globalisation) may not be as significant.
- A well-rounded conclusion that supports the judgement given.
- The conclusion should start by answering the question. In this case, when the question asks to evaluate causes / impacts / effects, consider discussing whether the causes or effects are likely to be large or small and why.
- One way to justify a point is to take the most important argument from the essay.
- You can also add new justification such as countering your evaluation point – see the essay above for an example of this.
- A new mini evaluation point also helps in the conclusion. Think about what your judgement / answer to the question may depend on. In this case, whether automation increases income inequality depends on which jobs it replaces.
As a result, this answer would likely score full marks or close to this.
Other possible causes of higher income inequality could include (but are not limited to):
- Weakened trade unions.
- Increased use of insecure work arrangements such as zero hours contracts.
- Market based supply side policies such as privatisation.
- Growing differences in education outcomes.
- The relation between wealth inequality and income inequality. [The degree of wealth inequality can affect the degree of income inequality].