Economic Inequality

Economic Inequality Definition

Economic Inequality refers to the inequality in terms of wealth distribution and opportunities among people belonging to different groups, communities or countries. Its increasing trend indicates more disparity, which can be appropriately expressed with the cliché “the rich get richer while the poor get poorer. In other words,  it captures the growing gap in assets or income between the richest and the poorest segments of the society.

Types of Economic Inequality

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Source: Economic Inequality (wallstreetmojo.com)

Although various characteristics can drive a person’s economic position, income, pay, and wealth are considered to be the most appropriate factors that encapsulate a person’s economic position within society.

  1. Income Inequality – Income inequality refers to the extent of income disparity among the people in a group. In this case, income doesn’t just include money received from employment. Rather all the income earned in wages, salaries, return on investments, interest on deposits, dividendsDividendsDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company.read more from equity, rent, etc.
  2. Pay Inequality – Pay inequality is slightly different than income inequality as pay includes the payment received from the employment, which can be on an hourly, weekly, monthly, annual basis. The pay, in this case, may also include bonuses.
  3. Wealth Inequality – Wealth inequality indicates a disparity in terms of total assetsTotal AssetsTotal Assets is the sum of a company's current and noncurrent assets. Total assets also equals to the sum of total liabilities and total shareholder funds. Total Assets = Liabilities + Shareholder Equityread more owned by an individual or household. These assets also include financial assetsFinancial AssetsFinancial assets are investment assets whose value derives from a contractual claim on what they represent. These are liquid assets because the economic resources or ownership can be converted into a valuable asset such as cash.read more, private pension rights, and property.

How is Economic Inequality Measured?

It is measured using the following –

  1. Gini Coefficient – The Gini coefficientGini CoefficientGini Coefficient or Gini Index is statistical dispersion depicting the income dispersions amongst the population of a country i.e. it represents the wealth inequalities of the citizens of a particular country. read more helps determine the inequality across the entire society as a whole and not just among some specific income groups. Gini coefficient of 1 indicates maximum inequality, which means that all the income went to a single person and no one else got anything. In contrast, the Gini coefficient of 0 indicates minimum inequality, which means that the income is equally shared in society. The lower the Gini coefficient, the lower, is the inequality.
  2. Palma Ratio – The Palma ratio is a type of ratio measure that compares the share of income of the top 10% of the society to that of the bottom 40% of the society. In societies with lower inequality, this ratio is less than 1, which means that the top 10% of that society doesn’t earn more than the bottom 40%. On the other hand, in societies with high inequality, the Palma ratio can go as high as 7. The lower the Palma ratio, the lower is the inequality.

Examples of Economic Inequality

Below are some examples  –

Example #1

Let us take the example of the Gini coefficient of three nations (Australia, Costa Rica, and Israel) for 2018. Comment on the economic inequality of the nations based on the Gini Coefficient.

Example 1

Source data.oecd.org

From the above table, it can be seen that economic inequality is moderate in Australia and Costa Rica (Gini coefficient close to 0.3). Simultaneously, it is relatively worse for Israel with a Gini coefficient of close to 0.5.

Example #2

Let us take the example of the Palma ratio of the same three nations for the year 2018. Comment on the economic inequality of the nations based on the Palma ratio.

Delinquency Rate Example 1.1

Sourcedata.oecd.org

The above table suggests that economic inequality is moderate in Australia and Israel (Palma ratio slightly above 1.0), while it is relatively worse in Costa Rica with Palma ratio close to 3.0.

Causes of Economic Inequality

  • The wage in a free market is a function of the demand for the skills required for a job. The difference in skill levels results in disparity in wages.
  • The difference in the levels of education also influences the ability to earn.
  • Growing technology has resulted in eradicating rudimentary jobs, which require a basic skill set, resulting in joblessness.

Effects

  • Health and social problems are found to be worse in countries with higher economic inequality.
  • Social indicators like educational performance, life expectancy, and trust among the population are low in countries with higher economic inequality.
  • Higher inequality often results in a growing debt burden.
  • Some studies suggest that high economic inequality impact growth in the long term.
  • Societies with high inequality suffer from higher crime rates and an unstable political environment.

Benefits

  • Experts believe that rising levels of inequality can drive economic growth in the short term.
  • In some cases, higher economic inequality paves the way for fairer wealth distribution.

Recommended Articles

This has been a guide to Economic Inequality and is the definition. Here we discuss types, causes, effects, and how it is measured along with examples, benefits, and disadvantages. You can learn more about financial analysis from the following articles –