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Income Inequality in America, Essay Example

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Income Inequality in America. Is it a problem and how can it be fixed?

The fact that income inequality is a problem in the United States is undeniable. Claims of the widened income gap between rich Americans and poor Americans, in addition to the diminishing middle class, is a cause for concern (Yates 1). The income inequality is one of the worse political and economic problems the United States faces (Piketty and Saez 1-3). It causes significant problems to social and political stability. It is also an indicator of national decline. Indeed, it is based on this premise that, this essay examines whether income inequality in America is a problem, as well as how it can be fixed.

Income inequality leads to political change. As Saez and Zucman (1-6) explain, loss of income by the middle class compared to the top-earners leads to political change. During the 2000s, many businesses emerged seeking political offices, as they catered for nearly 30 times more employees than the trade unions. Between the year 2000 and 2010, business interest groups spent $492 million on labor, and nearly $28.6 billion on sponsoring activism. This led to the rise of political setting the business groups dominated (Smith 3-5).

Income inequality has adverse effects on democracy. Some scholars have considered that income inequality is not compatible with real democracy (Milanovic 1). This is since creating a disparity between wealthy and poor is historically the main cause of most revolution. Indeed, it is commented that the political system in the United States faces serious threats of drifting towards a kind of oligarchy by influencing the affluent, corporations, and special interest groups. Even though, income inequality may not have impact on economic growth, the action by the government may reduce the current levels. This raises tax rates on the wealthy. It may also cause political dispute or friction – between the poor and the rich.

Income inequality contributes to national poverty. Greater income inequality is likely to encourage greater rates of poverty, as under such situations, income shifts from those in the lower income bracket to those in the upper-income bracket. Saez and Zucman (1-6) argue that when wealth remains in upper income bracket, it may lead to political revolutions and policy reforms to offset the impacts that induce poverty. This has been the trend over the decade (Economist 1). The gap in earnings has also increased over the past five years. Current statistics from the U.S. Census shows that in 2010, the wealthiest 20 percent of entire households was allocated 50.2 percent of the sum household-income, compared to the poorest 20 percent, which received 3.3 percent. In the 1980s, the income shares of the richest households received 44.1 percent. The poorest got 4.2 percent. This shows rising inequality and poverty. Further statistics indicates that individuals in the least-affluent households lost nearly 21.4 percent of their income share. On the other hand, the most-affluent households witnessed an income rise of nearly 13.8 percent. Conversely, the remaining two poorest quintiles lost income (Economist 1).

Income inequality leads to political polarization. As Political Research Quarterly establishes, income inequality is connected to the current political polarization in the United States. In its 2013 study, Political Research Quarterly established that officials who were elected tended respond to the whims of the officials within the upper-income bracket, as a result ignoring the needs of people within the lower income group. The analysis provided by Martin and Harris (1) show that, income inequality is connected to the extent to which the House of Representatives polarization has always voted.

Income inequality also leads to social stratification. Martin and Harris (1) show that class divisions have mainly resulted due to income inequality. This has led to class warfare where the rich rally around the rich and the poor rally around the poor to gain political emancipation. Hence, the rich tend to create an own virtual country, which in their perception should be a self-contained world that is complete with first-rate social services, separate economy, and infrastructure. Indeed, the gap between poor and the rich is widening more in the United States than most advanced country. A growing consensus, for that reason, is that Americans have placed emphasis on pursuing economic growth instead of income redistribution. This argument is supported by current economists, such as Corak (2013) in his analysis of theorist Alan Krueger’s “Great Gatsby Curve.” In his review, Corak (2013) indicates that nations with greater income inequalities also tend to have a greater proportion of economic advantages and disadvantages. The trend is passed on from parents to their offspring.

On the other hand, some political theorists have argued that income inequality is not a problem, and that the problems have been overstated.

Indeed, Saez and Zucman (1-6) perceive that despite the existence of income inequality, economic growth and equality in terms of getting opportunities should be what matters. Some commentators have also expressed that despite being an American problem, it is also a global problem. As a result, it should not trigger significant policy reforms. Others have also expressed that income inequality has some underlying advantages, leading to a well-functioning and competition-driven economy. Additionally, significant policy reforms to cut out income inequality may lead to policies that lessen the welfare of the more affluent individuals.

A section of researchers also argues that there is no basis in the argument that income inequality slows economic and socio-political growth. Responding to claims that income inequality slows economic and socio-political growth, Petryni (1) argues that inequality is healthy within a free market economy, as it promotes greater competition for economic and political opportunities.

At the same time, wealth inequalities tend to compensate for themselves where an extensive increase in wealth occurs. This also implies that since the income inequalities do not pose significant political or economic problems, forced wealth transfers through taxation may obliterate the income pools needed to create new ventures, leading to further political discord between the poor and the wealthy in the society. Indeed, some recent studies have established a link between high marginal tax rates on high-income earners and greater growth in employment (Petryni 1).

Some political and social theorists also perceived income inequality as valuable and natural characteristic of US economy. The American Enterprise Institute sees the growth of income inequality gap as linked to the growth of opportunities—including the motivation and desire to seek political and social emancipation.

Smith (1) further contends that inequality emanates from the growth of economic prosperity and leads to an improved standard of living of the entire US population. Such incomes, Milanovic (1) argues, are a way of rewarding certain actors in the economy for their maximal investment efforts in the future. Towards this end, therefore, suppressing inequality discourages output and pursuit of political emancipation.

Conclusion and recommendations

Largely, income inequality is a problem in the United States. Income inequality contributes to national poverty. It also has adverse effects on democracy. Further, it leads to political change. Income inequality also leads to political polarization and stratification.

Hence, there is a need for more advanced tax and transfer policies that can align the United States with the other developed nations. This requires tax reforms, such as enacting tax incidence adjustments, subsidizing healthcare and increasing the social security, heavy investment in infrastructure, fortifying labor influence and providing higher education at low costs.

Making education available to more Americans through policies that subsidize cost of education will mean that more Americans have an opportunity for better income. This is since individuals with high education qualification report lower unemployment rate. However, equal job opportunities are also crucial. Public expenditure on welfare should be increased to ensure social and economic security, where the government provides subsidized healthcare. The more affluent members of the society should also be taxed higher than, the poor Americans.

Works Cited

Corak, Miles. “Income Inequality, Equality of Opportunity, and Intergenerational Mobility.” Journal of Economic Perspectives 27.3(2013): 79–102

Economist, The. “The rich, the poor and the growing gap between them,” 2006. 11 April 2015, <http://www.economist.com/node/7055911>

Kenworthy, Lane. “Does More Equality Mean Less Economic Growth?” 2007, <http://lanekenworthy.net/2007/12/03/does-more-equality-mean-less-economic-growth/>

Martin, Jonathan and Harris, John. “President Obama, Republicans fight the class war.” Politico, 2012. <http://www.politico.com/story/2013/04/barack-obama-class-warrior-90052.html>

Milanovic, Branko. “More or Less.” International Monetary Fund, 2011.

Petryni, Matt. “Advantages & Disadvantages to Income Inequality.” n.d. 11 April 2015, <http://www.ehow.com/info_11415987_advantages-disadvantages-income-inequality.html>

Piketty, Thomas and Saez, Emmanuel. “Income Inequality In The United States, 1913–1998.” The Quarterly Journal Of Economics 28.1 (2003): 1-39

Saez, Emmanuel and Zucman, Gabriel. “Wealth and Inequality in the United States Since 1913: Evidence from Capitalised Income Tax Data.” National Bureau of Economic Research: Cambridge: 2013

Smith, Hedrick. “Who Stole the American Dream.” Random House: New York, 2012. < http://newshare.com/ruleschange/book-notes.pdf>

Todd, Michael. “The Benefits of Wealth Inequality (and Why We Should Not Fear It).” Pacific Standard , 2013. <http://www.psmag.com/business-economics/benefits-wealth-inequality-now-fear-67567>

Yates, Michael. “The Great Inequality.” Monthly Review 63.10 (2012)

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Causes and Consequences of Income Inequality – An Overview

Rising income inequality is one of the greatest challenges facing advanced economies today. Income inequality is multifaceted and is not the inevitable outcome of irresistible structural forces such as globalisation or technological development. Instead, this review shows that inequality has largely been driven by a multitude of political choices. The embrace of neoliberalism since the 1980s has provided the key catalyst for political and policy changes in the realms of union regulation, executive pay, the welfare state and tax progressivity, which have been the key drivers of inequality. These preventable causes have led to demonstrable harmful outcomes that are not explicable solely by material deprivation. This review also shows that inequality has been linked on the economic front with reduced growth, investment and innovation, and on the social front with reduced health and social mobility, and greater violent crime.

1 Introduction

Income inequality has recently come to be viewed as one of the greatest challenges facing the world today. In recent years, the topic has dominated the agenda of the World Economic Forum (WEF), where the world’s top political and business leaders attend. Their global risks report, drawn from over 700 experts in attendance, pronounced inequality to be the greatest threat to the world economy in 2017 ( Elliott 2017 ). Likewise, the past decade has seen leading global figures such as former American President Barack Obama, Pope Francis, Chinese President Xi Jinping, and the former head of the International Monetary Fund (IMF), Christine Lagarde, all undertake speeches on the gravity of income inequality and the need to address its rise. This is because, as this research note shows, income inequality engenders harmful consequences that are not explicable solely by material deprivation.

The general dynamics of income inequality include a tendency to rise slowly and fluctuate over time. For instance, Japan had one of the highest rates in the world prior to the Second World War and the United States (US) one of the lowest, which has since completely reversed for both. The United Kingdom (UK) was also the second most equitable large European country in the 1970s but is now the most inequitable ( Dorling 2018 : 27–28).

High rates of inequality are rarely sustained for long periods because they tend to lead to or become punctuated by man-made disasters that lead to a levelling out. Scheidel (2017) posits that there in fact exists a violent ‘Four Horseman of Leveling’ (mass mobilisation warfare, transformation revolutions, state collapse, and lethal pandemics) for inequality, which have at times dramatically reduced inequalities because they can lead to the alteration of existing power structures or wipe out the wealth of elites and redistribute their resources. For instance, the pronounced shocks of the two world wars led to the ‘Great Compression’ of income throughout the West in the post-war years. There is already some evidence that the current global pandemic caused by the novel Coronavirus, has led to greater aversion to income inequality ( Asaria, Costa-Font, and Cowell 2021 ; Wiwad et al. 2021 ).

Thus, greater aversion to inequality has been able to reduce inequality in the past, this is because, as this review also shows, income inequality does not result exclusively from efficient market forces but arises out of a set of rules that is shaped by those with political power. Inequality’s rise is not inevitable, nor beyond the control of governments and policymakers, as they can affect distributional outcomes and inequality through public policy.

It is the purpose of this review to outline the causes and consequences of income inequality. The paper begins with an analysis of the key structural and institutional determinants of inequality, followed by an examination into the harmful outcomes of inequality. It then concludes with a discussion of what policymakers can do to arrest the rise of inequality.

2 Causes of Income Inequality

Broadly speaking, explanations for the increase in income inequality have largely been classified as either structural or institutional. Historically, economists emphasised structural causes of increasing income inequality, with globalisation and technological change at the forefront. However, in recent years opinion has shifted to emphasise more institutional political factors to do with the adoption of neoliberal reforms such as privatisation, deregulation and tax and welfare reductions since the early 1980s. They were first embraced and most heavily championed by the UK and US, spreading globally later, and which provide the crucial catalysts of rising income inequality ( Atkinson 2015 ; Brown 2017 ; Piketty 2020 ; Stiglitz 2013 ). I discuss each of these key factors in turn.

2.1 Globalisation

One of the earliest, and most prominent explanations for the rise of income inequality emphasised the role of globalisation ( Borjas, Freeman, and Katz 1992 ; Revenga 1992 ). Globalisation has led to the offshoring of many goods and services that used to be produced or completed domestically in the West, which has created downward pressures on the wages of lower skilled workers. According to the ‘market forces hypothesis,’ increasing inequality is a response to the rising demand for skills at the top, in which the spread of globalisation and technological progress have been facilitated through reduced barriers to trade and movement.

Proponents of globalisation as the leading cause of inequality have argued that globalisation has constrained domestic state choices and left governments collectively powerless to address inequality. Detractors admit that globalisation has indeed had deep structural effects on Western economies but its impact on the degree of agency available to domestic governments has been mediated by individual policy choices ( Thomas 2016 : 346). A key problem with attributing the cause of inequality to globalisation, is that the extent of the inequality increase has varied considerably across countries, even though they have all been exposed to the same effects of globalisation. The US also has the highest inequality amongst rich countries, but it is less reliant on international trade than most other developed countries ( Brown 2017 : 56). Moreover, a recent meta-analysis by Heimberger (2020) found that globalisation has a “small-to-moderate” inequality-increasing effect, with financial globalisation displaying the largest impact.

2.2 Technology

A related explanation for inequality draws attention to the impact of technology specifically. The advent of the digital age has placed a higher premium on the skills needed for non-routine work and reduced the value placed on lower skilled routine work, as it has enabled machines to replace jobs that could be routinised. This skill-biased technological change (SBTC) has led to major changes in the organisation of work, as many full-time permanent jobs with benefits have given way to part-time flexible work without benefits, that are often centred around the completion of short ‘gigs’ such as a car journey or food delivery. For instance, the Organisation for Economic Co-operation and Development (OECD) estimated in 2015 that since the 1990s, roughly 60% of all job creation has been in the form of non-standard work due to technological changes and that those employed in such jobs are more likely to be poor ( Brown 2017 : 60).

Relatedly, a prevailing doctrine in economics is ‘marginal productivity theory,’ which holds that people with greater productivity levels will earn higher incomes. This is due to the belief that a person’s productivity is equated to their societal contribution ( Stiglitz 2013 : 37). Since technology is a leading determinant in the productivity of different skills and SBTC has led to increased productivity, it has also become a justification for inequality. However, it is very difficult to separate any one person’s contribution to society from that of others, as even the most successful businessperson owes their success to the rule of law, good infrastructure, and a state educated workforce ( Stiglitz 2013 : 97–98).

Further criticisms of the SBTC explanation, are that there was still substantial SBTC when inequality first fell dramatically and then stabilised in the period from 1930 to 1980, and it has failed to explain the perpetuation of both the gender and racial wage gap, “or the dramatic rise in education-related wage gaps for younger versus older workers” ( Brown 2017 : 67). Although it is difficult to decouple globalisation and technology, as they each have compounding tendencies, it is most likely that globalisation and technology are important explanatory factors for inequality, but predominantly facilitate and underlie the following more determinant institutional factors that happen to be already present, such as reduced tax progressivity, rising executive pay, and union decline. It is to these factors that I now turn.

2.3 Tax Policy

Taxes overwhelmingly comprise the primary source of revenue that governments can use for redistribution, which is fundamental to alleviating income inequality. Redistribution is defended on economic grounds because the marginal utility of money declines as income rises, meaning that the benefit derived from extra income is much higher for the poor than the rich. However, since the late 1970s, a major rethinking surrounding redistributive policy occurred. This precipitated ‘trickle-down economics’ theory achieving prominence amongst American and British policymakers, whereby the benefits from tax cuts on the wealthy would trickle-down to everyone. Subsequently, expert opinion has determined that tax cuts do not actually spur economic growth ( CBPP 2017 ).

Personal income tax progressivity has declined sharply in the West, as the average top income tax rate for OECD members fell from 62% in 1981 to 35% in 2015 ( IMF 2017 : 11). However, the decline has been most pronounced in the UK and the US, which had top rates of around 90% in the 1960s and 1970s. Corporate tax rates have also plummeted by roughly one half across the OECD since 1980 ( Shaxson 2015 : 4). Recent International Monetary Fund (IMF) research found that between 1985 and 1995, redistribution through the tax system had offset 60% of the increase in market inequality but has since failed to respond to the continuing increase in inequality ( IMF 2017 ). Moreover, in a sample of 18 OECD countries encompassing 50 years, Hope and Limberg (2020) found that tax reforms even significantly increased pre-tax income inequality, while having no significant effect on economic growth.

This decline in tax progressivity has been a leading cause of rising income inequality, which has been compounded by the growing problem of tax avoidance. A complex global web of shell corporations has been constructed by international brokers in offshore tax havens that is able to keep wealth hidden from tax collectors. The total hidden amount in tax havens is estimated to be $7.6 trillion US dollars and rising, or roughly 8% of total global household wealth ( Zucman 2015 : 36). Recent research has revealed that tax havens are overwhelmingly used by the immensely rich ( Alstadsæter, Johannesen, and Zucman 2019 ), thus taxing this wealth would substantially reduce income inequality and increase revenue available for redistribution. The massive reduction in income tax progressivity in the Anglo world, after it had been amongst its leaders in the post-war years, also “probably explains much of the increase in the very highest earned incomes” since 1980 ( Piketty 2014 : 495–496).

2.4 Executive Pay

The enormous rising pay of executives since the 1980s, has also fuelled income inequality and more specifically the gap between executives and their employees. For example, the gap between Chief Executive Officers (CEO) and their workers at the 500 leading US companies in 2016, was 335 times, which is nearly 10 times larger than in 1980. It is a similar story in the UK, with a pay ratio of 131 for large British firms, which has also risen markedly since 1980 ( Dorling 2017 ).

