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Economic inequality

Economic inequality is an umbrella term for a) income inequality or distribution of income (how the total sum of money paid to people is distributed among them), b) wealth inequality or distribution of wealth (how the total sum of wealth owned by people is distributed among the owners), and c) consumption inequality (how the total sum of money spent by people is distributed among the spenders). Each of these can be measured between two or more nations, within a single nation, or between and within sub-populations (such as within a low-income group, within a high-income group and between them, within an age group and between inter-generational groups, within a gender group and between them etc, either from one or from multiple nations).[2]

For the more general social form, see Social inequality.

Income inequality metrics are used for measuring income inequality,[3] the Gini coefficient being a widely used one. Another type of measurement is the Inequality-adjusted Human Development Index, which is a statistic composite index that takes inequality into account.[4] Important concepts of equality include equity, equality of outcome, and equality of opportunity.


Historically, there has been a long-run trend towards greater economic inequality over time. The exceptions to this during the modern era are the declines in economic inequality during the two World Wars and amid the creation of modern welfare states after World War II.[5] Whereas globalization has reduced the inequality between nations, it has increased the inequality within the population in most nations.[6][7][8][9] Income 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, with most people now living in middle-income countries.[6][10] However, inequality within the population in most has risen significantly in the last 30 years, particularly among advanced countries.[6][7][8][9]


Research has generally linked economic inequality to political and social instability, including revolution, democratic breakdown and civil conflict.[6][11][12][13] Research suggests that greater inequality hinders economic growth and macroeconomic stability, and that land and human capital inequality reduce growth more than inequality of income.[6][14] Inequality is at the center stage of economic policy debate across the globe, as government tax and spending policies have significant effects on income distribution.[6] In advanced economies, taxes and transfers decrease income inequality by one-third, with most of this being achieved via public social spending (such as pensions and family benefits).[6] While the "optimum" amount of economic inequality is widely debated, there is a near-universal belief that complete economic equality (Gini of zero) would be undesirable and unachieveable.[15]: 1 

Changes in the structure of households can play an important role. Single-headed households in OECD countries have risen from an average of 15% in the late 1980s to 20% in the mid-2000s, resulting in higher inequality.

refers to the phenomenon of people marrying people with similar background, for example doctors marrying other doctors rather than nurses. OECD found out that 40% of couples where both partners work belonged to the same or neighbouring earnings deciles compared with 33% some 20 years before.[18]

Assortative mating

In the bottom percentiles, number of hours worked has decreased.

[18]

The main reason for increasing inequality seems to be the difference between the demand for and supply of skills.

[18]

: with rising wealth & income, a person may spend more. In an extreme example, if one person owned everything, they would immediately need to hire people to maintain their properties, thus reducing the wealth concentration.[130] On the other hand, high-income persons have higher propensity to save.[131] Robin Maialeh then shows that increasing economic wealth decreases propensity to spend and increases propensity to invest which consequently leads to even greater growth rate of already rich agents.[132]

propensity to spend

Health: For long time the higher material living standards lead to longer life, as those people were able to get enough food, water and access to warmth. British researchers and Kate Pickett have found higher rates of health and social problems (obesity, mental illness, homicides, teenage births, incarceration, child conflict, drug use) in countries and states with higher inequality.[153][154] Their research included 24 developed countries, including most U.S. states, and found that in the more developed countries, such as Finland and Japan, the heath issues are much lower than in states with rather higher inequality rates, such as Utah and New Hampshire. Some studies link a surge in "deaths of despair", suicide, drug overdoses and alcohol related deaths, to widening income inequality.[155][156] Conversely, other research did not find these effects or concluded that research suffered from issues of confounding variables.[157]

Richard G. Wilkinson

Social goods: British researchers and Kate Pickett have found lower rates of social goods (life expectancy by country, educational performance, trust among strangers, women's status, social mobility, even numbers of patents issued) in countries and states with higher inequality.[153][154]

Richard G. Wilkinson

Social cohesion: Research has shown an inverse link between income inequality and social cohesion. In more equal societies, people are much more likely to each other, measures of social capital (the benefits of goodwill, fellowship, mutual sympathy and social connectedness among groups who make up a social units) suggest greater community involvement.

trust

Happiness: According to the 2019 , increasing socioeconomic inequality, along with rising healthcare costs, surging addiction rates, and an unhealthy work–life balance, are causes of unhappiness around the world.[158][159]

World Happiness Report

Crime: The cross national research shows that in societies with less economic inequality the rates are consistently lower.[160] A 2016 study finds that interregional inequality increases terrorism.[161] Other research has argued inequality has little effect on crime rates.[162][163]

homicide

Welfare: Studies have found evidence that in societies where inequality is lower, population-wide satisfaction and happiness tend to be higher.[165][166][167]

[164]

Poverty: Study made by Jared Bernstein and Elise Gould suggest, that the poverty in the United States could have been reduced by the lowering of economic inequality for the past few decades.[169]

[168]

Debt: Income inequality has been the driving factor in the growing ,[170][171] as high earners bid up the price of real estate and middle income earners go deeper into debt trying to maintain what once was a middle class lifestyle.[172]

household debt

Economic growth: A 2016 meta-analysis found that "the effect of inequality on growth is negative and more pronounced in less developed countries than in rich countries", though the average impact on growth was not significant. The study also found that wealth inequality is more pernicious to growth than income inequality.

