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Income Inequality

Updated on April 23, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Income Inequality?

Income inequality refers to the crucial imbalance of income dispersal across the population. It is certainly a vital aspect of social class and power structure. Moreover, the income inequality definition and its preventive measures (like loans, tax slabs, and subsidies) are alike for a specific country and globally. 

Income Inequality

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Gini coefficient is generally used to measure inequality ranging between 0 (absolute equality) and 1 (absolute inequality). Please note that its causes include financial deepening, commercial globalization, trade globalism, and technological developments. 

Key Takeaways

  • The income inequality definition infers the degree of disproportionate income distribution within the society. Also, it is affected by and affects the imbalance of social stature, riches, and political influence. 
  • Typically, the Gini coefficient is employed to calculate the inequality level from 0 (absolute equality) to 1 (absolute inequality). 
  • Its causes are trade globalization, technological advancements, financial networks, and commercial globalism.
  • It has different effects on the wellness level of different countries. Additionally, taxation and ownership patterns indirectly impact income distribution. 

Income Inequality Explained

Income inequality impacts and is impacted by the discrimination of political influence, social rank, wealthWealthWealth refers to the overall value of assets, including tangible, intangible, and financial, accumulated by an individual, business, organization, or nation.read more, and various additional types. That is to say, it may arise within a nation, between multiple countries, or for the people worldwide overlooking national borders. Nonetheless, tax slabs, loansLoansA loan is a vehicle for credit in which a lender will give a sum of money to a borrower or borrowing entity in exchange for future repayment.read more, and subsidiesSubsidiesA subsidy in economics refers to direct or indirect financial assistance from the government to an individual, household, business, or institution to promote social and economic policies.read more may prevent the same. 

Bureaucratic, legal, and fiscal elements, including corporate control and level of public vs private management and ownership of assets, influence the income level, notwithstanding individual attributes. Moreover, the international inequality level stays severe, with numerous people constantly in extreme poverty. 

Please note that its consequences for the degrees of welfare are different for all countries. Furthermore, this depends upon whether necessities are mainly market-driven and the availability of production resources, namely, automation, property, and water.

Moreover, 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 is the most preferred option among the five income inequality measures, including the Lorenz curveLorenz CurveLorenz Curve, named after American Economist Max O. Lorenz, is a graphical representation of an economic inequality model, taking the population percentile on the X-axis and cumulative wealth on the Y-axis. Complementing this graph would be a diagonal line at 45⁰ angle from the origin, indicating the population's perfect income or wealth distribution.read more, Decile ratios, the Palma ratio, and the Theil index. The high income (and further) inequalities across the US are uncertain. However, please note that ownership and taxation formats indirectly affect income dissemination.

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Income Inequality Causes

To clarify, the following are the reasons for global income inequality:

Income Inequality Causes

1. Technological Innovations

New computer technology has a key role in backing up the skill premium, increasing employment income variation. So, technological progress can remove numerous jobs by investmentInvestmentInvestments are typically assets bought at present with the expectation of higher returns in the future. Its consumption is foregone now for benefits that investors can reap from it later.read more in mechanization or improve the skill criterion for job appointment and maintenance. It unequally stimulates the demand for a skilled workforce and money over an unskilled or low-skilled workforce. 

2. Trade Globalization

Partially authorized by technological advancements, the high monetary and trade flows between nations are usually stated as steering unfair income dispersal. Moreover, trading liberty can prospectively have combined impacts on the earnings of the unskilled workforce in developed countries. 

3. Commercial Globalization

Enhanced cash flows and capitalismCapitalismCapitalism is an economic system consisting of businesses, resources, capital goods, and labour. Private entities own it, and the income is derived by the level of production of these factors. Because of the private hands, these entities can be operated efficiently and maximize their production activity also.read more, especially Foreign Direct InvestmentForeign Direct InvestmentA foreign direct investment (FDI) is made by an individual or an organization, into a business located in a foreign country. The host nation receives job creation prospects, advanced technology, a higher standard of living, infrastructural development, and overall economic growth.read more (FDI) and portfolio flows, have reportedly surged the income inequality in emerging and developed laissez-faire economies.