Piketty (2014 : 335) posits that the dramatic reduction in top income tax has had an amplifying effect on top executives pay since it provides them with much greater incentive to seek larger remuneration, as far less is then taken in tax. It is difficult to objectively measure an individual’s contribution to a company and with the onset of trickle-down economics and accompanying business-friendly climate since the 1980s, top executives have found it relatively easy to convince boards of their monetary worth ( Gabaix and Landier 2008 ).

The rise in executive pay in both the UK and US, is far larger than the rest of the OECD. This may partially be explained by the English-speaking ‘superstar’ theory, whereby the global market demand for top CEOs is much higher for native English speakers due to English being the prime language of the global economy ( Deaton 2013 : 210). Saez and Veall (2005) provide support for the theory in a study of the top 1% of earners from the Canadian province of Quebec, which showed that English speakers were able to increase their income share over twice as much as their French-speaking counterparts from 1980 to 2000. This upsurge of income at the top of the labour market has been accompanied by stagnation or diminishing returns for the middle and lower parts of the labour market, which has been affected by the dramatic decline of union influence throughout the West.

2.5 Union Decline

Trade unions have typically been viewed as an important force for moderating income inequality. They “contribute to wage compression by restricting wage decline among low-wage earners” and restrain wage surges among high-wage earners ( Checchi and Visser 2009 : 249). The mere presence of unions can also drive up the wages of non-union employees in similar industries, as employers tend to give in to wage demands to keep unions out. Union density has also been proven to be strongly associated with higher redistribution both directly and indirectly, through its influence on left party governments ( Haddow 2013 : 403).

There had broadly existed a ‘social contract’ between labour and business, whereby collective bargaining establishes a wage structure in many industries. However, this contract was abandoned by corporate America in the mid-1970s when large-scale corporate donations influenced policymakers to oppose pro-union reform of labour law, leading to political defeats for unions ( Hacker and Pierson 2010 : 58–59). The crackdown of strikes culminating in the momentous Air Traffic Controllers’ strike (1981) in the US and coal miner’s strike (1984–85) in the UK, caused labour to become de-politicised, which was self-reinforcing, because as their political power dispersed, policymakers had fewer incentives to protect or strengthen union regulations ( Rosenfeld and Western 2011 ). Consequently, US union density has plummeted from around a third of the workforce in 1960, down to 11.9% last decade, with the steepest decline occurring in the 1980s ( Stiglitz 2013 : 81).

Although the decline in union density is not as steep cross-nationally, the pattern is still similar. Baccaro and Howell (2011 : 529) found that on average the unionisation rate decreased by 0.39% a year since 1974 for the 15 OECD members they surveyed. Increasingly, the decline in the fortunes of labour is being linked with the increase in inequality and the sharpest increases in income inequality have occurred in the two countries with the largest falls in union density – the UK and US. Recent studies have found that the weakening of organised unions accounts for between a third and a fifth of the total rise in income inequality in the US ( Rosenfeld and Western 2011 ), and nearly one half of the increase in both the Gini rate and the top 10%’s income share amongst OECD members ( Jaumotte and Buitron 2015 ).

To illustrate the changing relationship between inequality and unionisation, Figure 1 displays a local polynomial smoother scatter plot of union density by income inequality, for 23 OECD countries, 1980–2018. They are negatively correlated, as countries with higher union density have much lower levels of income inequality. Figure 2 further plots the time trends of both. Income inequality (as measured via the Gini coefficient) has climbed over 0.02 percentage points on average in these countries since 1980, which is roughly a one-tenth rise. Whereas union density has fallen on average from 44 to 35 percentage points, which is over one-fifth.

Gini coefficient by union density, OECD 1980–2018. Data on Gini coefficients from SWIID ( Solt 2020 ); data on union density from ICTWSS Database ( Visser 2019 ).

Gini coefficient by union density, 1980–2018. Data on Gini coefficients from SWIID ( Solt 2020 ); data on union density from ICTWSS Database ( Visser 2019 ).

In sum, income inequality is multifaceted and is not the inevitable outcome of irresistible structural forces such as globalisation or technological development. Instead, it has largely been driven by a multitude of political choices. Tridico (2018) finds that the increases in inequality from 1990 to 2013 in 26 OECD countries, was largely owing to increased financialisation, deepening labour flexibility, the weakening of trade unions and welfare state retrenchment. While Huber, Huo, and Stephens (2019) recently reveals that top income shares are unrelated to economic growth and knowledge-intensive production but is closely related to political and policy changes surrounding union density, government partisanship, top income tax rates, and educational investment. Lastly, Hager’s (2020) recent meta-analysis concludes that the “empirical record consistently shows that government policy plays a pivotal role” in shaping income inequality.

These preventable causes that have given rise to inequality have created socio-economic challenges, due to the demonstrably negative outcomes that inequality engenders. What follows is a detailed analysis of the significant mechanisms that income inequality induces, which lead to harmful outcomes.

3 Consequences of Income Inequality

Escalating income inequality has been linked with numerous negative outcomes. On the economic front, negative results transpire beyond the obvious poverty and material deprivation that is often associated with low incomes. Income inequality has also been shown to reduce growth, innovation, and investment. On the social front, Wilkinson and Pickett’s ground-breaking The Spirit Level ( 2009 ), found that societies that are more unequal have worse social outcomes on average than more egalitarian societies. They summarised an extensive body of research from the previous 30 years to create an Index of Health and Social Problems, which revealed a host of different health and social problems (measuring life expectancy, infant mortality, obesity, trust, imprisonment, homicide, drug abuse, mental health, social mobility, childhood education, and teenage pregnancy) as being positively correlated with the level of income inequality across rich nations and across states within the US. Figure 3 displays the cross-national findings via a sample of 21 OECD countries.

Index of health and social problems by Gini coefficient. Data on health and social problems index from The Equality Trust (2018) ; data on Gini coefficients from OECD (2020) .

3.1 Economic

Income inequality is predominantly an economic subject. Therefore, it is understandable that it can engender pervasive economic outcomes. Foremost economically speaking, it has been linked with reduced growth, investment and innovation. Leading international organisations such as the IMF, World Bank and OECD, pushed for neoliberal reforms beginning in the 1980s, although they have recently started to substantially temper their views due to their own research into inequality. A 2016 study by IMF economists, noted that neoliberal policies have delivered benefits through the expansion of global trade and transfers of technology, but the resulting increases in inequality “itself undercut growth, the very thing that the neo-liberal agenda is intent on boosting” ( Ostry, Loungani, and Furceri 2016 : 41). Cingano’s (2014) OECD cross-national study, found that once a country’s income inequality reaches a certain level it reduces growth. The growth rate in these countries would have been one-fifth higher had income inequality not increased, while the greater equality of the other countries included in the study helped to increase their growth rates.

Consumer spending is good for economic growth but rising income inequality shifts more money to the top of the income distribution, where higher income individuals have a much smaller propensity to consume than lower-income individuals. The wealthy save roughly 15–25% of their income, whereas low income individuals spend their entire income on consumer goods and services ( Stiglitz 2013 : 106). Therefore, greater inequality reduces demand in an economy and is a major contributor to the ‘secular stagnation’ (persistent insufficient demand relative to aggregate private savings) that the largest Western economies have been experiencing since the financial crisis. Inequality also increases the level of debt, as lower-income individuals borrow more to maintain their standard of living, especially in a climate of low interest rates. Combined with deregulation, greater debt increases instability and “was a major contributor to, if not the underlying cause of, the 2008 financial crash” ( Brown 2017 : 35–36).

Another key economic effect of income inequality is that it leads to reduced welfare spending and public investment. Since a greater share of the income distribution is earned by the very wealthy, governments have less income available to fund education, public amenities, and other services that the poor rely heavily on. This creates social separation, whereby the wealthy opt out in publicly funding services because their private equivalents are of better quality. This causes a cycle of increasing income inequality that is likely to eventually lead to a situation of “private affluence and public squalor” ( Marmot 2015 : 39).

Lastly, it has been proven that economic instability is a by-product of increasing inequality, which harms innovation. Both countries and American states with the highest inequality have been found to be the least innovative in terms of the amount of Intellectual Property (IP) patents they produce ( Dorling 2018 : 129–130). Although income inequality is predominantly an economic subject, its effects are so pervasive that it has also been linked to a host of negative health and societal outcomes.

Wilkinson and Pickett found key associations between income inequality for both physical and mental health. For example, they discovered that on average the life expectancy gap is more than four years between the least and most equitable richest nations (Japan and the US). Since their revelations, overall life expectancy has been reported to be declining in the US ( Case and Deaton 2020 ). It has held or declined every year since 2014, which has led to a cumulative drop of 1.13 years ( Andrasfay and Goldman 2021 ). Marmot (2015) has provided evidence that there exists a social gradient whereby differences in affluence translate into increasing health inequalities, which can be shown even down to the neighbourhood level, as more affluent areas have higher life expectancy on average than deprived areas, and a clear gradient appears where life expectancy increases in line with affluence.

Moreover, Marmot’s famous Whitehall studies, which are large-scale longitudinal studies of Whitehall employees of UK central government, found an inverse-relationship between salary grade and ill-health, whereby low-grade workers were four times as likely as high-grade workers to suffer from ill-health ( 2015 : 11). Health steadily improves with rank and the correlation is little affected by lifestyle controls such as tobacco and alcohol usage. However, the leading factor that seems to make the most difference in ill-health is job stress and a person’s sense of control over their work, including the variety of work and the use and development of skills ( Schrecker and Bambra 2015 : 54–55).

‘Psychosocial stresses,’ like those appearing in the Whitehall studies, have been found to be more common and frequent amongst low-income individuals, beyond just the workplace ( Jensen and van Kersbergen 2017 : 24). Wilkinson and Pickett (2019) posit that greater income inequality engenders low self-esteem, chronic stress and depression, stemming from status anxiety. This occurs because more importance is placed on where people fit in a hierarchy with greater inequality. For evidence, they outline a clear relationship of a much higher percentage of the population suffering from mental illness in more unequal countries. Meticulous research has shown that huge inequalities in income result in the poor having feelings of shame across a range of environments. Furthermore, Dickerson and Kemeny’s (2004) meta-analysis of 208 studies found that stress-hormone (cortisol) levels were raised particularly “when people felt that others were making negative judgements about them” ( Rowlingson 2011 : 24).

These effects on both mental and physical health can be best illustrated via the ‘absolute income’ and ‘relative income’ hypotheses ( Daly, Boyce, and Wood 2015 ). The relative income hypothesis posits that when an individual’s income is held constant, the relative income of others can affect a person’s health depending on how they view themselves in comparison to those above them ( Wilkinson 1996 ). This pattern also holds when income inequality increases at the societal level, because if such changes lead to increases in chronic stress, it can increase ill-health nationally. Whereas the absolute income hypothesis predicts that health gains from an extra unit of income diminish as an individual’s income rises ( Kawachi, Adler, and Dow 2010 ). A mean preserving transfer from a richer to poorer individual raises the health of the poorer individual more than it lowers the health of the richer person. This occurs because there is an optimum threshold of income required to maintain good health. Thus, when holding total income constant, a more equal distribution of income should improve overall population health. This pattern also applies at the country-wide level, as the “effect of income on health appears substantial as countries move from about $15,000 to 25,000 US dollars per capita,” but appears non-existent beyond that point ( Leigh, Jencks, and Smeeding 2009 : 386–387).

Income inequality also impacts happiness and wellbeing, as the happiest nations are routinely the ones with low inequality, such as Denmark and Norway. Happiness has been proven to be affected by the law of diminishing returns in economics. It states that higher income incrementally improves happiness but only up to a certain point, as any individual income earned beyond roughly $70,000 US dollars, does not bring about greater happiness ( Deaton 2013 : 53). The negative physical and mental health outcomes that income inequality provoke, also impact key societal areas such as crime, social mobility and education.

Rates of violent crime are lower in more equal countries ( Hsieh and Pugh 1993 ; Whitworth 2012 ). This is largely because more equal countries have less poverty, which leads to less people being desperate about their situation, as lower-income individuals have been shown to commit more crime. Relatedly, according to strain theory, more unequal societies place higher social value in achieving economic success, while providing lower means to achieve it ( Merton 1938 ). This generates strain, which may lead more individuals to pursue crime as a means of attaining financial success. At the opposite end of the income spectrum, the wealthy in more equal countries are also less likely to exploit others and commit fraud or exhibit other anti-social behaviour, partly because they feel less of a need to cut corners to get ahead, or to make money ( Dorling 2017 : 152–153). Homicides also tend to rise with inequality. Daly (2016) reveals that inequality predicts homicide rates better than any other variable and accounts for around half of the variance in murder rates between countries and American states. Roughly 90% of American homicides are committed by men, and since the majority of homicides occur over status, inequality raises the stakes of disputes over status amongst men.

Studies have also shown that there is a marked negative relationship between income inequality and social mobility. Utilising Intergenerational Earnings Elasticity data from Blanden, Gregg, and Machin (2005) , Wilkinson and Pickett (2009) first outline this relationship cross-nationally for eight OECD countries. Corak (2013) famously expanded on this with his ‘Great Gatsby Curve’ for 22 countries using the same measure. I update and expand on these studies in Figure 4 to include all 36 OECD members, utilising the WEF’s inaugural 2020 Social Mobility Index. It clearly shows that social mobility is much lower on average in more unequal countries across the entire OECD.

Index of social mobility by Gini coefficient. Data on social mobility index from World Economic Forum (2020) ; data on Gini coefficients from SWIID ( Solt 2020 ).

A primary driver for the negative relationship between inequality and social mobility, derives from the availability of resources during early childhood. Life chances have been shown to be determined in early childhood to a disproportionately large extent ( Jensen and van Kersbergen 2017 : 29). Children in more equitable regions such as Scandinavia, have better access to resources, as they go to similar schools, receive similar educational opportunities, and have access to a wider range of career options. Whereas in the UK and US, a greater number of jobs at the top are closed off to those at the bottom and affluent parents are far more likely to send their children to private schools and fund other ‘child enrichment’ goods and services ( Dorling 2017 : 26). Therefore, as income inequality rises, there is a greater disparity in the resources that rich and poor parents can invest in their children’s education, which has been shown to substantially affect “cognitive development and school achievement” ( Brown 2017 : 33–34).

4 Conclusions

The causes and consequences of income inequality are multifaceted. Income inequality is not the inevitable outcome of irresistible structural forces such as globalisation or technological development. Instead, it has largely been driven by a multitude of institutional political choices. These preventable causes that have given rise to inequality have created socio-economic challenges, due to the demonstrably negative outcomes that inequality engenders.

The neoliberal political consensus poses challenges for policymakers to arrest the rise of income inequality. However, there are many proven solutions that policymakers can enact if the appropriate will can be summoned. Restoring higher levels of labour protections would aid in reversing the declining trend of labour wage share. Similarly, government promotion and support for new corporate governance models that give trade unions and workers a seat at the table in ownership decisions through board memberships, would somewhat redress the increasing power imbalance between capital and labour that is generating more inequality. Greater regulation aimed at limiting the now dominant shareholder principle of maximising value through share buy-backs and instead offering greater incentives to pursue maximisation of stakeholder value, long-term financial stability and investment, can reduce inequality. Most importantly, tax policy can be harnessed to redress income inequality. Such policies include restoring higher marginal income and corporate tax rates, setting higher corporate tax rates for firms with higher ratios of CEO-to-worker pay, and establishing luxury taxes on spiralling compensation packages. Finally, a move away from austerity, which has gripped the West since the financial crisis, and a move towards much greater government investment and welfare state spending, would also lift growth and low-wages.

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What is income inequality.

Broadly speaking, income inequality refers to the fact that different people earn different amounts of money. The wider those earnings are dispersed, the more unequal they are. But that intuitive concept of dispersal can be defined in several different ways. Indeed, income itself is a somewhat ambiguous idea that can be defined in different ways.

All that said, in the contemporary United States income inequality has been increasing for several decades by essentially any measure. Similar trends are observed in most other rich countries. At the same time, on a global scale inequality is probably declining.

Inequality has become a hot topic in American politics in recent years. The Occupy Wall Street movement's slogans about the 99 percent versus the 1 percent have stirred an influential current in politics. In a December 2013 speech Barack Obama called inequality the "defining challenge of our time." Conservative politicians overwhelmingly disagree, and focus groups seem to indicate that the public prefers talk about "opportunity" to explicit discussion of inequality. Still, the trend toward more inequality shows no sign of halting and left-of-center figures are likely to keep it on the policy agenda.

How do you measure inequality?

Inequality can be defined or measured in a number of different ways.

One traditional approach was to compare the income of a relatively broad swath of affluent people — the top ten percent of the income distribution (the top decile) or the top twenty percent (the top quintile) — to the national median or average. One big advantage of this approach is that the relevant data is readily available from the Census Bureau and other survey-based sources. A major downside is that this method doesn't tell you much of anything about the earnings of the very highest earners — people in the top 1 percent, for example.

A newer line of research pioneered by Emmanuel Saez, Thomas Piketty, and their collaborators at the World Top Incomes Database has been to use tax records to focus on the incomes of the very top of the distribution. That lets you understand the top 1 percent, the top 0.1 percent, and even the top 0.001 percent. This work has been the basis of much subsequent discussion about the 99 percent versus the 1 percent but the even finer slices are interesting, too.

