Economic Inequality

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21 Aug, 2024

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

This social and economic inequality can be caused due to multiple reasons such as technological advancement, globalization, and internal government policies such as fiscal policies or labor policies. Despite a strong opinion that this difference in economic condition is a bad thing for the economy, it also provides rewards for individual effort, talent, and achievements.

Economic Inequality Meaning

Economic inequality means the disparity in wealth distribution and opportunities among people belonging to various groups, communities, or countries. It is increasing trend displays differences in assets or income between the society’s wealthiest and the poorest segments.
The types of economic inequality are income inequality, wealth inequality, and pay inequality.
One can measure economic inequality using the Palma ratio and Gini coefficient.
Often, higher inequality results in a debt burden. Social problems and health are worse in countries with higher economic inequality.

Economic Inequality Explained

Economic inequality is the differences in income and opportunities for citizens from various groups. However, global economic inequality has been a topic of interest for citizens, politicians, and analysts alike for multiple reasons.

It is a major cause of concern for most economies in the world as makes it very difficult for some individuals to grow financially while another set of people have an advantage over the latter in terms of opportunities, network, and money.

It is also closely linked to lower health and social issues within the group that is at the lower end of this spectrum. They also have a lower level of satisfaction and happiness from their work and life in general. Despite the fact that there is strong opposition to this phenomenon globally, some also believe that the differences in financial net worth provide motivation and incentives for individuals or organizations that make smarter choices, giving them freedom to try newer things to succeed, and thereby, are rewarded significantly for going that extra mile in comparison to others.

Types

Although various characteristics can drive a person's economic position, income, pay, and wealth are considered the most relevant factors that encapsulate a person's financial position within society. Let us understand the different types of global economic inequality through the discussion below.

Income Inequality – Income inequality refers to the extent of income disparity among the people in a group. In this case, income does not just include money received from employment. Rather, all the income earned in wages, salaries, return on investments, interest on deposits, dividends from equity, rent, etc.
Pay Inequality – Pay inequality is slightly different from income inequality as pay includes the payment received from employment, which can be hourly, weekly, monthly, or annual. The compensation, in this case, may also comprise bonuses.
Wealth Inequality – Wealth inequality indicates a disparity in total assets owned by an individual or household. These assets also include financial assets, private pension rights, and property.

How is it Measured?

The social and economic inequality are metrics that are closely looked at and analyzed by governments and analysts alike. Therefore, to understand the intricate details of the concept, it is important to place impetus on this aspect. Let us do so through the points below.

Gini Coefficient – The Gini coefficient helps determine the inequality across the entire society, not just among some specific income groups. Gini coefficient of 1 indicates maximum imbalance, which means that all the income went to a single person and no one else got anything. In contrast, the Gini coefficient of 0 indicates minimum inequality, which means that society's revenue is equally shared. The lower the Gini coefficient, the lower the disparity.
Palma Ratio – The Palma ratio is a ratio measure that compares the share of income of the top 10% of the society to that of the bottom 40% of the community. In societies with lower inequality, this ratio is less than 1, which means that the top 10% of that society does not earn more than the bottom 40%. On the other hand, in communities with high inequality, the Palma ratio can go as high as 7. Therefore, the lower the Palma ratio, the lower the disparity.

Examples

Let us understand the concept of global economic inequality with the help of a couple of examples.

Example #1

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

Source - data.oecd.org

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

Example #2

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

Source - data.oecd.org

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

Causes

The causes could be different for different economies or even vary based on the development and other factors of the economy at different time frames. Let us understand the causes of social and economic inequality through the discussion below.

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

Effects

The indifference in financial spread within an economy or across borders causes shifts in multiple avenues and in both micro and macro level. Let us understand the effects of global economic inequality through the explanation below.

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

Benefits

Despite the majority of opinions about this phenomenon being against social and economic inequality, a certain section of the society and some experts believe otherwise. They are of the opinion that it is somewhat good for the economy and individuals who put in more hard work or creativity into their work. Let us understand this perspective through the discussion below.

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

Frequently Asked Questions (FAQs)

What are examples of economic inequality?

The income gap, gender inequality, social class, and health care are examples of economic inequality.

How economic inequality harms societies?

Economic inequality may harm society in the form of lower long-term GDP growth, inferior public health, high crime rates, lower average levels of education, and high political inequality.

What are the solutions to economic inequality?

One can reduce economic inequality through income support and transfers, i.e., government programs such as free health care, wealth, and food stamps among different policy types, and tax relief.

Why economic inequality is bad?

According to experts, economic inequality bothers economic growth and promotes political dysfunction. Concentrated income and wealth may lower the demand level in the economic system because affluent sections of society are bound to spend less than the poor. Moreover, decreased opportunities for low-income people also harm the economic system.