Income Inequality

Income Inequality Definition

Income Inequality is defined as an unequal distribution of income between the masses or a situation when a large proportion of total income is held by the small percentage of the population which is possible due to various reasons such as the variation in sources of income, number of dependents, easier availability of resources, etc.

Income Inequality

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Types of Income Inequality

Income Inequality Types

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  • Market Inequality: The inequality that arises due to differences in the characteristics of the individuals, like energy, intelligence quotient, emotional quotient, etc. can result in different satisfaction level of the customers and hence the individuals with possession of such traits can comparably make more money than the others.
  • Political-Economic Inequality: The inequality that arises due to the political-economic factors resulting from the administration policies of the government in place. The policies by the government can severely impact the income levels of the individuals. The government can follow the leftist approach to maintain the income levels within a pre-decided range. Or, they can follow capitalist which is beneficial to people with higher earning ability.

The income inequality resulting from political-economic factors is considered more dangerous than market inequality because the factors, in this case, are not under the control of an individual.

How to Analyze Income Inequality?

Income equality does not provide any inference if it is considered as an absolute number but it can be a useful indicator of the economy is considered as relative measurement, through the following procedure:

The population is to be divided from richest to poorest into 5 segments with each segment representing 20% of the total population and the proportion of total income held by each segment is to be mentioned. This way one can infer how much of total income is concentrated with the richest 20% of the group considered for analysis.

Example of Income Inequality

The following table provides the income distribution by different population segments based on income levels:

Income Groups

 LowestLower MiddleMiddleUpper MiddleUpperTotal
Proportion of Population20%20%20%20%20%100%
Proportion of Income2%8%14%19%57%100%

As suggested by the table. The richest 20% of the population holds 57% of the total income of the group. It means that they will have sufficient resources to earn a good livelihood for themselves while if we consider the bottom 2%, they are going to have a hard time to meet even their daily needs.

Advantages

As unrealistic as it may sound, but Income Inequality does have advantages as well. As mentioned by the American Enterprise Institute as well, Income Inequality should be perceived as an opportunity – An opportunity to advance further in income scale through education.

Inequality comes naturally as the country prospers and it is seen as a means to reward the people with a high concentration of income for higher investment in the future. The suppression of inequality can suppress that investment.

Disadvantages

  • Divides the community between rich and poor which can result in serious social outbursts from time to time because the poor section may feel suppressed by the rich class.
  • It can breed corruption as well since it gives an impetus to desire to earn or save as much as possible.
  • Problems with the implementation of government policies as allocating the resources to different income classes become difficult.

Limitations

It does not provide an exact picture of the society: Along with Income Inequality, it is important other important factors related to the well-being of the individuals are considered as well such as education level, mortality rate, Human Development Index, etc.

For example, it is possible that in a country, income inequality is very low, maybe zero even. It will indicate that everyone earns the same amount in that country. But what if that same amount is also not enough to meet the basic needs because of high inflation, high tax rate, low education level, lack of decisive government at the center, etc.

Measures to Reduce Income Inequality

The following are the measure to consider for reducing income inequality.

  • Tax slabs: Many companies have different tax slabs as per the income of the individual. These tax slabs ensure that the person earning more should pay much more tax as compared to the one earning less. An income class can be left out from the taxation system too, that is, tax-free (direct tax). The government can redistribute these collected taxes in the form of other perks and benefits like health and education to the underprivileged section of the society
  • Subsidies: Since the tax slabs can help through direct taxes only, subsidies can help in saving other needful expenses of the people. The government can subsidize the essentials like food, water, health, education, etc. for the lower income group
  • Easier Availability of Capital: In order to boost entrepreneurship among the lower income group of the society, the government can provide the loans at a cheaper rate of interest

Thus, Income Inequality is a metrics that governments should always keep track of and try to minimize it. However, it should not be reduced to null as well since sometimes income inequality is perceived as a reward for those who undertake the risks to invest in the future.

This has been a guide Income Inequality and its definition. Here we discuss the measures to reduce income inequality by country with the help of an example. You can know more about economics from the following articles –

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