It is also at times interesting to look at the gap between the poor (say the bottom 10 percent) and the median household. Metrics that define poverty in relative terms tend to, in effect, look at this kind of inequality. So discussions of the living standards of the poor are normally framed in terms of poverty rather than inequality.

Last but by no means least, there is a widely used summary method of calculating inequality that is known as the gini coefficient . A gini coefficient of 0 corresponds to precise equality while a gini coefficient of 1 corresponds to a state of total inequality.

What is a gini coefficient?

The gini coefficient is the most widely used single-summary number for judging the level of inequality in a particular country or region. Unfortunately, it does not lend itself to a particularly obvious intuitive interpretation.

The way it works is to start with a Lorenz curve :

The horizontal axis on this chart represents cumulative shares of the population. The vertical axis is cumulative shares of income. Trace the curve to the 50 percent point, in other words, and you'll see what share of national income the bottom 50 percent of the income distribution earns. Trace the curve to the 75 percent point and you'll see what share the bottom three quarters earn.

In a perfectly equal society, the bottom X percent would earn X percent of the income for any value of X and the Lorenz curve would be a perfect 45 degree angle. In unequal societies, the bottom X percent always earn less than X percent of the income. Except that the bottom 100 percent by definition must earn 100 percent of the income. So an unequal society is always a society whose Lorenz curve swoops below the 45 degree line and then converges with it at the very end.

The 45 degree angle divides a square in half. The Lorenz curve divides that half into two sections — A and B. The gini coefficient equals A / (A+B).

The downside to using a gini coefficient to describe a society is that (as you can see above) it's an incredibly abstract idea that's difficult to verbally describe. The advantage to using a gini coefficent is that in principle it summarizes all the information about the distribution of income and thus facilitates easy comparisons.

Is inequality bad?

There is considerable disagreement about this point.

One prominent argument in political philosophy, found in John Rawls' book A Theory of Justice , holds that inequalities in economic and social status can be justified to the extent that they serve the interests of the least-fortunate class in society but not otherwise. In other words, if society of impoverished subsistence farmers finds that the only way to broadly raise living standards is to industrialize and create a small class of rich factory owners, that's okay. Or if paying doctors substantially more than the average person's salary is the way to induce people to master the craft of medicine and cure the sick, that's okay too. Exactly how much inequality this approach (dubbed "the difference principle" by Rawls) would countenance in practice is difficult to say.

A different criticism of inequality appeals to an idea known as the declining marginal utility of money . In other words the exact same amount of money means different things to the real living standards of different people. A modest financial loss could mean foregone food for a poor person, foregone preventive medical care for someone further up the economic food chain, a foregone vacation for someone more prosperous than that, a somewhat-less-fancy vacation for someone even more prosperous than that, and it would be completely imperceptible to a genuinely rich person. In that view, inequality-reducing redistribution could increase overall human well-being.

Still on both of these views what's bad about inequality is that it's a sign of potentially foregone opportunity to raise the absolute living standards of the less-fortunate. There are also various efforts to demonstrate that inequality per se is a cause of problems.

Many of these ideas are summed up in The Spirit Level by Kate Pickett and Richard Wilkinson, which purports to show that inequality as such drives a number of social ills including low life expectancy, obesity, and poor educational outcomes. Another line of research claims to show that inequality is associated with a lack of social mobility. Last, there is a long tradition of argument that massive levels of economic inequality subvert democratic politics by concentrating excessive political influence in the hands of economic elites.

Counterposed to all of this is a long and broadly libertarian line of argumentation that there's nothing wrong with some people becoming extraordinarily rich if they happen to provide products or services that are broadly in demand.

How economically unequal is the United States?

By international standards, the United States is a very unequal country. Here's our gini coefficient compared to the other major rich economies:

The contemporary United States is also unequal by historical terms. Here's a look at the top ten percent's share of income over time:

One nuance to international comparisons is that the United States is considerably larger than other rich countries. If you look at inequality across the entire European Union rather than within a single European country, the EU as a whole is less equal than almost any particular European state. Conversely, if you consider the United States separately the vast majority of states are more equal than the country as a whole.

Is inequality rising because the rich are getting richer or because the poor are getting poorer?

Mostly because the rich are getting richer. A vast swath of American households have been in financial distress since the economic crisis of 2008, but taking the long view incomes have tended to rise across the board. They've simply risen dramatically faster for the highest-income households than for the rest of the population:

Why is inequality rising?

There is some disagreement about this and also some nuance as to exactly which aspect of inequality we're talking about and what kind. Some of the most prominent accounts:

• Skill-biased technological change. Technological improvements raise incomes, but they do so unevenly. Rewards disproportionately go to highly educated workers. On this view, rising inequality reflects slowing educational progress and better schooling is the key solution. This has been the traditionally dominant view in economics, but it doesn't explain the specific rise of the top 1 percent very well.
• Immigration. Importing low-skilled workers to do low-paid jobs tends to raise measured income inequality. David Card estimates immigration to be the cause of about 5 percent of the total rise in inequality .
• Decline of labor unions. Labor unions reduce inequality both by raising wages at the low end and constraining them at the high end. Bruce Western and Jake Rosenfeld estimate that the decline of labor unions as a force in the American economy is responsible for 20 to 33 percent of the overall rise in inequality .
• Trade. Growing international trade with lower-wage countries such as China seems to have reduced the wage share of overall national income , boosting the incomes of people with large stock holdings.
• Superstar effects. Because the world is bigger and richer in 2014 than it was in 1964, being a "star" performer — the most popular athlete, author, or singer — is more lucrative than it used to be.
• Executives and Wall Street . Increased incomes for CEOs and financial sector professionals account for 58 percent of the top 1 percent of the income distribution and 67 percent of the top 0.1 percent. So the specific dynamics of compensation in those areas are wielding a big influence.
• Minimum wage. David Autor, Alan Manning, and Christopher Smith find that about a third (or possibly as much as half) of the growth in inequality between the median and the bottom ten percent is due to the declining real value of the minimum wage. This is different from the issues about the top end pulling away that normally dominate political discussions of inequality, but it's a noteworthy finding nonetheless.
• The fundamental nature of capitalism. Thomas Piketty has made waves lately with his new book Capital in the 21st Century, which argues that very high levels of inequality are the natural state of market economies . In his view, it's the economic equality of the mid-twentieth century that needs explaining, not today's inequality.

How does inequality relate to opportunity and upward mobility?

One common political response to rising inequality has been to argue that what really matters is economic opportunity : do people have a chance to rise to the top? Alan Krueger, the then-chair of the White House Council on Economic Advisors challenged this notion in 2012 with what he called "The Great Gatsby Curve." It shows a strong correlation between national income inequality and intergenerational mobility:

UC Davis economic historian Gregory Clark has challenged the link in an even more profound way by arguing that properly measured, social mobility is extremely low everywhere and always has been, even in places like Sweden .

What can the government do to reduce inequality?

The most straightforward thing the government could do to reduce income inequality would be to tax the rich more heavily and give additional money to the poor. The United States has some of the lowest taxes of any rich country so there's certainly room to do more.

Laws that were friendlier to labor union organizing and to the activities of existing labor unions would also likely reduce inequality. So would altering the mix of immigrants to the United States to include a higher proportion of skilled workers. So would improvements in educational attainment. But these kinds of measures speak more to the gap between the top 10 or 20 percent and the rest, not to the gap between the top 1 or 0.1 percent and the average.

For incomes at the very top, there is taxation and then there is the idea of directly targeting the sources of high-income individuals' earnings. That could mean stricter regulation of the financial sector to reduce earnings on Wall Street, or weaker protections for the holders of copyrights to reduce the earnings of superstars.

How does income inequality relate to wealth inequality?

Income is the flow of money that you receive. For most people it's your wages or salary. For some people, there might be dividends, interest payments, or rent thrown in. Wealth is how many financial assets you have stockpiled. The equity in your home, your bank account, your retirement account, or other stocks and bonds you may have accumulated.

There are two main reasons for this.

One is that the bottom quarter or so of the population has zero or negative net wealth , due to student loans, underwater mortgages, credit card debt, auto loans, or other debt instruments. Nobody has negative income and very few people have zero income when government benefits are factored in.

The other is that wealth leads to income. A billionaire who owns tons of stock is going to earn substantial dividends from his stock holdings. Some of that income will be saved, and turn into further wealth. This tends to put the wealth of the wealthiest on an upward trajectory unless something like a war or a depression or a massive political intervention interferes.

What's happening to inequality elsewhere in the world?

Broadly speaking, income inequality appears to be on the rise in almost all developed countries. That was the conclusion of a recent report on the subject by the Organization Economics Cooperation and Development (OECD) .

What's happening to global income inequality?

Even as inequality rises in most rich countries there is evidence that global inequality is declining somewhat from a very high level. World Bank economist Branko Milanovic made the following comparison of the global gini coefficient to the gini coefficients of a few specific countries:

On the other hand, the richest of the world's rich — the billionaires — are getting richer at a rapid pace according to Forbes' annual tally:

Why do some economists say the increase in inequality has been overstated?

While income inequality has been a growing subject of public discussion and most authorities take it for granted at this point that incomes in the United States have grown very unequal, there is some dispute about this. Richard Burkhauser, a Cornell University economist, and Scott Winship, a policy analyst at the Manhattan Institute, have been the leading proponents of the view that the new conventional wisdom overstates the increase in inequality.

The dispute hinged on a variety of conceptual issues, but also on the existence of different sources of data about income. Let's start with the data, and then get into the conceptual problems.

Census vs IRS

The biggest, broadest difference between inequality measures you will see is that some economists (following the work of Thomas Piketty and Emanuel Saez) look at tax return data from the Internal Revenue Service while others rely on the Current Population Survey (CPS) data from the Census Bureau.

The big advantage of the CPS is that it lets you find out information about non-cash compensation — mostly health insurance — and government benefits programs, both of which are important to middle- and working-class economic welfare.

The big disadvantage of the CPS is that because it's based on broad statistical counting, it doesn't give you insight into the top 1 percent, top 0.1 percent, or top 0.01 percent of the population. And since a very large share of the top 5 percent's overall income is in the hands of a very small elite (the top 0.1 percent, say) the CPS ends up undercounting the overall high-end cash income.

Household size

The average size of the American household has shrunk over time, meaning that income-per-household-member for the middle class has grown faster than income-per-household. Some people feel that "income stagnation" claims should be adjusted accordingly (which gives you a better sense of average living standards) while others do not (which gives you a better sense of the state of the labor market).

Taxes and transfers

Since 1979, the tax burden on poor and middle class families has shrunk. Social welfare expenditures (primarily health care programs like Medicaid and the Affordable Care Act) have risen, and a larger share of the population is receiving Social Security and Medicare benefits. All this means that if consider middle class incomes after taxes and transfers , you get a considerably rosier picture than if you consider pre-tax income. For similar reasons, IRS data will tend to suggest that retirees are very poor by neglecting the considerable value of government programs that lift the elderly out of poverty.

Somewhat ironically, the people who insist on including tax and transfer data in their inequality metrics tend to be associated with the political right while the people who argue in favor of progressive taxation and a generous welfare state tend to want to leave this stuff out of their inequality metrics.

Capital gains

Another conceptual issue relates to the treatment of capital gains, in other words profits earned on investments. Including IRS data on capital gains adds a lot to the incomes at the high end, because very rich people own the bulk of stock. At the same time, since profits from the sale of owner occupied housing are not normally taxed, middle class households' main form of capital gains income generally doesn't show up in this dataset.

Another issue with IRS capital gains data is that investment profits are taxed when they are realized, i.e. you pay tax on stock market profits when you sell shares. Combine that with the stock market's tendency to fluctuate up and down and this creates a very unstable income series. That, in turn, means that estimates of high-end income gains over a given period can be highly sensitive to your use of start and end dates. The realization issue also makes a difference for middle class incomes. Middle class workers tend to hold stock in tax-advantaged accounts like 401(k)s and IRAs. The value of these portfolios builds up, tax free, over time. The gains are then realized (and taxed) after retirement, when labor income has dropped to zero.

Health insurance

Many people receive deeply discounted health insurance as part of their compensation package. As the cost of health care has risen over the decades, so has the value of these benefits. Putting a precise number on their value is conceptually challenging, but it is clear that $0 is not the right number. Rich people tend to have better insurance plans than middle class people, but only to a moderate extent. Including the value of health insurance benefits makes middle class income growth look more robust and the growth in inequality smaller.

The bottom line

For all of these issues, there is merit to both ways of looking at the issue. It's important to ask yourself what, specifically, you are interested in and for authors to be clear about what data they are referring to when making polemical points. The IRS income data is the only way to measure the growth of high-end incomes, which makes it indispensable for understanding the economic elite. But it's a rather poor guide to middle class living standards.

The easy answer would be to say to look at the IRS data for a glance at the elite, and turn to different Census-based measures to understand the fate of the middle class. The problem is that one of the main things people would like to understand is how soaring incomes at the top have impacted living standards in the middle. There's simply no entirely satisfactory way of doing this. Census-based measures will miss the soaring elite incomes, while IRS-based measures will leave out health insurance, treat home sales and retirement accounts oddly, and most of all miss the impact of government programs.

Where can I learn more about inequality?

The World Top Incomes Database is the best source of raw data about income and wealth inequality around. The researchers involved in the project also regularly publish papers based on the data that are often enlightening. One of them, Thomas Piketty, has recently published a book, Capital in the 21st Century, that offers one of the most thorough treatments of the subject.

Branko Milanovich's 2011 book The Haves and the Have Nots: A Brief and Idiosyncratic History of Global Inequality is a useful discussion of the generally neglected worldwide perspective on inequality.

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Page One Economics ®

Income and wealth inequality.

"For we, the people, understand that our country cannot succeed when a shrinking few do very well and a growing many barely make it. We believe that America's prosperity must rest upon the broad shoulders of a rising middle class." 

—President Barack Obama 1

Introduction

There are many different types of inequality among people: educational attainment, work experience, and health—to name a few. This essay discusses economic inequality: its causes, measurement, and the potential impact of its growth in the U.S. economy.

Economists directly link differences in educational attainment and work experience, also known as human capital, to differences in economic outcomes. That is, formal education and job skills determine how likely a person is to find and hold a stable job that pays good wages. The flow of money from wages is the most important source of income for most people. Over time, regular income from employment allows people to own assets such as a home or a retirement financial portfolio. That stock of assets is called wealth .

Data collected by federal organizations such as the Census Bureau and the Board of Governors of the Federal Reserve System (BOG) allow us to measure how unequal the distributions of income and wealth are in the United States. Those data show that, since the 1970s, some individuals and families are earning much more income and accumulating much larger amounts of wealth than the typical family does. 

Data reported by the World Bank allow us to compare the distribution of income across countries. As of 2018, the available data show large international differences in income inequality. Although not all countries in the world have data on income inequality, among those that do, the United States ranks among the top 25% most unequal.

What Causes Inequality?

The root cause of differences in income and wealth across individuals and households is a combination of personal and social factors. Personal factors are unique to individuals and include talent, effort, and luck. Such factors can be either nurtured or hindered by the family upbringing of the individual. Social factors affect groups of people and include education policies, labor market laws, tax codes, and financial regulations. At any moment in time, social factors can overpower personal factors to determine individual prosperity and increase inequality among people. 2

For example, as gradually more married women started working outside the home between 1960 and 2000, their family incomes increased and the differences in income between households became larger depending on whether they had one or two people earning wages. At the same time, differences in the types of jobs women and men tend to hold also contribute to income inequality between genders. 3

Because wealth is accumulated over time, older people are generally wealthier than younger people. For that reason, if there are many more young people than old people in the general population and the old hold more wealth than the young, overall wealth inequality will be high. 4

Finally, some people argue that the type of monetary policy used to ensure steady access to credit by households and businesses during recent economic contractions may contribute to higher levels of income inequality. However, that claim is hotly disputed. 5

How Is Income Inequality Measured?

There are different ways to measure how unequal income is in a country. The U.S. Census measures income inequality as the ratio of the mean, or average, income for the highest quintile (top 20 percent) of earners divided by the mean income of the lowest quintile (bottom 20 percent) of earners in a particular area. Let's say a small county has 500 people earning an income. To measure how unequal those incomes are, the Census surveys and sorts each person's income from highest to lowest, calculates the average income of the 100 people earning the most and the average income of the 100 people earning the least, and divides the first figure by the second figure. 

Figure 1 Income Inequality by County 

SOURCE: U.S. Census via FRED ® , Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/graph/?m=QRCJ , accessed June 23, 2021.

Figure 1 shows average county-level income inequality measured between 2016 and 2020. The Census considers the average income over a five-year period to account for the fact that peoples' income changes from year to year. Measured this way, income inequality can be as high as 130 or as low as 5. These measurements mean that the most affluent households in a particular county can earn as much as 130 times or as little as 5 times as much as the least affluent households do.

Another way to measure income inequality in a population is to calculate the Gini index . The World Bank uses that index to measure how much the distribution of income among households deviates from a perfectly equal distribution. The Gini index can take any value between 0 and 100. A value of 0 represents perfect equality: All households earn the same income. A value of 100 indicates perfect inequality: One household earns all the income, and all other households earn nothing.