But, on the other hand, the centralization of foreign liabilities and assets in the comparably higher technology and skill-concentrated sectors surges the salary of and demand for higher-skilled labor. 

4. Financial Network

Computed as the corresponding share of the stock market and banking sectors within an economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more, fiscal development mostly surges top incomes during the initial expansion phase. Furthermore, inequity may boost as higher salaried individuals have an imbalanced bigger portion of access to funds. This would undoubtedly further augment the skill premium and possibly the return to capital. 

Examples

To clarify, let’s understand income inequality by country and globally through these examples. 

Example#1

Assume that the populace is divided into five categories, varying from poor to upper-class income groups. Every type demonstrates 20% of the entire population, and below-mentioned is the proportion of total income each one possesses. 

Income Groups

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

As the table signifies, the wealthiest 20% of the populace owns 57% of the group’s total earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments.read more with adequate resources to live a prosperous life. However, the bottom 2% encounter severe difficulties fulfilling their necessities. 

Example#2

The US census bureau data assures that potential new citizens at its southern border are correct about the country being the land of opportunities. 

Reportedly, the chief demographic elements elucidating distinctions in family incomes are variable through the lifetime and mainly are controllable. For instance, being in school and graduating from college, getting and remaining married, working as a full-time employee, etc. 

Additionally, the research by Mark Rank and Thomas Hirschl displays a dynamic income flexibility pattern. This causes almost 70% of Americans to be at the top income level for at least one year and nearly one-third to be at the top for at least ten years. 

Income Inequality in America 

In America, the growth of income inequality by country is attached to various factors incorporating globalism, technological advancement, and value disintegration of the living wagesLiving WagesThe Living Wage is the money that a worker must earn to meet their basic needs by society's standards. The living wage is not the same as a minimum wage which is the lowest income that the law guarantees to lead a life out of poverty.read more. Its continuous escalation since 1980 has caused strain among investigators, legislators, public members, and educationalists. 

During COVID-19, the prosperous Americans (presumably white) were noticeably more resilient to e-working, reducing their vulnerability to its physical, psychological, and economic damages. As a result, across the last five decades, the formal poverty index for every US household has hardly moved up and down. 

The adults in families with at least $200,000 yearly revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more were more likely to shift toward remote working (almost six times) in 2020 than ones with below $25000 annual salary. As against the country’s top fifth of earners, the top 1% of US wage earners bring home a variable payment amount (93 times as much as the lowest 20%). 

The decrease in US labor unions (under 11% since their culmination in the 1940s and 1950s) allowed the individuals on the top of the income ladder for power amplification. Therefore, they could turn around the economic regulations for their benefit. 

Frequently Asked Questions (FAQs)

What Are the Causes of Income Inequality?


The causes of global income inequality are as follows, 

1. Financial deepening
2. Trade globalism
3. Commercial globalization, and 
4. Technological changes 

Moreover, other causes may incorporate modifications in the labor market organizations and redistributive regulations. 

Why Income Inequality Is a Problem?

Income inequality is a problem because it boosts the power of affluent individuals while worsening the condition of the poor populace. Also, this leads to uneven wealth and opportunities distribution which ultimately brings down the nation’s Gross Domestic Product (GDP). Thus, adequate national and global policies must be put in place for better results. 

What Is Global Income Inequality?

The global income inequality definition refers to the unequal distribution of income worldwide. Moreover, there are five income inequality measures: the Gini coefficient (mostly used), the Lorenz curve, decile ratios, and the Theil index. 
The global inequality in opportunities generates inequalities in health, education, income, and other relevant life dimensions.  

This article is a guide to Income Inequality and its Definition. Here we explain income inequality by country (in America) and globally, its measures & causes. You can learn more about Economics from the following articles: –