What is Economic Inequality? The Overview
Keywords:- Economic Inequality, society, equality, income, pay, wealth, poverty
Written By: Tanishka Ranjan
Increasing economic inequality in recent years has triggered an outpouring of analysis and reflection on the causes and consequences. It is the unequal distribution of income, wealth, prestige, well-being etc. across the given population. It is a concern in almost all the countries around the world.
Growing economic inequalities serves to fragment the sense of who we are. People increasingly think of society as consisting of ‘US’ and ‘THEM’. A certain degree of economic inequality is probably built into the capitalist economic system. But this inequality can be tempered by appropriate government policies.
INTRODUCTION TO ECONOMIC INEQUALITY
Economic inequality is the unequal distribution of income and opportunity between different groups in society or either we can say that Economic inequality is how unevenly income, wealth, prestige, well-being etc. are distributed across a given population. The less equal the distribution, the higher inequality is.
However, people‘s economic positions are also related to other characteristics, such as whether or not they have a disability, their ethnic background, or whether they are a man or a woman. In both popular and academic writing and public debates, many see increasing inequality in the distribution of income and have it as an important social problem.
HISTORY
Economic inequality between nations peaked in the 1970s when world income was distributed bimodally into ‘RICH’ and ‘POOR’ countries. Since then, income levels across countries have been converging.
Although there is a very long history of concern with economic inequality, interest in this topic has intensified significantly since the great recession of 2008 to 2009. In the year 1961, The share of the total wealth of the top 1% was fairly constant at around 12%. By the year 1991, the share of the total wealth of the bottom 50% fell marginally to 10.9% from 12.3%. It steadily increased and reached 42.5% in 2020.
TYPES OF ECONOMIC INEQUALITY
There are three main types of economic inequality:
- Income Inequality: It is the extent to which income is distributed evenly in a group of people. Income is not just the money received through pay, but all the money received from employment (wages, salaries, bonuses etc). Investments, such as interest on saving accounts and dividends from shares of stocks, savings, state benefits, pensions (state, personal, company) and rent.
- Play Inequality: It is difference between people’s pay and this may be within one company or across all payments received. A person’s pay is different from their income. Pay refers to the payment from employment only. This can be on an early, monthly or annual basis, is typically paid weekly or monthly and may also include bonuses.
- Wealth Inequality: It refers to the unequal distribution of assets in a group of people. Wealth refers to the total amount of assets of an individual or household. This may include financial assets, such as bonds and stocks, property and private pensions.
COMMONLY USED MEASURES OF ECONOMIC INEQUALITY
- Gini Coefficient – It measures inequality across the whole of society rather than simply comparing different income groups.
- Ratio Measures – It compares how much people at one level of the income distribution have compared to people at another.
- Palma Ratio – It is the ratio of the income share of the top 10% to that of the bottom 40%.
CAUSES
There are many reasons for economic inequality within societies. These causes are often interrelated, non-linear, and complex. Among the acknowledged factors that impact economic inequality in some parts are the labour market, innate ability, education, race, gender, culture, wealth condensation, and development patterns.
- The labour market – One of the major reasons there is economic inequality within modern market economies is because wages are determined by a market, and are hence influenced by supply and demand.
- Inner ability – Many people believe that there is a connection between differences in innate ability, such as intelligence, strength, or charisma, and between an individual’s level of wealth.
- Education – One important factor in the creation of inequality is the variable ability of individuals to get an education. Education, especially education in an area where there is a high demand for workers, creates high wages for those with this education. Contrariwise, those who are unable to afford an education generally receive much lower wages.
- Gender, Race and Culture – The existence of different genders, races and cultures within a society is also thought to contribute to economic inequality.
- Wealth condensation – According to this, those who already hold wealth have the means to invest in new sources of creating wealth or to otherwise leverage the accumulation of wealth, thus are the beneficiaries of the new wealth. This is reflected in the common saying ‘the rich get richer and the poor get poorer.
- Development patterns – Countries with low levels of development have relatively equal distributions of wealth. As a country develops, it acquires more capital, which leads to the owners of this capital having more wealth and income and introducing inequality.
EFFECTS
- Social cohesion – In more equal societies, people are much more likely to trust each other, measures of social capital suggest greater community involvement, and homicide rates are consistently lower.
- Population health – It is not only the poor who tend to be sick when everyone else is healthy but there is a continual gradient, from the top to the bottom of the socio-economic ladder, relating status to health.
- Utility, Economic welfare, and Distributive efficiency – Economic inequality is thought to reduce distributive efficiency within society. That is to say, inequality reduces the total personal utility because of the decreasing marginal utility of wealth.
- Economic incentives – One of the main reasons that inequality might induce economic incentives is because material well-being and conspicuous consumption are related to status. In this view, high stratification of income (high inequality) creates high amounts of social stratification, leading to greater competition for status.
- Economic growth – Inequality reduces growth in poor countries and promotes growth in rich ones.
SOLUTIONS
- The government must become the employer of last resort.
- Applying fiscal and monetary policies aggressively to achieve full employment.
- Taking actions against countries that manage their currencies to subsidise their exports to us and tax our exports to them.
- By supporting sectoral training, apprenticeships, and earn-while-you-learn programs.
- Providing better oversight of financial markets.
- Maintaining and strengthening safety net programs like the EITC and CTC, SNAP, and Medicaid.
- Reducing the rate at which high-income taxpayers can take tax deductions, imposing a small tax on financial market transactions.
CONCLUSION
Keeping economic inequality in check is an uphill battle. Unfortunately, economic inequality has happened in history and is still prevalent today. The richest people and countries are only growing wealthier and the poorest people and countries are growing poorer and poorer every day.
This needs to be changed in our society. Policies that address income inequality can focus narrowly on individual skills, opportunities, and aspirations. Or it may focus more broadly on altering the social, political, and economic structures that create and maintain income inequality.
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