Figure 2 Gini Index by Nation

SOURCE: World Bank via FRED ® , Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/graph/?m=QRFh , accessed April 6, 2021.

Figure 2 shows country-level income inequality measured with a Gini index in 2018. The highest value is 54, and the lowest value is 25. It is important to note that two countries can have very similar Gini indexes despite having very different distributions of income. For example, in 2018, the Gini index for the United States was 41.4 and for Bulgaria was 41.3, despite the fact that those two countries' economic and social histories are very different.

In the United States, since the 1970s, the Gini index has increased at a steady rate, indicating greater income inequality across families. 6 Some research suggests that this growing difference is related to the increased value of the stock market. Wealthier households hold more stocks than poorer households. So, when stock market prices rise, the income of wealthier households grows relatively more and overall income inequality increases. 7  

How Is Wealth Inequality Measured?

The BOG combines information from two different surveys to measure how wealth is distributed among households: It takes the value of a household's assets (e.g., the current market price of a home) and liabilities (e.g., the unpaid part of a mortgage for a home) and calculates the difference between the two, which is called net worth . Next, the BOG sorts household wealth from highest to lowest and reports the net worth of four different groups: the wealthiest 1% of the population, the next 9%, the next 40%, and the bottom 50%.

Figure 3 Share of Total Net Worth Held by Population Groups

SOURCE: Board of Governors of the Federal Reserve System via FRED ® , Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/graph/?g=O2Kq , accessed April 6, 2021.

Figure 3 shows the share of total net worth held by each of those four groups. In 2021, the wealthiest 1% of the population (about 3.3 million households) held about one-third of total net worth; the next 9% (almost 30 million households) held a little more than one-third; the next 40% (about 133 million households) and the bottom 50% (about 166 million households) together held the rest—less than one-third of total net worth.

The data from the BOG show increasing wealth concentration since 1989, when the data first became available. 8 It is important to note that, over time, some individual households can move up or down between wealth groups, depending on the changing value of their assets. Also, some research suggests the particular nature of some economic fluctuations impacts some households' net worth more than others. For example, the real estate crash associated with the 2007-09 recession resulted in large losses for the poorest 50% of the population. 9

Does Inequality Matter?

The economic impact of growing income and wealth inequality in the United States is an intensely studied question. Economists are debating how to answer that question by analyzing data and creating mathematical models to study it. Because this is ongoing work, there is no single answer.

Some research shows that, in richer countries, more unequal income makes economic fluctuations more pronounced. 10 That finding means that the changes in overall income and employment known as business cycles become more dramatic. Moreover, statistical evidence suggests increased income inequality undermines economic growth due to lower educational achievements (and human capital) among poorer individuals and households. 11 As discussed earlier, education builds a person's human capital and is rewarded with higher income from employment. Finally, research suggests the increasing income and wealth inequality can undermine the use of monetary policy (as we know it) to maximize employment and ensure price stability. 12  

Inequality in individual economic outcomes arises from a combination of personal traits and social conditions. The distributions of income and wealth in a society can be measured in multiple ways: comparing the highest to the lowest earners, calculating an index describing how unequal income is among all individuals, and assessing people's financial wellbeing according to the value of their wealth holdings. Regardless of how we measure income and wealth inequality, their distributions in the United States are becoming more unequal. This trend is likely to impact economic life as we know it. More research is needed to figure out precisely how that may happen.

1 Obama, Barack. "Inaugural Address." January 21, 2013; https://obamawhitehouse.archives.gov/the-press-office/2013/01/21/inaugural-address-president-barack-obama .

2 For an example of how the use of city maps to assess lending risk after the Great Depression influenced homeownership rates across population groups for decades afterward, see the following article: Mendez-Carbajo, Diego. "Neighborhood Redlining, Racial Segregation, and Homeownership." Federal Reserve Bank of St. Louis Page One Economics , September 2021; https://research.stlouisfed.org/publications/page1-econ/2021/09/01/neighborhood-redlining-racial-segregation-and-homeownership .

3 For more on gender and labor markets, see the following article: Mendez-Carbajo, Diego. "Gender and Labor Markets." Federal Reserve Bank of St. Louis Page One Economics , January 2022; https://research.stlouisfed.org/publications/page1-econ/2022/01/03/gender-and-labor-markets .

4 For more on aging and wealth inequality, see the following article: Vandenbroucke, Guillaume and Zhu, Heting. "Aging and Wealth Inequality." Federal Reserve Bank of St. Louis Economic Synopses , 2017, No. 2; https://research.stlouisfed.org/publications/economic-synopses/2017/02/24/aging-and-wealth-inequality/ .

5 For a contribution to the ongoing debate about the relationship between monetary policy and income inequality, see the following article: Bullard, James. "Income Inequality and Monetary Policy: A Framework with Answers to Three Questions." Presented at the C. Peter McColough Series on International Economics, Council on Foreign Relations, New York, June 26, 2014; http://research.stlouisfed.org/econ/bullard/pdf/Bullard_CFR_26June2014_Final.pdf .

6 The following FRED® graph shows the income Gini ratio of all families, reported by the U.S. Census Bureau since 1947: https://fred.stlouisfed.org/graph/?g=MKYg .

7 For more on income inequality and the stock market, see the following articles: 

Bennett, Julie and Chien, YiLi. "The Large Gap in Stock Market Participation Between Black and White Households." Federal Reserve Bank of St. Louis Economic Synopses , 2022, No. 7; https://research.stlouisfed.org/publications/economic-synopses/2022/03/28/the-large-gap-in-stock-market-participation-between-black-and-white-households/ . 

Owyang, Michael T. and Shell, Hannah G. "Taking Stock: Income Inequality and the Stock Market." Federal Reserve Bank of St. Louis Economic Synopses , 2016, No. 7; https://research.stlouisfed.org/publications/economic-synopses/2016/04/29/taking-stock-income-inequality-and-the-stock-market/ .

8 For more about the change in wealth distribution over time, see the following post: Federal Reserve Bank of St. Louis. "Comparing the Assets of the Rich, Poor, and Middle Class." FRED ® Blog , October 21, 2019; https://fredblog.stlouisfed.org/2019/10/comparing-the-assets-of-the-rich-poor-and-middle-class/ .

9 For more on how recessions impact household net worth, see the following article: Mendez-Carbajo, Diego. "How Recessions Have Affected Household Net Worth, 1990-2017: Uneven Experiences by Wealth Quantile." Federal Reserve Bank of St. Louis Economic Synopses , 2020, No. 38; https://research.stlouisfed.org/publications/economic-synopses/2020/08/07/how-recessions-have-affected-household-net-worth-1990-2017-uneven-experiences-by-wealth-quantile .

10 For more on the relationship between inequality and economic fluctuations, see the following article: Iyigun, Murat F. and Owen, Ann L. "Income Inequality and Macroeconomic Fluctuations." Board of Governors of the Federal Reserve System International Finance Discussion Papers , July 1997; https://www.federalreserve.gov/econres/ifdp/income-inequality-and-macroeconomic-fluctuations.htm .

11 For more on the relationship between income inequality and economic growth, see the following article: Cingano, Federico. "Trends in Income Inequality and its Impact on Economic Growth." Organisation for Economic Co-operation and Development OECD Social, Employment, and Migration Working Papers , 2014, No. 163; https://www.oecd.org/els/soc/trends-in-income-inequality-and-its-impact-on-economic-growth-sem-wp163.pdf .

12 For more on the relationship between income inequality and monetary policy, see the following article: Cairo, Isabel and Sim, Jae W. "Income Inequality, Financial Crises, and Monetary Policy." Board of Governors of the Federal Reserve System Finance and Economics Discussion Series , July 2018; https://www.federalreserve.gov/econres/feds/income-inequality-financial-crises-and-monetary-policy.htm .

© 2022, Federal Reserve Bank of St. Louis. The views expressed are those of the author(s) and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

Asset: A resource with economic value that an individual, corporation, or country owns with the expectation that it will provide future benefits.

Gini index: A statistical measure of income inequality in a population that ranges from 0 (indicating absolute income equality) to 100 (indicating a perfectly inequal income distribution).

Household: A group of people living in the same home, regardless of their relationship to one another.

Income: The payment people receive for providing resources in the marketplace. When people work, they provide human resources (labor) and in exchange they receive income in the form of wages or salaries. People also earn income in the forms of rent, profit, and interest.

Liability: A legal responsibility to pay back money from a loan or other type of debt.

Net worth: The value of a person's assets minus the value of his or her liabilities.

Quintile: Any of five equal groups into which a population can be divided according to the distribution of values of a particular variable.

Wealth: The value of a person's assets accumulated over time.

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Key findings on the rise in income inequality within america’s racial and ethnic groups.

Income inequality – the gap in incomes between the rich and poor – has increased steadily in the United States since the 1970s. By one measure, the gap between Americans at the top and the bottom of the income ladder increased 27% from 1970 to 2016. However, the rise in inequality within America’s racial and ethnic communities varies strikingly from one group to another, according to a new Pew Research Center analysis of government data.

In this analysis, which draws on data from the American Community Survey and U.S. decennial censuses, income inequality is measured using the 90/10 ratio – the income of those at the high end (90th percentile) of the income distribution relative to the income of those at the low end (10th percentile). “Income” refers to the resources available to a person based on the income of their household, whether the person had personal earnings or not. Thus, people’s incomes are represented by their household’s income adjusted for household size. (See the report methodology for details.)

Here are five key findings from the report:

2 Income inequality among Asians in the U.S. nearly doubled from 1970 to 2016. The top-to-bottom income ratio among Asians increased 77% from 1970 to 2016, a far greater increase than among whites (24%), Hispanics (15%) or blacks (7%). As a result, Asians displaced blacks as the most economically divided racial or ethnic group in the U.S. In 1970, income inequality among Asians was roughly on par with whites and Hispanics and significantly less pronounced than it was among blacks. The Asian experience with inequality reflects the fact that the incomes of Asians near the top increased about nine times faster than the incomes of Asians near the bottom from 1970 to 2016, 96% compared with 11%. These were the greatest and the smallest increases in incomes at the two rungs of the ladder among the racial and ethnic groups analyzed. 

4 Income gaps across racial and ethnic groups persist and, in some cases, are wider than in 1970. Large gaps between the incomes of blacks and whites have narrowed only modestly in recent decades. In 2016, blacks at the 90th percentile of their distribution earned 68% as much as whites at their 90th percentile, the same as in 1970. At the median, blacks earned 65% as much as whites in 2016, up from 59% in 1970. Similarly, lower-income blacks narrowed the gap slightly from 47% in 1970 to 54% in 2016.

While the income gap between blacks and whites closed somewhat from 1970 to 2016, Hispanics fell even further behind at all income levels. For example, at the high end of the income distribution, Hispanics earned 65% as much as whites in 2016 compared with 74% in 1970. Higher-income Asians moved further out in front of higher-income whites, but lower-income Asians did not keep pace. Asians at the 10th percentile earned 8% more than whites in 1970, but in 2016 they earned 17% less.

5 The Asian and Hispanic experiences with inequality are partly driven by immigration patterns. Immigrants accounted for 81% of the growth in the Asian adult population in our sample from 1970 to 2016. This surge followed the Immigration and Nationality Act in 1965, drawing migrants from many countries for family reunification or as refugees , and later through skill-based programs such as the H-1B visa program . The result is a wide variation in education levels and incomes among Asians in the U.S. In 2015, the share with at least a bachelor’s degree among adults ages 25 and older ranged from 9% among Bhutanese to 72% among Indians, median household income varied from $36,000 among Burmese to $100,000 among Indians, and poverty rates were as high as 35% among Burmese and 33% among Bhutanese (incomes not adjusted for household size).

Hispanic immigrants, many of whom were unauthorized, accounted for 50% of the growth in the Hispanic adult population in our sample from 1970 to 2016. The Hispanic immigrant population tilts to the lower end of the education and income distributions. In 2015, 47% of foreign-born Hispanics ages 25 and older had not graduated from high school , compared with 13% of Americans overall. And only 11% of Hispanic immigrants had attained at least a bachelor’s degree, compared with 31% of Americans overall. The influx of lower-skill, lower-income immigrants likely exerted a drag on the measured growth in income for Hispanics.

Overall, the contrasting experiences of America’s racial and ethnic groups with income inequality – as well as the persistence of gaps in income across them – could reflect differences in the characteristics of workers, such as educational attainment (greater among Asians and whites) and the share foreign born (greater among Asians and Hispanics). In addition, the historical legacy and current impact of discrimination are considered to be an important source of gaps in income across groups.

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Trust in America: How do Americans view economic inequality?

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About Pew Research Center Pew Research Center is a nonpartisan fact tank that informs the public about the issues, attitudes and trends shaping the world. It conducts public opinion polling, demographic research, media content analysis and other empirical social science research. Pew Research Center does not take policy positions. It is a subsidiary of The Pew Charitable Trusts .

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Essays on Income Inequality

Income inequality is a pressing issue that affects societies globally. As such, it is an important topic for academic discussion and analysis. When selecting an income inequality essay topic, it is crucial to choose a subject that is both relevant and interesting. The chosen topic should also allow for in-depth research and analysis. This will ensure that the essay is engaging, informative, and thought-provoking.

Income inequality is a multifaceted issue that has far-reaching implications for individuals and society as a whole. By selecting the right essay topic, students can explore various aspects of income inequality and its impact on different facets of life, such as education, healthcare, and social mobility. This allows for a comprehensive understanding of the issue and encourages critical thinking and discussion.

When selecting an income inequality essay topic, it is important to consider the student's interests, the availability of research material, and the potential for original analysis. Students should also consider the relevance of the topic to current societal and economic trends. Additionally, choosing a topic that allows for the exploration of different perspectives and potential solutions can lead to a more engaging and impactful essay.

Recommended Income Inequality Essay Topics

Income inequality is a prominent issue in society, and writing an essay on this topic can help to raise awareness and spark important discussions. Here is a list of income inequality essay topics to consider:

Economic Impact

• The relationship between income inequality and economic growth
• The impact of income inequality on consumer spending
• Income inequality and its effect on poverty rates
• The role of income inequality in financial crises
• Globalization and its impact on income inequality

Social Impact

• Income inequality and access to quality education
• The effects of income inequality on healthcare disparities
• Income inequality and its influence on crime rates
• The relationship between income inequality and social mobility
• Income inequality and its impact on mental health

Policy and Solutions

• Strategies to reduce income inequality through tax reform
• The role of minimum wage policies in addressing income inequality
• Universal basic income as a solution to income inequality
• The impact of social welfare programs on income inequality
• The role of education and skill development in reducing income inequality

Gender and Income Inequality

• The gender wage gap and its contribution to income inequality
• Income inequality and women's access to leadership positions
• The intersection of race, gender, and income inequality
• Gender-based discrimination and its impact on income inequality
• Policies and initiatives to address gender-based income disparities

Geographical Disparities

• Rural vs. urban income inequality: A comparative analysis
• The impact of income inequality on regional economic development
• Income inequality and access to resources in developing countries
• Income inequality in specific regions (e.g., Appalachia, the Rust Belt)
• The role of infrastructure and public services in addressing geographical income disparities

By choosing a topic from the above list, students can delve into various aspects of income inequality and contribute to the ongoing dialogue on this critical issue. Each topic provides ample opportunities for in-depth research, analysis, and the exploration of potential solutions.

The Relationship Between Income Inequality and Crime

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Literature review on income inequality and economic growth

This paper provides a comprehensive literature review of the relationship between income inequality and economic growth. In the theoretical literature, we identified various models in which income inequality is linked to economic growth. They include (i) The level of economic development, (ii) The level of technological development, (iii) Social-political unrest, (iv) The savings rate, (v) The imperfection of credit markets, (vi) The political economy, (vii) Institutions and (viii) The fertility rate. Based on the transmission mechanisms of these models, we found that the relationship between income inequality and growth can be negative, positive or inconclusive. The first three models demonstrate that the relationship is inconclusive, the fourth shows that it is positive, while the remainder indicate that the relationship should be negative. In the face of theoretical ambiguity, we also noted that the empirical findings on the relationship between income inequality and growth are highly debatable. These findings can be broadly classified into four categories, namely negative, positive, inconclusive and no relationship. Based on these findings, we provide a critical survey on methodology issues employed in the prior studies and propose a better methodology to researchers for future studies.

• • Theoretical and empirical literature is reviewed and synthesis is done to understand the income inequality-growth nexus

Graphical Abstract

Specification table

Across countries, the unequal distribution of income and resources among the population is the defining challenge of our time. In both developed and developing economies, the income inequality gap (as measured by the decile ratios and the Gini coefficient based on the Lorenz curve) between rich and poor is at high levels, and continues to rise [24] . When income inequality becomes extremely high, it fuels social dissatisfaction and raises the threat of social and political unrest [13] . In similar vein, Alesina and Perotti [8] :1 argue that high income inequality, “ by increasing the probability of coups, revolutions, mass violence or, more generally, by increasing policy uncertainty and threatening property rights, has a negative effect on investment and, as a consequence, reduces growth ”.

