Income inequality is defined as a large disparity between the money earned by the richest persons in an economy and the poorest. Wages, investment profits, rent, and real estate sales are all examples of income.
Defining Income Inequality
Income inequality is the gap in how income is allocated across people, groups, populations, social classes, or nations in economic terms. It is an important aspect of how we comprehend socioeconomic categories, especially how we distinguish the upper, middle, and working classes. Many other types of inequality, such as income, political power, and social position, have an influence on it. Income is an important component in determining the quality of life since it provides access to health care, education, and housing, among other things. Income inequality fluctuates according to societal characteristics such as sexual orientation, gender identity, age, and race or ethnicity, resulting in a bigger disparity between the top and working classes.Key Takeaways
- National and global economic disparity is becoming more serious challenges that must be addressed.
- The economic rebound will favor the wealthiest earnings more than the lower earners.
- In the United States, the richest 20% make more than half of the overall revenue.
- Outsourcing and corporations replacing labor with technology have increased inequality.
- With job training and education investments, the United States may reduce economic disparity.
How Income Inequality Is Measured
The United States Census Bureau calculates income disparity based on household income. It compares population quintiles, which are split into fifths. The Gini index, which aggregates the distribution of income into a single figure, is another often used metric. It varies from zero, which represents a completely equitable distribution, to one, which represents a single individual having all of the money.Income Inequality in the U.S.
In 2020, the wealthiest 20% of the population earned 52.2 percent of total income in the United States. 3 For the first time since 2011, the median household income declined considerably to $67,521. This is a 2.9 percent decrease from the previous year's figure. The richest of the affluent, the top 5%, received 23% of all income. Their household income was $446,030 on average. Only 3% of the nation's income was obtained by the poorest 20%. The average family income of the lowest earner was $14,589. 3. Employers seldom provide health insurance, sick leave, or pension plans to low-wage workers. They can't take time off if they become sick, and they have little chance of retiring. These discrepancies contribute to healthcare inequity, which raises the overall cost of medical treatment. People who cannot afford preventative treatment frequently end up in the hospital emergency department. In 2014, 15.4 percent of uninsured individuals who went to the E.R. claimed they did so because they had no other option. They see their primary care physician in the emergency room. This expense was passed on to Medicaid by the hospitals. The Gini index in the United States, which assesses distribution and is frequently used to calculate income disparities, was 0.489 in 2020. That's about the same as the previous year, but it's a lot worse than it was in 1968 when it was only 0.386. Note: For a household of only one individual in the most expensive states in the U.S., a living wage is more than $20 per hour. That would come out to about $41,700 in 2021.Income Inequality Has Worsened
The rebound from the 2008 financial crisis enriched the wealthy. The average household income increased by 25.7 percent between 1993 and 2015. The richest one percent of the population received 52% of the growth. The graph below depicts the average income increase and loss over the last 22 years. It then computes how much of the overall growth was accounted for by the richest 1% of the population. Income disparity has been increasing even before the 2008 crisis. Between 1979 and 2007, the wealthiest 1% of families' income climbed by 275 percent. It increased by 65% for the top fifth. The poorest fifth rose by only 18%. That is true even after "wealth redistribution," which involves deducting all taxes and adding all Social Security income. Because the wealthy become wealthier quicker, their share of the pie increases. The richest 1% of the population increased their proportion of overall income by 10%. Everyone else saw their slice of the pie decrease by 1% to 2%. Even if the poor's income has increased, they have fallen further behind the affluent. As a result, economic mobility has dwindled. During the same time span, average salaries remained unchanged. This is despite a 15% rise in worker productivity and a 13% increase in company profits each year.Causes of Income Inequality
Income disparity may be exacerbated through job outsourcing, technology, and deregulation. Corporations are frequently criticized for prioritizing profits over labor. Companies in the United States compete with lower-cost Chinese and Indian firms that pay their employees significantly less. As a result, many corporations have outsourced high-tech and manufacturing employment to other countries. Between 1980 and 2020, the United States lost 36% of its industrial jobs. Historically, they were higher-paying union employment. Service occupations have grown, but they are significantly lower paid. Technology also contributes to economic disparity. It has also replaced numerous production employees. Those who have received technological training may be able to obtain higher-paying employment. Education has the potential to significantly improve economic mobility. Americans with college degrees earn 84 percent more than individuals with merely a high school diploma during their lifetime. Note: According to a McKinsey research, the performance gap costs the U.S. economy more than all recessions from the 1970s through 2008. Labor-dispute investigations will be less strict as a result of deregulation. This is also advantageous to corporations rather than salary people. Companies went public in the 1990s to raise capital to invest in expansion. Managers must now deliver ever-increasing profits in order to satisfy investors. Payroll is often the largest budget line item for most businesses. Re-engineering has enabled companies to accomplish more with fewer full-time personnel. It also entails recruiting more contract and temporary workers. Immigrants, many of whom are in the country illegally, are filling increasingly low-wage service occupations. They have less negotiating power and hence less ability to demand greater compensation. The Federal Reserve has earned some criticism in recent years. Low loan rates were meant to boost the housing sector by making homes more affordable. While this is true, home prices have recently begun to climb fast while incomes have stayed relatively stable. Note: The ordinary American still cannot afford to purchase a home. This is especially true for younger individuals who are more likely to start new homes. The Fed generated an asset bubble in equities by keeping Treasury rates low. This aided the richest 10%, who possess 84% of the wealth in equities and bonds. Other investors have been purchasing commodities, pushing up food costs by 40% since 2009. This growth is detrimental to the lowest 90%, who spend a bigger proportion of their income.A Global Perspective
Brazil and India, for example, are growing more competitive in the global economy. Their labor forces are growing more skilled, and their economies are diversifying. As a result, the distribution of wealth is changing. This change aims to reduce global income disparity. The richest 1% of the world's population controls 44% of its wealth. While Americans control 25% of the world's money, China controls 22% of the world's people and 8.8% of its wealth. India accounts for 15% of the world's population and 4% of its riches. Other countries' wealth increases as they progress.Frequently Asked Questions (FAQs)
How does income inequality affect the economy?
Wage disparity dampens economic development by transferring resources away from lower- and middle-class spenders and toward rich savers. According to studies, when so much income is concentrated among the wealthy, it reduces aggregate demand by between 2% and 4% of GDP.Why has income inequality increased?
There are various reasons for the growing wage disparity in the United States. Economists have noted that policies have largely failed to curb these trends over the last 40 years. The federal minimum wage, in particular, has trailed well behind economic development, and support for unions and worker negotiating strength has waned.Which countries have the most economic inequality?
Angola has the biggest inequality of any nation, with a reported Gini score in 2019, according to the most recent statistics from the United Nations University World Institute for Development Economics Research. Slovakia is at the other extreme of the spectrum.