[14]

Civic participation: Higher income inequality led to less of all forms of social, cultural, and civic participation among the less wealthy.

[173]

Political instability: Studies indicate that economic inequality leads to greater political instability, including an increased risk of democratic breakdown[174][175][176][177] and civil conflict.[178][13] A significant impact of inequality on civil war probability has been found through anthropometric methods.[179]

[12]

Political party responses: One study finds that economic inequality prompts attempts by left-leaning politicians to pursue redistributive policies while right-leaning politicians seek to repress the redistributive policies.

[180]

A lot of research has been done about the effects of economic inequality on different aspects in society:

Perspectives[edit]

Fairness vs. equality[edit]

According to Christina Starmans et al. (Nature Hum. Beh., 2017), the research literature contains no evidence on people having an aversion to inequality. In all studies analyzed, the subjects preferred fair distributions (inequity aversion) to equal distributions, in both laboratory and real-world situations. In public, researchers may loosely speak of equality instead of fairness, when referring to studies where fairness happens to coincide with equality, but in many studies fairness is carefully separated from equality and the results are univocal. Very young children seem to prefer fairness over equality.[181]


When people were asked, what would be the wealth of each quintile in their ideal society, they gave a 50-fold sum to the richest quintile than to the poorest quintile. The preference for inequality increases in adolescence, and so do the capabilities to favor fortune, effort and ability in the distribution.[181]


Preference for unequal distribution has been developed to the human race possibly because it allows for better co-operation and allows a person to work with a more productive person so that both parties benefit from the co-operation. Inequality is also said to be able to solve the problems of free-riders, cheaters and ill-behaving people, although this is heavily debated.[181] Researches demonstrate that people usually underestimate the level of actual inequality, which is also much higher than their desired level of inequality.[182]


In many societies, such as the USSR, the distribution led to protests from wealthier landowners.[183] In the current U.S., many feel that the distribution is unfair in being too unequal. In both cases, the cause is unfairness, not inequality, the researchers conclude.[181]

Socialist perspectives[edit]

Socialists attribute the vast disparities in wealth to the private ownership of the means of production by a class of owners, creating a situation where a small portion of the population lives off unearned property income by virtue of ownership titles in capital equipment, financial assets and corporate stock. By contrast, the vast majority of the population is dependent on income in the form of a wage or salary. In order to rectify this situation, socialists argue that the means of production should be socially owned so that income differentials would be reflective of individual contributions to the social product.[184]


Marxian economics attributes rising inequality to job automation and capital deepening within capitalism. The process of job automation conflicts with the capitalist property form and its attendant system of wage labor. In this analysis, capitalist firms increasingly substitute capital equipment for labor inputs (workers) under competitive pressure to reduce costs and maximize profits. Over the long term, this trend increases the organic composition of capital, meaning that less workers are required in proportion to capital inputs, increasing unemployment (the "reserve army of labour"). This process exerts a downward pressure on wages. The substitution of capital equipment for labor (mechanization and automation) raises the productivity of each worker, resulting in a situation of relatively stagnant wages for the working class amidst rising levels of property income for the capitalist class.[185]


Marxist socialists ultimately predict the emergence of a communist society based on the common ownership of the means of production, where each individual citizen would have free access to the articles of consumption (From each according to his ability, to each according to his need). According to Marxist philosophy, equality in the sense of free access is essential for freeing individuals from dependent relationships, thereby allowing them to transcend alienation.[186]

Meritocracy[edit]

Meritocracy favors an eventual society where an individual's success is a direct function of his merit, or contribution. Economic inequality would be a natural consequence of the wide range in individual skill, talent and effort in human population. David Landes stated that the progression of Western economic development that led to the Industrial Revolution was facilitated by men advancing through their own merit rather than because of family or political connections.[187]

Liberal perspectives[edit]

Most modern social liberals, including centrist or left-of-center political groups, believe that the capitalist economic system should be fundamentally preserved, but the status quo regarding the income gap must be reformed. Social liberals favor a capitalist system with active Keynesian macroeconomic policies and progressive taxation (to even out differences in income inequality). Research indicates that people who hold liberal beliefs tend to see greater income inequality as morally wrong.[188]


However, contemporary classical liberals and libertarians generally do not take a stance on wealth inequality, but believe in equality under the law regardless of whether it leads to unequal wealth distribution. In 1966 Ludwig von Mises, a prominent figure in the Austrian School of economic thought, explains:

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