Given the already high level of income inequality and rising trends in many countries, along with the potentially negative consequences for economies, we found that a significant body of literature examines the causes of income inequality and its consequences for economic development. Among them were theoretical analyses of the inequality–growth nexus, which identified various transmission mechanisms linking income inequality to economic growth. These include (i) The level of economic development, (ii) The level of technological development, (iii) Social-political unrest, (iv) The savings rate, (v) The imperfection of credit markets, (vi) The political economy, (vii) Institutions and (viii) The fertility rate. Based on these models, we found that the relationship between income inequality and growth can be negative, positive or inconclusive. Theories on the level of economic development (see [7 , 31 , 38 , 54] ) and technological development (see [6 , 29 , 33] ) demonstrate that the relationship between inequality and growth changes from positive to negative as the level of development increases. Inconclusive results are also echoed by the social-political unrest model, which argues that the socio-political unrest stemming from high income inequality can either inhibit or benefit growth (see [13 , 14 , 56 , 62] ). In addition, theories on the political economy (see [9 , 11 , 13 , 46 , 48 , 50] ), the imperfection of credit markets (see [5 , 12 , 30 , 51] ; Panniza, [46] ), institutions (see [22 , 34 , 61] ) and the fertility rate (see [26] ) demonstrate that income inequality is negatively related to growth. The only theory which supports the positive relationship between income inequality and growth is the theory on the savings rate (see [3 , 17 , 42 , 53] ).

Given such theoretical ambiguity, it is little wonder that the empirical findings on the relationship between income inequality and growth are strongly debated. Early empirical studies by Alesina and Rodrik [9] , Persson and Tabellini [50] and Perotti [49] reported that inequality exerted a negative impact on growth. That negative relationship has been confirmed by numerous subsequent studies (see, for example, Panniza, [18 , 19 , 46 , 55 , 64] ). Evidence of a negative relationship has, however, been challenged by studies which reported positive results on the inequality–growth nexus (see, for example, [28 , 39 , 57 , 58] ). In addition, several studies have yielded inconclusive findings, with most reporting that the relationship is positive in high-income and negative in low-income countries (see, for example, [13 , 20 , 25 , 27] ). A few studies found no relationship between inequality and growth (see [15 , 44] ).

Given the above background, the aim here is to provide a comprehensive literature review of the relationship between income inequality and economic growth, both in theory and empirically. While Section 2 critically analyses the theoretical framework of the income inequality–growth nexus, Section 3 reviews empirical studies on this relationship. Section 4 provides a critical survey on methodology issues employed in the prior studies and proposes a better methodology that can help reconcile the literature. Section 5 concludes the study.

Income inequality and economic growth: Theoretical framework

A theoretical analysis of the inequality–growth nexus has identified various transmission mechanisms in which income inequality is linked to economic growth. These mechanisms are discussed in detail in this section.

The level of economic development

Early researchers explored the link between income inequality and growth through the lens of the developmental stage of the economy. Kuznets [38] documented that the relationship between the two variables relies on the level of economic development of a country, meaning there is a differential relationship between income inequality and growth, with a positive relationship during the early stage of economic development and a negative relationship during the mature stage. This may be attributed to shifts of labor, from one sector to other, developed sectors. For example, when labor moves from the agricultural sector to other sectors of the economy, the per capita income of those individuals increases, as their skills are in demand in those sectors. Individuals who remain in the agricultural sector keep earning a low income, thus income inequality increases during this stage. As the economy develops, with labour continuing to move from agriculture to other sectors, individuals who remain in the agricultural sector will earn higher incomes due to the low supply of labour in that sector. Income inequality thus declines during this stage. Kuznets [38] describes the relationship as an inverted U-hypothesis, which advocates that inequality tends to increase during early stages of economic development and decrease during later stages. This argument is supported by Ahluwalia [7] , Robinson [54] and Gupta and Singh [31] .

The level of technological development

In addition to sectoral change, Galor and Tsiddon [29] , Helpman [33] and Aghion et al. [6] explored the link by connecting income inequality to the developmental stage of technology. During the early stages of technological development, innovative ideas in the economic sector result in increases in income inequality. This is due to the fact that new technology requires highly skilled labor and training, which raises wages in these sectors compared to those sectors which use old technology. As a result, employees in the new sector earn high per-capita incomes, while those working in the sector with old machines continue earning lower incomes. Therefore, income inequality increases during the early stages of technological improvements. However, as the economy moves to the more mature stage of technological development, income inequality decreases, the reason being that as more labour shifts to the sector using new technology, the incomes of those who remained in the sector with old technology also increase due to the low supply in labor in that sector. Therefore, the wage differential gap between them declines, leading to a decrease in income inequality.

The role of technology was probed further by researchers who focused on the Fourth Industrial Revolution (4IR). By implementing modern technologies, 4IR will lead to the continuing automation of traditional manufacturing and industrial processes. As Krueger [37] documented, improvements in technology widen the income inequality gap in the labor market between skilled and lowly skilled labour, because the income of highly skilled labor increases (as those individuals are in demand), while lowly skilled laborers continue earning low incomes. In similar vein, 4IR is skills-biased, which leads to a widening of the income inequality gap [1] . Based on this argument, technological improvements can be harmful to growth, due to concerns about growing inequality and unemployment.

Social-political unrest

Some studies argue that the rise of socio-political unrest, stemming from high income inequality, may dampen growth (see [13 , 14 , 62] ). In countries with extreme wealth and income inequality, there are high levels of social unrest that cause people to engage in strikes, criminality and other unproductive activities. This often results in wastage of government resources and disruptions that threaten the political stability of the country. It causes uncertainty in government and slows down productivity in the economy, while discouraging investment.

By contrast, high income inequality due to the rise of socio-political unrest can promote growth. To reduce the number of strikes, criminal activity, uncertainty and political unrest, politicians and leaders favor redistribution – from the rich to the poor – in the form of a transfer of payments. In turn, this creates a safety net for the population and government to restore society's trust in government. As a result, levels of uncertainty decline and investment increases, prompting an increase in the growth rate in the long run [13 , 14 , 62] . Similarly, Saint-Paul and Verdier [56] demonstrate that, in the presence of high income inequality, the median voter favors a transfer of payments by means of public expenditure, such as financing education. This, in turn, increases human capital for the poor to access education, thereby promoting growth.

The political economy

Political economy models demonstrate that high income inequality may hinder growth (see [9 , 13 , 48] ). The law and government play crucial roles in the economy, with government in charge of the redistribution of income and resources among the population. These models reveal that when the mean income is greater than that of the median voter, people support the redistribution of income and resources (from the rich to the poor). Redistribution takes place through a transfer of payments and public expenditure, such as the establishment of health facilities and the building of schools, among others. This kind of redistribution reduces growth in the long run, however, by discouraging innovation and investment, and causing low productivity [9 , 13 , 48] . In addition, when there is high income inequality, the population demands equal distribution. That sometimes results in riots and other unproductive activities which retard economic growth. Furthermore, factors such as lobbying and rent-seeking, which often occur during the political process, also discourage growth. This happens when those in the upper decile of income distribution prevent the redistribution of income and resources to the poor, resulting in a wastage of government funds and corruption, both of which hamper economic growth in the long run [11 , 46 , 48 , 50] .

The imperfection of credit markets

The imperfect credit markets model demonstrates that income inequality is negatively associated with growth through credit markets (see [4 , 12 , 30 , 51] ; Panniza, [46] ). In an imperfect credit market, a high degree of income inequality limits the poor from accessing credit. Asymmetric information – where the lender and borrower have limited information about each other – inhibits the ability to make well-informed decisions. This limits the ability to borrow and returns on investment. In addition, imperfect laws make it difficult for creditors to collect defaulted loans, because the law might protect the assets of the borrower from being repossessed as collateral. Such laws constrain the collection of debt, leading to the hard terms and conditions faced by potential creditors. This prohibits access to credit for some individuals, in particular the poor. Given that investment depends on how much income and how many assets an individual has, the poor (who only have income for basic necessities) are unable to afford investment opportunities with high returns (for instance, to invest in human capital or property, among others). For this reason, extremely high income inequality reduces investment opportunities, leading to declining growth in the long run.

Existing studies report that income inequality exerts a positive impact on economic growth through savings rates (see [3 , 13 , 17] ). According to these studies, savings are a function of income. As income earned increases, so the savings rate rises, and vice versa. In the presence of high income inequality, rich people earn high incomes which help them to save more, because their marginal propensity to save is relatively high. This increases the aggregate savings, leading to a rise in capital accumulation, thereby enhancing economic growth in the long run (see [3] , [17] , [42] , [53] , [66] ). Following on this argument, Shin [59] demonstrates that the redistribution of income and resources from rich to poor is harmful to growth. Such action reduces the income, wealth and other resources of the rich, leading to a decline in the marginal propensity to save. As a result, aggregate savings and investments decline.

Institutions

Several studies illustrate that income inequality inhibits growth through institutions (see [22 , 34 , 61] ). Institutions play a vital role in the wellbeing of a country, because they are the key drivers of economic growth and development in the long run [2 , 60 , 65] . The quality of institutions is important for distribution and growth outcomes. High income inequality creates fertile ground for bad institutions, and exacerbates inequality and inefficiency, which leads to low growth rates in the long run. In the case of high income inequality, political decisions tend to be biased towards enriching the already rich minority, at the expense of the poor. This results in poor policies, leading to a high level of inefficiency, wastage of state resources, social dissatisfaction and political instability. It further perpetuates inequality and inhibits growth in the long run [34 , 61] . Based on this argument, bad institutions tend to associate with extreme records of inequality, inefficiency and sluggish growth. By contrast, good institutions tend to associate with low inequality, productivity and economic growth.

The fertility rate

Income inequality has been found to negatively affect growth through differences in fertility (see [26] ). This study documented that a widening income inequality gap raises differences in fertility between the rich and the poor in a population. The low-income group usually have many children, and tend to invest less in their children's education due to a lack of financial resources. By contrast, those in the high-income group usually have fewer children and invest more in their education. Therefore, in the case of extreme income inequality, the high fertility differential has a negative impact on human capital, leading to a decline in economic growth.

Income inequality and economic growth: Empirical evidence

Given such theoretical ambiguity, the empirical findings on the relationship between income inequality and growth are also highly debatable. These findings can broadly be classified into four categories, namely negative, positive, inconclusive and no relationship.

Studies with negative results on the relationship between income inequality and economic growth

The earliest empirical studies examining the inequality–growth nexus were conducted in the 1990s, and employed the ordinary least squares (OLS) and two-stage least squares (2SLS) estimation techniques (see [9 , 49 , 50] ). Alesina and Rodrik [9] examined the relationship between distributive politics and economic growth in 46 countries, for the period 1960–1985. They found that higher income inequality was accompanied by low growth. Similarly, Persson and Tabellini [50] examined the impact of inequality on growth in 56 countries, for the period 1960–1985, and found that inequality exerted a negative impact on growth. Using similar estimating techniques, Perotti [49] analysed the relationship between income distribution, democratic institutions and growth in 67 countries, and found that countries with a low level of inequality tended to have high investments in human capital, which then led to economic growth.

Studies in the 2000s developed different estimation techniques to solve the problem at hand. For example, Panizza [46] employed the standard fixed effect (FE) and generalised method of moments (GMM) to reassess the relationship between income inequality and economic growth in the United States for the period 1940–1980. The results of that study documented that income inequality negatively affected economic growth. Another single-country study was conducted on China, where Wan et al. [64] investigated the short- and long-run relationship between inequality and economic growth during the period 1987–2001. By using three-stage least squares, they found that the relationship was nonlinear and negative for China. Recently, Iyke and Ho [35] studied income inequality and growth in Italy, from 1967–2012, using the autoregressive distributed lag (ARDL) estimation technique. Their study found that income inequality affected growth both in the short and long run. That is, income inequality slowed down growth in the country.

In multiple-country studies, Knowles [36] re-examined the relationship between inequality and growth in 40 countries using comparable data and OLS from 1960–1990. That investigation found a negative relationship between inequality and economic growth for the full sample. When the countries were divided according to the income level, he found a significant negative relationship in the low-income countries but an insignificant relationship in high- and middle-income countries. Malinen [41] investigated a sample comprising 60 countries (developed and developing economies) using the Gini index as a measure of income inequality. Panel cointegration methods were used, employing panel dynamic OLS and panel dynamic seemingly unrelated regression (SUR) to analyze the steady state correlation between income inequality and economic development. During the period under study, the findings revealed a negative steady-state correlation between income distribution and economic development. In addition, in developed countries, income inequality was associated with low economic growth in the long run. Another study focused on developed countries: Cingano [23] , for instance, examined the impact of income inequality and economic growth in OECD (Organisation for Economic Co-operation and Development) countries between 1980 and 2012. Employed GMM, the researcher found that in those countries income inequality negatively affected economic growth. Furthermore, the study confirmed human capital as the transmission channel through which income inequality affects growth. Research by Braun et al. [18] , tested the main prediction of their model with respect to the impact of income inequality on growth at different levels of financial development. By using pooled OLS, dynamic panel and instrumental variables (IV) estimations on 150 countries during the period between 1978 and 2012, they found that greater income inequality is associated with lower economic growth. In addition, they also found that such an effect is significantly attenuated when the level of financial development increases in economies. Another study by Royuela et al. [55] tested the income inequality-growth nexus for over 200 comparable regions in 15 OECD countries during 2003–2013. By using the similar estimation techniques of Bruan et al. [18] , they showed a general negative association between inequality and growth in OECD regions. Recently, Breunig and Majeed [19] re-investigated the impact of inequality and economic growth in 152 countries. The study used GMM for the period 1956 to 2011 and found that inequality had a negative effect on growth. They further found that when both poverty and inequality were considered, the negative impact of inequality on growth was concentrated on countries with high rates of poverty.

Studies with positive results on the relationship between income inequality and economic growth

A study which found a positive relationship is that of Partridge [47] , who investigated whether inequality benefited or hindered growth in the United States between 1960 and 1990. That study, which employed OLS, yielded the following results: first, during the period of the study, a positive relationship was found between inequality and economic growth. That is, American states with high inequality grew faster. Second, the study reported that the wellbeing of the median voter had a positive impact on growth. This implies that the unequal distribution of income and resources among the population encouraged economic activity and, in turn, grew the economy. In another single-country study, Rangel et al. [52] focused on growth and income inequality by investigating the linear correlation and inverted-U shape hypothesis in Brazil, from 1991–2000. They found that, in the long run, income inequality and growth tended to move together. The results also confirmed the existence of the inverted-U hypothesis between income inequality and economic growth.

Bhorat and Van der Westhuizen [16] investigated the relationship between economic growth, poverty and inequality in South Africa, for the period 1995–2005. The study employed a distribution-neutral measure, poverty inequality elasticity estimates, and the marginal proportional rate of substitution. During the period under study, the researchers found a shift in the distribution of income and resources during periods of growth, and hence income inequality tended to increase with increases in economic growth. Later, Shahbaz [58] and Majeed [40] both employed the ARDL technique to study the income inequality–growth nexus in Pakistan, with the first investigation spanning the years 1971–2005, and the second, 1975–2013. Both studies identified a positive correlation between income inequality and economic growth in Pakistan during the period under investigation. Majeed [40] further argued that because the poor population did not participate in the growth process, growth became unsustainable.

Studies on multiple countries also reported positive results. For example, Li and Zou [39] re-examined the relation between inequality and growth from 1947–1994 for a group of developed and developing countries. Using FE and RE methods and expanded data, they found that high income inequality resulted in an increase in economic growth. Later, Forbes [28] also re-assessed the inequality–growth relationship in 45 countries, from 1966–1995. With the use of FE and RE, Chamberlain's ᴫ matrix procedure and Arrelano and Bond's GMM, the findings showed that as income increased in the short to medium term, economic growth tended to increase. A recent study by Scholl and Klasen [57] revisited the inequality-growth relationship, paying special attention to the role of transition (post-Soviet) countries. The study was based on the specification used by Forbes [28] on a sample of 122 countries over the period of 1961–2012. By using FE, GMM and IV estimation techniques, they found a positive association between inequality and growth in the overall sample which was driven by transition countries.

Studies with inconclusive results on the relationship between income inequality and economic growth

A number of studies yielded inconclusive findings on the inequality–growth nexus. In particular, most reported that the relationship was positive in high-income countries and negative in the low-income countries. For example, Deininger and Squire [25] employed cross-country samples from 1960–1992 to analyse the influence of inequality (income and distribution of assets) on economic growth, and also studied the effect it exerts on reducing poverty. Using OLS and panel data, that study found that income inequality had a negative effect on future growth. In addition, Deininger and Squire [25] reported that high income inequality reduced the income of the poor and boosted the income of the rich. Barro [13] used 2SLS to study the inequality–growth relationship in a panel of countries for the period 1965–1995. The results showed that, in rich countries, inequality positively affected economic growth, while in poor countries it negatively affected growth during the period under study. This means that, for rich countries, as inequality increased, the economy (as measured by Gross Domestic Product [GDP] per capita) tended to increase as well, while in poor countries, the economy tended to decline as inequality increased.

