Income Inequality

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Income Inequality Resulting From Flaws in the Efficient Market Theory Over the past few years, compensation of individuals in the financial sector has come under increased scrutiny. According to a report by Egger, Vonerlich, and Radulesec, they “find evidence of a significant earnings premium in the financial sector which amounts to about 43% in the average OECD in the country—after conditioning out observable director-specific and firm-specific characteristic”1. Is this premium truly deserved? Normal “efficient market” economic theory would predict that finance incomes were rising because employees were comparatively more productive than in other sectors. However, Tomaskovic-Devey and Lin suggest that increased incomes in the financial…show more content…
Many are learning to budget for the first time, and are too overwhelmed to think beyond the next paycheck. Thinking about building up wealth and assets is the last thing on many graduates’ minds, and in fact a recent article featured on Elite Daily claimed “if you have savings in your 20’s, you are doing something wrong.”4 That suggests that those who build up savings in their 20’s aren’t enjoying life. With so much information (and misinformation) it is no wonder that many forgo saving until later. It stands to reason that those who enter the workforce with some sort of prior financial knowledge should have a big leg up versus the rest of the population. And indeed, the data supports this. Financially savvy people are more likely to plan, save, invest in stocks, and accumulate more wealth. They are also less likely to have credit card debt, and when they do, they manage it better, paying off the full amount each month rather than just paying the minimum due. They also refinance their mortgages when it makes sense to do so, tend not to borrow against their 401(k) plans, and are less likely to use high-cost borrowing methods.”5 So what separates the financially savvy from the financially illiterate? Education would be an obvious choice. But surprisingly, higher education does not help according to…show more content…
This theory could prove to be more difficult than it seems. Actual investment returns are difficult to ascertain (and easily fudged by respondents) as respondent can tend to overestimate their returns without knowing that they are being dishonest. Additionally, it is difficult to record the “true” returns, as it is difficult for most investors to understand what they are actually paying into financial products. In order to accurately estimate the benefit of financial advice on returns, the study should control for factors such as race, education, wealth, and gender. Something that might complicate the study is the quality of financial advice that has been received. As has been mentioned before, substantial economic rents have been imposed by commission-based employees in the financial sector. Poor and costly advice might be much more damaging than no financial advice at all. Once the data is collected, a regression should be run on the difference that financial advice provides on investment returns over both a five and ten-year period. If the investors that had the advantage of professional advice gain substantially more wealth than

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