Studies using GMM methods reached similar results. For example, Voitchovsky [63] analysed the link between income distribution and economic growth in 21 developing countries, from 1975–2000. The findings showed that income inequality had a positive effect on growth at the upper decile of income distribution, while inequality negatively affected growth at the lower decile. Similarly, Castelló-Climent [21] confirmed that the relationship between income and growth was positive in high-income countries and negative in low- and middle-income countries. That study examined the correlation between income and human capital and economic growth across countries during the period 1992–2000. The results further indicated that both income and human capital inequality constrained economic growth for low- and middle-income countries. However, in high-income countries, income and human capital inequality encouraged economic growth during the period under study. In yet another investigation, Fawaz et al. [27] studied the income inequality–growth nexus, focusing on its link to credit constraints in high- and low-income developing countries from 1960–2010. The study found similar results, namely that in low-income developing countries, income inequality is negatively related to economic growth. For high-income developing countries, income inequality was positively related to economic growth.

Halter et al. [32] reported that this relationship changed over time, having studied the relationship across countries from 1965–2005, using GMM. The findings showed that, in the short run, high inequality encouraged economic growth, but over the long run, high inequality slowed down the economy and impeded growth. Likewise, Ostry et al. [45] investigated the link between redistribution, inequality and growth in various countries, and found that net inequality was positively correlated to economic performance during the early stage of economic development, but turned negative during the mature stage. Research by Brueckner and Lederman [20] studied the relationship between inequality and GDP per capita growth. Using panel data from 1970 to 2010, the findings documented that in low income countries transitional growth was positively affected by higher income inequality while such effect turned negative in high income countries.

Studies with evidence of no relationship between income inequality and economic growth

Some studies reported no relationship between income inequality and economic growth. For example, research by Niyimbanira [44] focused on how economic growth affected income inequality from 1996–2014. That study employed the FE method and the pooled regression model, using data from 18 municipalities across the provinces of South Africa. The findings confirmed that economic growth reduced poverty, but had no effect on income inequality, which implies that there was no relationship between income inequality and economic growth. Benos and Karagiannis [15] examined the relationship between top income inequality and growth under the influence of physical and human capital accumulation in the U.S. By using 2SLS and GMM on the annual panel of U.S. state-level data during 1929 to 2013, they concluded that changes in inequality do not have an impact on growth. Table 1 shows the summary of empirical studies discussed in this section.

Summary of empirical studies on the association between income inequality and economic growth

Note: - denotes negative; + denotes positive; 0 denotes no relationship

Methodology

As we have discussed in the previous section, the empirical findings on income inequality and growth are highly inconclusive. In this section, by providing a critical survey on methodology issues employed in the prior studies, we offer possible explanations on the disparity found in the empirical findings, particularly on multiple-countries studies. The early multiple-countries studies [9 , 49 , 50] in general reached a consensus on the negative impact of inequality on growth. Although they used different measures of inequality and samples, they all employed the Ordinary Least Squares (OLS) and Two-Stage Least Squares (2SLS) estimation techniques on cross-section data to estimate the coefficient on the inequality variable.

By the late 1990s, however, the general consensus on the negative relationship between income inequality and growth was challenged by concerns over data quality and the methodological procedures used (see Neves and |Silva, [43] ). With regard to the data quality, some studies argued that the dataset used in the previous studies, which lacked comparability due to the use of different income definitions (gross income versus expenditures) can lead to different results (see [10 , 36] ). According to Knowles [36] , European countries, the U.S. and most of the Latin American countries use gross income data whereas most of the African and Asian countries use expenditure data. Since expenditure is more equally distributed than gross income, such difference in income distribution may lead to a difference in the final results.

Concerning the methodological procedures, there has been a shift on the usage of panel data instead of cross-sectional data in the later studies. Forbes [28] argues that the use of panel data is desirable as it can specifically estimate how a change in a country's level of inequality within a given country will affect growth in that country. In addition, panel data can remove bias from the correlation between time-variant, observable country characteristics and the explanatory variables by controlling for differences in these characteristics. Due to these considerations, many studies started to use panel data (see [13 , 28 , 39] ; among others). However, the use of panel data in the studies may lead to more diverse results. One of the possible explanations is the diversity of estimators employed in the panel studies. While most of the cross-section studies use OLS, panel studies use a wide variety of estimators such as fixed effects, random effects, GMM, etc. Given that these estimators have different underlying assumptions, they are likely to produce different results among the panel studies [43] . Another possible explanation is that, unlike the cross-section data, panel data controls for time-variant, observable country characteristics. Given that the impact of inequality on growth tends to differ across countries and regions, the inter-continental variation contribute a substantial part of the effect. Therefore, the usage of panel data analysis may lead to different results when different samples are used in the studies. With the wider usage of various panel data estimation techniques in the later studies, it is not surprising that we found more diverse results in the inequality-growth literature.

Based on the above considerations, researchers should be more cautious when identifying a general global pattern regarding the inequality-growth relationship. Instead, we propose that more emphasis should be placed on identifying the inequality-growth relationship on a national or regional level. Such an approach will provide a better understanding of the inequality-growth process on the study area by overcoming data comparability constraints and possible methodological challenges.

This paper presented a comprehensive literature review of the relationship between income inequality and economic growth. In the theoretical literature, various transmission mechanisms were identified in which income inequality is linked to economic growth, namely the level of economic development, the level of technological development, social-political unrest, the political economy, the imperfection of credit markets, the savings rate, institutions, and the fertility rate. Based on these models, we found that the relationship between income inequality and growth can be negative, positive or inconclusive. For example, based on the level of economic and technological development, the relationship between inequality and growth is positive and becomes negative as the level of development progresses. Inconclusive results were reported by the social-political unrest model, showing that the rise in socio-political unrest stemming from high-income inequality could either dampen or promote growth. In addition, theories on the political economy, the imperfection of credit markets, institutions and the fertility rate, reported that income inequality was negatively related to growth. The only theory which supported the positive relationship between income inequality and growth was the theory of savings rates.

On the empirical front, we found that numerous studies joined the debate by testing the relationship between income inequality and economic growth. Some found a positive relationship, while others identified a negative impact. Some studies yielded inconclusive findings. In particular, most found that the relationship was positive in high-income countries and negative in low-income countries. Several studies documented no relationship between income inequality and economic growth. In the methodology section, we provided a critical survey on methodology issues employed in the prior studies. We argued that the varying results obtained by these studies can be attributed to empirical aspects such as the data comparability and methodological procedures used. We, therefore, suggest that future studies should place more emphasis on identifying the inequality-growth relationship on a national or regional level to better understand the inequality-growth process on the study area. In addition, we conjecture that as the study countries and time span differed in the empirical studies, the impacts of the various theoretical channels we identified previously could also play a uniquely important role in affecting the relationship of the inequality–growth nexus in those studies. It would be prudent for future studies to apply the theoretical models to provide an in-depth analysis of the existing empirical findings. Such findings, with reference to the social, political and economic structure, would provide more relevant policy recommendations to the countries under study.

Declaration of Competing Interest

The authors of this paper certify that there is no financial or personal interest that influenced the presentation of the paper.

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What Is Income Inequality?

• How It Works
• Measurement
• How to Reduce It
• U.S. Income Inequality

The Bottom Line

Income inequality definition: examples and how it's measured.

Ariel Courage is an experienced editor, researcher, and former fact-checker. She has performed editing and fact-checking work for several leading finance publications, including The Motley Fool and Passport to Wall Street.

Investopedia / Sabrina Jiang

Income inequality refers to how unevenly income is distributed throughout a population. The less equal the distribution, the greater the income inequality. Income inequality is often accompanied by wealth inequality, which is the uneven distribution of wealth.

Populations can be divided up in different ways to show different levels and forms of income inequality, such as income inequality by gender or race. Different measures, such as the Gini Index , can be used to analyze the level of income inequality in a population.

Key Takeaways

• Income inequality can result in a lack of opportunities for better standards of living and stable financial futures, and political and social upheavals.
• Income inequality studies help to show the disparity of income among different population segments.
• When analyzing income inequality, researchers study distributions based on gender, ethnicity, geographic location, and occupation.
• Case studies and analyses of income inequality, income disparity, and income distributions are provided regularly by a variety of top sources.
• The Gini Index is a popular way to compare income inequalities universally across the globe.

Understanding Income Inequality

Income inequality, or the imbalance of income earned by a group people, exists in countries throughout the world. In the U.S., these differences in income have become pronounced over the past fifty years. Income inequality is not the same as wealth inequality; the former involves salaries/wages while the latter involves net worth.

Causes of Income Inequality

Some of the factors that affect income inequality include:

Globalization: The increase in trade among nations resulted in the move of manufacturing and other jobs by corporations in the U.S. to countries where labor costs were cheaper. For working-class and middle-class Americans, this meant that secure, even generational, jobs and income disappeared.

Advances in Technology: While a boon in many ways, certain workplace technological advancements, such as automation, have led to the loss of jobs for blue-collar workers and lower wages for less educated workers.

Gender and Race Bias: Income disparities have always been clearly visible for women and people of color. It's widely acknowledged that, for example, male employees typically earn more than female employees in the same job positions. Likewise, white males earn more than non-white males.

Education: Workers with less than a high-school education experience less growth in wages than those with college educations and post graduate degrees. The announcements of multi-million dollar salaries and bonuses (even in troubling economic times) going to C-Suite executives drives this income disparity home.

Economic Conditions: When economic conditions weaken, financial turmoil, unemployment, slowing business investment, and more can affect incomes.

Taxation: Although high-income earners pay a larger percentage of their income in taxes than lower-income earners, federal taxation has not put the brakes on increasing income inequality. That may be due to certain tax policies, e.g., those related to corporate taxation, the capital gains tax rates, and income tax cuts, that benefit those with higher income more than those with lower income.

Consequences of Income Inequality

Some degree of income inequality is to be expected because of basic differences in talent, effort, and simple chance. However, according to the International Monetary Fund (IMF) , too much income inequality could "erode social cohesion, lead to political polarization, and ultimately lower economic growth."

Political upheaval and the disappearance of social, educational, and economic opportunities to improve standards of living and financial futures can also be consequences of income disparity.

Analysis of Income Inequality

Income inequality and income disparity can be analyzed through a variety of segmentations. Income distributions by demographic segmentation form the basis for studying income inequality and income disparity.

The different types of income segmentations studied when analyzing income inequality may include:

• Geographic location
• Historical income

How to Measure Income Inequality

One way to measure income inequality is to compare the income of a large group of high earners (for example, the top 10%) to the national median or average. Another approach compares the income of a lower-earning group (say, the bottom 10%) to the median or average.

Other researchers have begun looking at tax records of those with the highest incomes to draw conclusions about these most affluent slices of society.

A frequently used tool for measuring income inequality is the Gini Index. It was developed by Italian statistician Corrado Gini in the early 1900s to help quantify and more easily compare income inequality levels across countries of the world. The index can range from 0 to 100, with a higher level indicating greater income inequality among a country’s population and a lower level indicating less.

The latest available data from the World Bank shows South Africa reporting one of the highest income inequality dispersions with a Gini Index level of 63.0. The United States has a Gini Index level of 39.7. The Slovak Republic has the World Bank’s lowest Gini Index reading at 23.2.

How to Reduce Income Inequality

Dispersions of income inequality are an ongoing area of analysis for both local and global governing institutions. The IMF and World Bank have a goal to help improve the income of the lowest 10% of earners in all countries through their missions relating to financial stability, long-term economic development, and poverty reduction.

Globally, new innovations in financial technologies and production are helping to improve the banking services for the world’s lowest-income earners, as a worldwide initiative for financial inclusion is underway.

In addition, income inequality will be addressed more successfully when political, economic, and social leaders can agree on basic approaches to its improvement:

• Governments should step in when the free market is ineffective in increasing income.
• Governmental policies that promote income inequality must be acknowledged.
• Fiscal actions can improve income disparities.
• Universal health care could provide some increase in income equality.
• Improving the stability of other social programs such as Social Security and Medicaid could also relieve cost concerns for an enormous number of individuals.
• Better access to educational opportunities could improve socio-economic mobility.

Income Inequality in the United States

Income inequality in the U.S. has been increasing since the 1970s. Throughout the 20th century and up to the present, this inequality has been exacerbated by government tax and labor policies and ongoing discrimination by race and gender. A weakening middle class has also contributed to income inequality.

The organizations below conduct research and produce analysis reports on various examples of income inequality, income disparity, and income distributions in the U.S.

Urban Institute

In an analysis of 50 years of economic data, the Urban Institute showed that the poorest got poorer while the richest got much richer.

Between 1963 and 2016:

• The poorest 10% of Americans went from having zero assets to being $1,000 in debt.
• Families in the middle-income segment more than doubled their prior average wealth.
• Families in the top 10% had more than five times their prior wealth.
• Families in the top 1% had more than seven times their prior wealth.

The Urban Institute also researches the racial and ethnic wealth gap in the U.S. The organization reported that White families in 1963 had amassed a median wealth of approximately $45,000 more than families of color. By 2019, the median wealth for White families increased to approximately $153,000 more than Latinx families and $165,000 more than Black families.

Federal Reserve

The Federal Reserve provides a quarterly Distributional Financial Accounts report. This report shows wealth distributions for U.S. households. As of the fourth quarter of 2022, the Federal Reserve showed the following distributions of wealth across the U.S.

Economic Policy Institute

The Economic Policy Institute released a 2018 report showing a general trend toward increasing incomes of the top earners following the 2008 recession . Between 2009 and 2015, the Economic Policy Institute shows that the incomes of those in the top 1% grew faster than the incomes of the other 99% in 43 states and Washington D.C.

There can be many factors associated with this trend, including salary stagnation for wage-earning Americans, tax cuts for the richest Americans, a loss of manufacturing jobs, and a soaring stock market that inflated the worth of corporate executives and hedge fund managers.

Post-recession, companies are also investing heavily to hire and keep workers with specialized skills in fields such as engineering and  healthcare . This has caused reductions or new automation takeovers in other functions, pushing down wages for workers in less competitive jobs.

Furthermore, EPI data tracks wages by segment on a regular basis. As of 2022, it showed the following averages for Whites, Blacks, and Hispanics.

Institute for Women’s Policy Research

Income inequality is an economic concept that tends to hit some segments of populations harder than others, with significant wage gaps often identified for women, Blacks, and Hispanics working in the U.S. 

According to a study of incomes for full-time workers by the Institute for Women's Policy Research, in 2021 women of all races and ethnicities were paid an average of 83.1% of the salaries paid to men. When both part- and full-time incomes are included, women earn just 77.3 cents for each dollar a man earned.

The same report also broke down earnings by race and gender. It noted that, compared to the median weekly earnings of White men working full-time, Hispanic women earned 58.4% of that amount, Black women earned 63.1%, and White women earned 79.6%.

Pew Research Center

Data from the Pew Research Center also identifies income inequalities by gender . In 2022, according to its latest analysis of hourly earnings of full- and part-time employees, women earned an average of 82% of what men earned. This is not much of an improvement over the pay gap in 2002, when women earned 80% as much as men.

An income gap refers to the difference in income earned between demographic segments.

Why Is Income Inequality a Problem?

It's a serious problem because the lack of financial stability for large portions of a population can promote potentially destructive social and economic upheaval generally, as well as financial hardships and lower standards of living, in particular.

What Are 3 Effects of Income Inequality

Financial hardship for many, persistent poverty, and a dispirited populace that could be ripe for social and political unrest are just a few of the effects of income inequality.

How Can We Fix Income Inequality?

To reduce income inequality, governments and private sectors must address its various causes, including discrimination, unfair taxation, wage stagnation, and more that lead to large imbalances in compensation.

Income inequality is the disparity of incomes across a population. Some income inequality is always to be expected because people bring different degrees of talent, effort, and luck to their endeavors. But large imbalances in income have been caused and maintained by discrimination, taxation policies, the downfall of labor unions, troublesome economic conditions such as slow growth and high inflation, and more.

Countries must address income inequality to combat the disproportionate prosperity, financial hardship, and loss of social and economic opportunities that can lead to social discontent and political instability.

Tax Policy Center. " Briefing Book; How do taxes affect income inequality? "

Center for American Progress. " The American Middle Class, Income Inequality, and the Strength of Our Economy ."

International Monetary Fund. " The IMF and Income Inequality ."

World Bank. " Gini Index (World Bank Estimate) ."

Urban Institute. " Nine Charts About Wealth Inequality in America (Updated) ."

Urban Institute. " How Policymakers Can Ensure the COVID-19 Pandemic Doesn’t Widen the Racial Wealth Gap ."

The Federal Reserve. " DFA: Distributional Financial Accounts ."

Economic Policy Institute. " The Incomes of the Top 1 Percent Grew Faster Than the Bottom 99 Percent in 43 States and the District of Columbia From 2009-15 ."

Economic Policy Institute. " State of Working America Data Library ."

Institute for Women's Policy Research. " Gender Wage Gaps Remain Wide in Year Two of the Pandemic ."

Pew Research Center. " Gender pay gap in U.S. hasn’t changed much in two decades ."

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77 Income Inequality Essay Topics

🏆 best essay topics on income inequality, ✍️ income inequality essay topics for college, 👍 good income inequality research topics & essay examples, 🌶️ hot income inequality ideas to write about.

• Education and Income Inequality Relationship
• Ethics in Social Work: Addressing Economic Inequality
• Economic Inequality as a Social Welfare Challenge
• Measuring Economic Inequality
• Education and Income Inequality in the United States
• Financial Inclusion and Income Inequality
• Income Inequality Based on Gender
• Economic Inequality and Its Relationship to Poverty This research paper will discuss the problem of economic inequality and show how this concept relates to poverty.
• Addressing Economic Inequality: The Pandemic Challenge Economic inequality continues to be relevant to modern society, with the full range of human rights being available only to the wealthy minority.
• Economic Inequality and Pandemic Challenge The most vulnerable populations were affected by the coronavirus pandemic because they often could not access economic and public health resources to meet their needs.
• Economic Inequality Between Genders Discussions on the problems of gender inequality have been going on for decades that’s why the difference in the earnings between men and women is called the gender pay gap.
• Pandemic Challenge and Economic Inequality The coronavirus pandemic has presented two significant challenges for American society: public health and economic crises.
• Income Inequality: A Historical Review The problem of income inequality is of high social importance: it negatively affects the country’s economy and society.
• Misconceptions About Income Inequality Since the views on the current state of income inequality are diametrically opposite, it is essential to examine the exact situation on a global scale.
• The PBS Interview on Income Inequality: Main Ideas The PBS interview on income inequality emphasizes the role of social class in the widening gap between the rich and the poor.
• Poverty in America: Socio-Economic Inequality The primary cause of poverty in the United States is socio-economic inequality since such ethnic minorities as Native Americans are among the poorest social groups in the US.
• Effects of the Income Inequality After watching the CNBC video, that described how the middle-skill workers share has shrunk over time, I thought of my uncle, who was laid off from a steel company in the early 2000s.
• Income Inequality in Developed Countries This article describes the problem of income inequality in developed countries such as China, Germany, France, and the United States, and the reasons for this problem.
• Globalization and Economic Inequality The debate on the issue of economic inequality mitigation has been one of the central aspects of global discussion for decades.
• Income Inequality in the Workplace: Feminist Responses The work discusses the issue of income inequality in the workplace as one of the main problems caused by the low social position of women and their historical perception as a weak gender.
• Educational Policy for Income Inequality in India This paper considers the ways in which external causes influence income inequality in India and the country’s overall state of the economy with the focus on future changes.
• Labor and Income Inequality in the U.S. The purpose of this paper is to explore the causes of growing income inequality in the United States by comparing Western and Rosenfeld and Bertrand and Mullainathan readings.
• American Welfare State and Income Inequality The creation and the growth of Franklin D. Roosevelt’s welfare state had a significant effect on the development of American society, including the economy, health, etc.
• Economic Inequality in Australia Australian low-income earners have experienced a 3% annual growth in their earnings on labor. However the country has expanding income inequality since 1995.
• Income Inequality: Changes and Causes in the US The evaluation of the changes promotes an understanding of the relationships between inequality of individuals and the economic growth of the country.
• Economy Studying: Income Inequality Most governments across the world have applied some of the remedies prescribed by the 19th century economists. These remedies appear inadequate in preventing the prevalence of income inequality.
• Income Inequality and Discrimination in the US Income inequality and discrimination affect people from colored races more than the native white Americans who have more privileges than the rest of the population.
• Absolute Income Inequality and Rising House Prices
• Probing the Influences on Growth and Income Inequality at the End of the 20th Century
• Retirement Income Arrangements and Lifetime Income Inequality
• Income Inequality and American Higher Education
• Absolute Income, Relative Income, Income Inequality, and Mortality
• Cross-National Income Inequality Databases
• Banking Development, Economic Structure, and Income Inequality
• Capital Income Shares and Income Inequality in EU Member Countries
• Factor Productivity and Income Inequality: A General Equilibrium Analysis
• Accounting for Mexican Income Inequality
• Capital Openness and Income Inequality: Smooth Sailing or Troubled Waters
• Beyond the Income Inequality Hypothesis: Class, Neo-Liberalism, and Health Inequalities
• Data Selection and Perliminary Analysis of a Study on Income Inequality
• Estate Tax and Lifetime Income Inequality
• Bilateral Relationship Between Technological Changes and Income Inequality in Developing Countries
• Dynamic Linkages Between Corruption, Economic Growth, and Income Inequality in Pakistan
• Accounting for Income Inequality: Empirical Evidence From India
• Democracy, Ideology, and Income Inequality
• Equity Market Liberalization, Credit Constraints, and Income Inequality
• Correlation Between Income Inequality and Homicide Rates
• United State’s Household Income Inequality Trends
• Business Political Capacity and the Top-Heavy Rise in Income Inequality
• Corruption and Income Inequality in the United States
• Employment Growth and Income Inequality: Accounting for Spatial and Sectoral Differences
• Accounting for Imputed and Capital Income Flows in Income Inequality
• Family Income Inequality and the Role of Married Females’ Earnings in Mexico
• Accounting for the Effect of Health on Cross-State Income Inequality in India
• Capital Accumulation and Income Inequality
• Early-Life Income Inequality and Adolescent Health and Well-Being
• Charting Income Inequality: The Lorenz Curve
• Decentralization, Fiscal Transfers, and Income Inequality in Central and Eastern European Countries
• Addressing Widening Income Inequality Through Community Development
• Double Auction Market Trading and Income Inequality
• Clientelism, Income Inequality, and Social Preferences: An Evolutionary Approach to Poverty Traps
• Aging, Interregional Income Inequality, and Industrial Structure
• Decomposing Income Inequality and Policy Implications in Rural China
• Entrepreneurship and Income Inequality in Southern Ethiopia
• Age-Specific Income Inequality and Life Expectancy: New Evidence
• Cash Transfer Programmes, Income Inequality, and Regional Disparities
• Family Structure, Female Employment, and National Income Inequality
• Agricultural Policy Reform and Its Impact on Farm Households Income Inequality
• Changing Income Inequality and Immigration in Canada
• Agriculture, Rural Poverty, and Income Inequality in Sub-Saharan Africa
• Finance and Income Inequality in Kazakhstan: Evidence Since Transition With Policy Suggestions
• Causality Among Financial Liberalization, Poverty, and Income Inequality
• Alternative Government Spending Rules: Effects on Income Inequality and Welfare
• Childhood, Schooling, and Income Inequality
• Finance and Income Inequality: Test of Alternative Theories
• Causality Between Output and Income Inequality Across U.S. States
• Area-Level Income Inequality and Individual Happiness: Evidence From Japan

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These essay examples and topics on Income Inequality were carefully selected by the StudyCorgi editorial team. They meet our highest standards in terms of grammar, punctuation, style, and fact accuracy. Please ensure you properly reference the materials if you’re using them to write your assignment.

This essay topic collection was updated on December 27, 2023 .

Closing the equity gap

Jeni Klugman

Caren Grown and Odera Onyechi

Why addressing gender inequality is central to tackling today’s polycrises

Nonresident Senior Fellow, Africa Growth Initiative, Global Economy and Development, Brookings Institution

As we enter 2023, the term “ polycrisis ” is an increasingly apt way to describe today’s challenges. 1 Major wars, high inflation, and climate events are creating hardship all around the world, which is still grappling with a pandemic death toll approaching 7 million people.

Faced with such daunting challenges, one might well ask why we should be thinking about the gender dimensions of recovery and resilience for future shocks. The answer is simple: We can no longer afford to think in silos. Today’s interlocking challenges demand that sharp inequalities, including gender disparities, must be addressed as part and parcel of efforts to tackle Africa’s pressing issues and ensure the continent’s future success.

“We can no longer afford to think in silos. … Gender disparities, must be addressed as part and parcel of efforts to tackle Africa’s pressing issues and ensure the continent’s future success.”

The burdens of the pandemic have been unequally borne across regions and countries, and between the poor and better off. Inequalities exist around gender—which can be defined as the “socially constructed roles, behaviors, activities, attributes and opportunities that any society considers appropriate for men and women, boys and girls” and people with non-binary identities. 2 As Raewyn Connell laid out more than two decades ago, existing systems typically distribute greater power, resources, and status to men and behaviors considered masculine . 3 As a result, gender intersects with other sources of disadvantage, most notably income, age, race, and ethnicity.

This understanding is now mainstream. As recently observed by the IMF, “The gender inequalities exposed by the COVID-19 pandemic follow different paths but almost always end up the same: Women have suffered disproportionate economic harm from the crisis.” 4 Among the important nuances revealed by micro-surveys is that rural women working informally continued to work through the pandemic , but with sharply reduced earnings in Nigeria and elsewhere. 5 And as the burden of child care and home schooling soared, rural households headed by women were far less likely than urban households to have children engaged in learning activities during school closures.

Important insights emerge from IFPRI’s longitudinal panel study (which included Ghana, Kenya, Niger, Nigeria, Senegal, and Uganda) covering income loss, coping strategies, labor and time use, food and water insecurity, and child education outcomes. 6

Among the especially adverse impacts for women were greater food and water insecurity compared to men, including worrying about insufficient food and eating less than usual, while a large proportion of women also did not have adequately diverse diets. Moreover, many women had to add hours to their workday caring for sick family members, and their economic opportunities shrank, cutting their earnings and widening gender income gaps.

While today’s problems seem daunting, there remain huge causes for optimism, especially in Africa. Over the past three decades, many African countries have achieved enormous gains in levels of education, health, and poverty reduction. Indeed, the pace of change has been staggering and commendable. As captured in the Women Peace and Security Index , which measures performance in inclusion, justice, and security, 6 of the top 10 score improvers during the period 2017-2021 were in sub-Saharan Africa. [GIWPS.2022. “Women Peace and Security Index” Georgetown Institute for Women, Peace and Security.] The Democratic Republic of Congo was among top score improvers since 2017, as the share of women with financial accounts almost tripled, to 24 percent; and increases exceeding 5 percentage points were registered in cell phone use and parliamentary representation. In the Central African Republic, improvements were experienced in the security dimension, where organized violence fell significantly, and women’s perceptions of community safety rose 6 percentage points up to 49 percent.

Looking ahead, efforts to mitigate gender inequalities must clearly be multi-pronged, and as highlighted above—we need to think outside silos. That said, two major policy fronts emerge to the fore.

Ensure cash transfers that protect against poverty , are built and designed to promote women’s opportunities, with a focus on digital payments. 7 Ways to address gender inequalities as part of social protection program responses 8 include deliberate efforts to overcome gender gaps in cell phone access by distributing phones to those women who need them, as well as private sector partnerships to subsidize airtime for the poorest, and to make key information services and apps freely available . 9 Programs could also make women the default recipient of cash transfer schemes, instead of the head of household. Furthermore, capacity-building initiatives can be built into program design to give women the skills and capabilities needed to successfully manage accounts and financial decisionmaking. 10

Reducing the risk of violence against women. Women who are not safe at home are denied the freedom from violence needed to pursue opportunities that should be afforded to all. In 2018, 10 of the 15 countries with the worst rates of intimate partner violence were in sub-Saharan Africa—in descending order of average intimate partner violence these were, the Democratic Republic of Congo, Madagascar, Congo, Equatorial Guinea, Zambia, Ethiopia, Liberia, South Sudan, Djibouti, and Uganda.

“As the burden of child care and home schooling soared, rural households headed by women were far less likely than urban households to have children engaged in learning activities.”

Conflicts and crises multiply women’s risk of physical, emotional, and sexual violence . During the pandemic, risk factors like economic stress were compounded by service closures and stay-at-home orders, which increased exposure to potential perpetrators. 11 Several governments responded by strengthening existing help services , including police and justice, supporting hotlines, ensuring the provision of psychological support, and health sector responses. 12 Examples of good practice included an NGO in North-Eastern Nigeria, which equipped existing safe spaces with phone booths to enable survivors to contact caseworkers.

However, given the high levels of prevalence and often low levels of reporting, prevention of gender-based violence is key. Targeted programs with promising results in prevention include community dialogues and efforts to change harmful norms, safe spaces, as well as possibilities to reduce the risk of violence through cash plus social protection programs. These efforts should be accompanied by more systematic monitoring and evaluation to build evidence about what works in diverse settings.

Finally, but certainly not least, women should have space and voices in decisionmaking. This case was powerfully put by former President Sirleaf Johnson in her 2021 Foresight essay, which underlined that “ economic, political, institutional, and social barriers persist throughout the continent, limiting women’s abilities to reach high-level leadership positions .” 13 Persistent gender gaps in power and decision-making, not only limits innovative thinking and solutions, but also the consideration of more basic measures to avoid the worsening of gender inequalities. Overcoming these gaps in power and decision-making requires safeguarding legal protections and rights, investing in women and girls financially, and opening space for women in political parties so that women have the platforms to access high-level appointed and competitive positions across national, regional, and international institutions. 14

Strengthening fiscal policy for gender equality

Senior Fellow, Center for Sustainable Development, Global Economy and Development, Brookings Institution

Research Analyst, Center for Sustainable Development, Global Economy and Development, Brookings Institution

It is often said that women act as “shock absorbers” during times of crisis; this is even more so in the current context of climate change, the COVID-19 pandemic, and increased geopolitical conflict. These three global crises have simultaneously stretched women’s ability to earn income and intensified their unpaid work. Well-designed fiscal policy can help cushion the effects of these shocks and enable women and their households to recover more quickly.

Over 60 percent of employed women in Africa work in agriculture, including in small-scale food production; women are the primary sellers in food markets, and they work in other sectors such as informal trading. At the same time, women are an increasing share of entrepreneurs in countries such as Ghana and Uganda, even as they face financial and other constraints to start and grow their firms. [Africa Gender Innovation Lab (GIL). 2020. “Supporting Women Throughout the Coronavirus Emergency Response and Economic Recovery.” World Bank Group. ] In addition to earning income for their households, women bear the major responsibility for unpaid domestic activities such as cooking; collecting water and fuelwood; caring for children, elderly, and other dependents—so women are more time-poor than are men.

African women and entrepreneurs have been impacted disproportionately more than men by the triple shocks mentioned earlier. Extreme weather events disrupt food production and agricultural employment, making it harder for women to earn income . 15 16 17 The pandemic and conflict in Ukraine further intensified women’s paid and unpaid activities . 18 19 Beyond climate change and the war in Ukraine, localized conflicts and insecurity in East and West Africa exposes women and girls to gender-based violence and other risks as they seek to support their families and develop new coping strategies. 20 21 22

“Responding to these shocks necessitates a large infusion of resources. In this context, fiscal policy can be deployed more smartly to advance gender equality and create an enabling environment for women to play a greater role in building their economies’ recovery and resilience.”

Responding to these shocks necessitates a large infusion of resources. In this context, fiscal policy can be deployed more smartly to advance gender equality and create an enabling environment for women to play a greater role in building their economies’ recovery and resilience. Public expenditure supports critical sectors such as education, health, agriculture, social protection, and physical and social infrastructure, while well-designed tax policy is essential to fund the public goods, services, and infrastructure on which both women and men rely.

Gender-responsive budgets, which exist in over 30 countries across the continent, can be strengthened. Rwanda provides a good model for other countries. After an early unsuccessful attempt, Rwanda invested seriously in gender budgeting beginning in 2011. 23 24 The budget is focused on closing gaps and strengthening women’s roles in key sectors—agriculture, education, health, and infrastructure—which are all critical for short- and medium-term economic growth and productivity. The process has been sustained by strong political will among parliamentarians. Led by the Ministry of Finance, the process has financed and been complemented by important institutional and policy reforms. A constitutional regulatory body monitors results, with additional accountability by civil society organizations.

However, raising adequate fiscal revenue to support a gender budget is a challenge in the current macro environment of high public debt levels, increased borrowing costs, and low levels of public savings. Yet, observers note there is scope to increase revenues through taxation reforms, debt relief, cutting wasteful public expenditure, and other means. 25 26 We focus here on taxation.

Many countries are reforming their tax systems to strengthen revenue collection. Overall tax collection is currently low; the average tax-to-GDP ratio in Africa in 2020 was 14.8 percent and fell sharply during the pandemic, although it may be rebounding. 27 Very few Africans pay personal income tax or other central government taxes, 28 29 and statutory corporate tax rates (which range from 25-35 percent), are higher than even the recent OECD proposal for a global minimum tax 30 so scope for raising them further is limited. Efforts should be made to close loopholes and reduce tax evasion.

As countries reform their tax policies, they should be intentional about avoiding implicit and explicit gender biases. 31 32 33 34 Most African countries rely more on indirect taxes than direct taxes, given the structure of their economies, but indirect taxes can be regressive as their incidence falls primarily on the poor. Presumptive or turnover taxes, for example, which are uniform or fixed amounts of tax based on the “presumed” incomes of different occupations such as hairdressers, can hit women particularly hard, since the burden often falls heavily on sectors where women predominate. 35 36

Property taxes are also becoming an increasingly popular way to raise revenue for local governments. The impact of these efforts on male and female property owners has not been systematically evaluated, but a recent study of land use fees and agricultural income taxes in Ethiopia finds that female-headed and female adult-only households bear a larger tax burden than male-headed and dual-adult households of property taxes. This is likely a result of unequal land ownership patterns, gender norms restricting women’s engagement in agriculture, and the gender gap in agricultural productivity. 37

“Indirect taxes can be regressive as their incidence falls primarily on the poor. Presumptive or turnover taxes … can hit women particularly hard, since the burden often falls heavily on sectors where women predominate.”

Going forward, two key ingredients for gender budgeting on the continent need to be strengthened. The first is having sufficient, regularly collected, sex-disaggregated administrative data related to households, the labor force, and other survey data. Investment in the robust technical capacity for ministries and academia to be able to access, analyze, and use it is also necessary. For instance, the World Bank, UN Women, and the Economic Commission for Africa are all working with National Statistical Offices across the continent to strengthen statistical capacity in the areas of asset ownership and control, work and employment, and entrepreneurship which can be used in a gender budget.

The second ingredient is stronger diagnostic tools. One promising new tool, pioneered by Tulane University, is the Commitment to Equity methodology, designed to assess the impact of taxes and transfers on income inequality and poverty within countries. 38 It was recently extended to examine the impact of government transfers and taxes on women and men by income level and other dimensions. The methodology requires standard household-level data but for maximum effect should be supplemented with time use data, which are becoming more common in several African countries. As African countries seek to expand revenue from direct taxes, lessons from higher income economies are instructive. Although there is no one size fits all approach, key principles to keep in mind for designing personal income taxes include building in strong progressivity, taxing individuals as opposed to families, ensuring that the allocation of shared income (e.g., property or non-labor income) does not penalize women, and building in allowances for care of children and dependents. 39 As noted, corporate income taxes need to eliminate the many breaks, loopholes, and exemptions that currently exist, 40 and countries might consider experimenting with wealth taxes.

In terms of indirect taxes, most African countries do not have single-rate VAT systems and already have zero or reduced rates for basic necessities, including foodstuffs and other necessities. While it is important to minimize exempted sectors and products, estimates show that goods essential for women’s and children’s health (e.g., menstrual health products, diapers, cooking fuel) should be considered part of the basket of basic goods that have reduced or zero rates. 41 And while African governments are being advised to bring informal workers and entrepreneurs into the formal tax system, 42 it should be noted that this massive sector earns well below income tax thresholds and already pays multiple informal fees and levies, for instance in fees to market associations. 43 44

Lastly, leveraging data and digital technologies to improve tax administration (i.e., taxpayer registration, e-filing, and e-payment of taxes) may help minimize costs and processing time, and reduce the incidence of corruption and evasion.32 Digitalization can also be important for bringing more female taxpayers into the net, especially if digital systems are interoperable; for instance, digital taxpayer registries linked to national identification or to property registration at the local level. However, digitalization can be a double-edged sword if privacy and security concerns are not built-in from the outset. Women particularly may need targeted digital financial literacy and other measures to ensure their trust in the system. Recent shocks have worsened gender inequality in Africa. It is therefore important now, more than ever, to invest in strengthening fiscal systems to help women and men recover, withstand future shocks, and reduce gender inequalities. While fiscal policy is not the only tool, it is an important part of government action. To be effective and improve both budgeting and revenue collection, more and better data, new diagnostic tools, and digitalization will all be necessary.

• 1. Martin Wolf. 2022.“How to think about policy in a policy crisis”. Financial Times.
• 2. WTO. 2022. “Gender and Health”. World Health Organization.
• 3. Connell RW. 1995. “Masculinities”. Cambridge, UK. Polity Press.
• 4. Aoyagi, Chie.2021.“Africa’s Unequal Pandemic”. Finance and Development. International Monetary Fund.
• 5. WB.2022. “LSMS-Supported High-Frequency Phone Surveys”. World Bank.
• 6. Muzna Alvi, Shweta Gupta, Prapti Barooah, Claudia Ringler, Elizabeth Bryan and Ruth Meinzen-Dick.2022.“Gendered Impacts of COVID-19: Insights from 7 countries in Sub-Saharan Africa and South Asia”. International Food Policy Research Institute.
• 7. Klugman, Jeni, Zimmerman, Jamie M., Maria A. May, and Elizabeth Kellison. 2020. “Digital Cash Transfers in the Time of COVID 19: Opportunities and Considerations for Women’s Inclusion and Empowerment”. World Bank Group.
• 8. IFPRI.2020. “Why gender-sensitive social protection is critical to the COVID-19 response in low-and middle-income countries”. International Food Policy Research Institute.
• 9. IDFR.2020. “Kenya: Mobile-money as a public-health tool”. International Day of Family Remittances.
• 10. Jaclyn Berfond Franz Gómez S. Juan Navarrete Ryan Newton Ana Pantelic. 2019. “Capacity Building for Government-to-Person Payments A Path to Women’s Economic Empowerment”. Women’s World Banking.
• 11. Peterman, A. et al.2020. “Pandemics and Violence Against Women and Children”.Center for Global Development Working Paper.
• 12. UNDP/ UN Women Tracker.2022. “United Nations Development Programme. COVID-19 Global Gender Response Tracker”. United Nations Development Programme. New York.
• 13. McKinsey Global Institute .2019. “The power of parity: Advancing women’s equality in Africa”.
• 14. Foresight Africa. 2022. “African Women and Girls: Leading a continent.” The Brookings Institution.
• 15. One recent study in West, Central Africa, East and Southern Africa found that women represented a larger share of agricultural employment in areas affected by heat waves and droughts, and a lower share in areas unaffected by extreme weather events. Nico, G. et al. 2022. “How Weather Variability and Extreme Shocks Affect Women’s Participation in African Agriculture.” Gender, Climate Change, and Nutrition Integration Initiative Policy Note 14.
• 16. Carleton, E. 2022. “Climate Change in Africa: What Will It Mean for Agriculture and Food Security?” International Livestock Research Institute (ILRI).
• 17. Nebie, E.K. et al. 2021. “Food Security and Climate Shocks in Senegal: Who and Where Are the Most Vulnerable Households?” Global Food Security, 29.
• 18. Sen, A.K. 2022. “Russia’s War in Ukraine Is Taking a Toll on Africa.” United States Institute of Peace.
• 19. Thomas, A. 2020. “Power Structures over Gender Make Women More Vulnerable to Climate Change.” Climate Change News.
• 21. Kalbarczyk, A. et al. 2022. “COVID-19, Nutrition, and Gender: An Evidence-Informed Approach to Gender Responsive Policies and Programs.” Social Science & Medicine, 312.
• 22. Epstein, A. 2020. “Drought and Intimate Partner Violence Towards Women in 19 Countries in Sub-Saharan Africa During 2011-2018: A Population-Based Study.” PLoS Med, 17(3).
• 23. Stotsky, J. et al. 2016. “Sub-Saharan Africa: A Survey of Gender Budgeting Efforts. IMF Working Paper 2016/512.
• 24. Kadama, C. et al. 2018. Sub-Saharan Africa.” In Kolovich, L. (Ed.), Fiscal Policies and Gender Equality (pp. 9-32). International Monetary Fund (IMF).
• 25. Ortiz, I. and Cummins, M. 2021. “Abandoning Austerity: Fiscal Policies for Inclusive Development.” In Gallagher, K. and Gao, H. (Eds.), Building Back a Better Global Financial Safety Net (pp. 11-22). Global Development Policy Center.
• 26. Roy, R. et al. 2006. “Fiscal Space for Public Investment: Towards a Human Development Approach.”
• 27. ATAF, 2021.
• 28. Moore, M. et al. 2018. “Taxing Africa: Coercion, Reform and Development. Bloomsbury Publishing.
• 29. Rogan, M. 2019. Tax Justice and the Informal Economy: A Review of the Debates.” Women in Informal Employment: Globalizing and Organizing Working Paper 14.
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• 31. Stotsky, J. et al. 2016. “Sub-Saharan Africa: A Survey of Gender Budgeting Efforts.” IMF Working Paper 2016/512.
• 32. Coelho, M. et al. 2022. “Gendered Taxes: The Interaction of Tax Policy with Gender Equality.” IMF Working Paper 2022/26.
• 33. Organisation for Economic Co-operation and Development (OECD). 2021. Gender and Capital Budgeting.
• 34. Grown, C. and Valodia, I. 2010. Taxation and Gender Equity: A Comparative Analysis of Direct and Indirect Taxes in Developing and Developed Countries. Routledge.
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• 36. Komatsu, H. et al. 2021. “Gender and Tax Incidence of Rural Land Use Fee and Agricultural In¬come Tax in Ethiopia.” Policy Research Working Papers.
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• 41. Woolard, I. 2018. Recommendations on Zero Ratings in the Value-Added Tax System. Independent Panel of Experts for the Review of Zero Rating in South Africa.
• 42. It is important to distinguish between firms and individuals that are large enough to pay taxes but do not (which include icebergs, e.g., which are registered and therefore partially visible to tax authorities but do not pay their full obligations) and ghosts, e.g., those which should register to pay but do not and there invisible to tax authorities) and firms and individuals that are small and potentially but not necessarily taxable such as street vendors and waste pickers. Rogan, M. (2019). “Tax Justice and the Informal Economy: A Review of the Debates.” Women in Informal Employment: Globalizing and Organizing Working Paper 14.
• 44. Ligomeka, W. 2019. “Expensive to be a Female Trader: The Reality of Taxation of Flea Market Trad¬ers in Zimbabwe.” International Center for Tax and Development Working Paper 93.

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India’s Income Inequality Is Now Worse Than Under British Rule, New Report Says

A new study from the World Inequality Lab finds that the present-day golden era of Indian billionaires has produced soaring income inequality in India—now among the highest in the world and starker than in the U.S., Brazil, and South Africa. The gap between India’s rich and poor is now so wide that by some measures, the distribution of income in India was more equitable under British colonial rule than it is now, according to the group of economists who co-authored the study, including the renowned French economist Thomas Piketty.

The current total number of billionaires in India is peaking at 271, with 94 new billionaires added in 2023 alone, according to Hurun Research Institute’s 2024 global rich list published Tuesday. That’s more new billionaires than in any country other than the U.S., with a collective wealth that amounts to nearly $1 trillion—or 7% of the world’s total wealth. A handful of Indian tycoons, such as Mukesh Ambani, Gautam Adani, and Sajjan Jindal, are now mingling in the same circles as Jeff Bezos and Elon Musk, some of the world’s richest people.

“The Billionaire Raj headed by India’s modern bourgeoisie is now more unequal than the British Raj headed by the colonialist forces,” the authors write.

The observation is particularly stark when considering India is now hailed as an 8% GDP growth economy, according to Barclays Research, with some projecting that India is poised to surpass Japan and Germany to become the world’s third-largest economy by 2027. 

But the authors of the World Inequality Lab study reached this conclusion by tracking how much of India’s total income, as well as wealth, is held by the country’s top 1%. While income refers to the sum of earnings, interest on savings, investments and other sources, wealth (or net worth) is the total value of assets owned by an individual or group. The authors combined national income accounts, wealth aggregates, tax tabulations, rich lists, and surveys on income, consumption, and wealth to present the study's findings.

Read More: Why India’s Next Election Will Last 44 Days

For income, the economists looked at annual tax tabulations released by both the British and Indian governments since 1922. They found that even during the highest recorded period of inequality in India, which occurred during the inter-war colonial period from the 1930s until India’s independence in 1947, the top 1% held around 20 to 21% of the country’s national income. Today, the 1% holds 22.6% of the country’s income. 

Similarly, the economists also tracked the dynamics of wealth inequality, beginning in 1961, when the Indian government first began conducting large-scale household surveys on wealth, debt and assets. By combining this research with information from the Forbes Billionaire Index , the authors found that India’s top 1% had access to a staggering 40.1% of national wealth.

Because the number of Indian billionaires shot up from one in 1991 to 162 in 2022, the total net wealth of these individuals over this period as a share of India’s net national income “boomed from under 1% in 1991 to a whopping 25% in 2022,” the authors said.

The report also found that the rise in inequality had been particularly pronounced since the ruling Bharatiya Janata Party first came to power in 2014. Over the last decade, major political and economic reforms have led to “an authoritarian government with centralization of decision-making power, coupled with a growing nexus between big business and government,” the report states. This, they say, was likely to “facilitate disproportionate influence” on society and government.

They added that average Indians, and not just the Indian elite, could still stand to gain from globalization if the government made more public investments in health, education, and nutrition. Moreover, a “super tax” of 2% on the net wealth of the 167 wealthiest Indian families in 2022-23 would result in 0.5% of national income in revenues, and “create valuable fiscal space to facilitate such investments,” the authors argued.

Until the government makes such investments, however, the authors caution against the possibility of India’s slide toward plutocracy. The country was once a role model among post-colonial nations for upholding the integrity of various key institutions, the authors say, and they point out that even the standard of economic data in India to study inequality has declined recently.

“If only for this reason, income and wealth inequality in India must be closely tracked and challenged,” the authors say.

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Write to Astha Rajvanshi at [email protected]

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Macroeconomic Developments and Prospects For Low-Income Countries—2024

Publication Date:

April 2, 2024

Electronic Access:

Free Download . Use the free Adobe Acrobat Reader to view this PDF file

The outlook for Low-Income Countries (LICs) is gradually improving, but they face persistent macroeconomic vulnerabilities, including liquidity challenges due to high debt service. There is significant heterogeneity among LICs: the poorest and most fragile countries have faced deep scarring from the pandemic, while those with diversified economies and Frontier Markets are faring better. Achieving inclusive growth and building resilience are essential for LICs to converge with more advanced economies and meet the Sustainable Development Goals (SDGs). Building resilience will also be critical in the context of a more shock-prone world. This requires both decisive domestic actions, including expanding and better targeting Social Safety Nets (SSNs), and substantial external support, including adequate financing, policy advice, capacity development and, where needed, debt relief. The Fund is further stepping up its support through targeted policy advice, capacity building, and financing.

Policy Paper No. 2024/011

External debt Monetary policy Political economy

9798400272400/2663-3493

PPEA2024011

Please address any questions about this title to [email protected]

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Panama’s 2024 Election: What to Know

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By Leila Miller

Why does this election matter?

Who is running, what are the main issues, who is expected to win, when will we learn the result, where can i find more information.

Political crisis has embroiled Panama’s May 5 presidential election, exacerbating uncertainty in a country dealing with drought and fallout from widespread protests.

Former President Ricardo Martinelli, who had appeared in polls as the front-runner, was disqualified from running after he received a 10-year sentence for money laundering. Panama’s Electoral Tribunal has allowed his running mate, a former public security minister named José Raúl Mulino, to take his place. Mr. Martinelli claims he is being politically persecuted.

Mr. Martinelli governed Panama during a period of strong economic growth and was popular despite his conviction. Mr. Mulino seems to have inherited his following. The result is a paradox: Although Panamanians see corruption as one of the country’s most pressing problems, they have also shown the highest support for Mr. Mulino, who strongly backs Mr. Martinelli.

The election takes place amid wide frustration with the political establishment. The current president, Laurentino Cortizo, from Panama’s largest political party, is extremely unpopular and has weathered corruption scandals. His administration drew enormous protests, with Panamanians paralyzing the country in 2023 to oppose a copper-mining contract that critics said would endanger the environment.

Political conflicts and social upheaval have affected the climate for foreign investment, an area that Panama relies on heavily. In March, Fitch Ratings downgraded Panama’s credit rating, citing the government’s closing of the mine after the protests. Growth of the country’s gross domestic product is expected to decline to 2.5 percent in 2024 from 7.5 percent in 2023 as a result of the closure, according to the International Monetary Fund.

Eight candidates are competing for a five-year term in a single-round vote. Panama does not permit incumbent presidents to run for a second consecutive term. Panama is also choosing its representatives on the National Assembly and in local governments.

Besides Mr. Mulino, hopefuls include José Gabriel Carrizo, known as Gaby, who is the current vice president; Martín Torrijos, a former president and son of a Panamanian dictator who negotiated for the United States to hand over control of the Panama Canal; Rómulo Roux, a former foreign minister; and Ricardo Lombana, a former diplomat.

Panama, a global trading hub, has been one of the hemisphere’s fastest-growing economies, with development driven by the expansion of the Panama Canal and investors drawn by free-trade agreements and the use of the dollar as a local currency. But the next president will have to address many fiscal, environmental, migration and corruption issues.

Panama’s pension system suffers from a high deficit. The economy, which is largely based on service work, also has a shortage of skilled labor and high numbers of informal workers, which aggravates income inequality.

Environmental challenges include a drought that has created low water levels in the canal, resulting in a reduced number of ships allowed through. The financial impact has so far been limited because of increases in tolls before the water crisis began, but shipping companies may eventually look for ways to avoid the canal.

Hundreds of thousands of migrants trek through Panama’s Darién Gap jungle, creating a humanitarian burden the next government will have to address. Finally, corruption is an ever-present concern, with the high-profile “ Panama Papers ” and Odebrecht bribery scandals placing the country in an unflattering spotlight in recent years.

Polls show Mr. Mulino with a more than 10-point lead over Mr. Lombana, Mr. Torrijos and Mr. Roux, his closest rivals. Mr. Mulino’s campaign has said that “Mulino is Martinelli,” and it is unclear whether Mr. Mulino can help Mr. Martinelli’s situation if he is elected president. Mr. Martinelli fled to the Nicaraguan Embassy in Panama City after the Supreme Court upheld his conviction this year.

In March, Panama’s Supreme Court said it would hear a challenge to the Electoral Tribunal’s decision to allow Mr. Mulino to replace Mr. Martinelli as a presidential candidate. It is unclear when it will rule.

The Electoral Tribunal will provide informal election results after 4:30 p.m. on election day. The winner is expected to become clear that night.

Why the Panama Canal Didn’t Lose Money When Ship Crossings Fell

Panama Bars Ex-Leader Martinelli From Presidential Election

Panamanian Candidate, Facing Prison, Vows to Campaign From an Embassy

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