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Economic inequality

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2014 differences in national income equality around the world as measured by the national Gini coefficient. The Gini coefficient is a number between 0 and 1, where 0 corresponds with perfect equality (where everyone has the same income) and 1 corresponds with absolute inequality (where one person has all the income, and everyone else has zero income).
Wealth disparity in major cities
Skid row tents
Tents of the homeless on the sidewalk in Skid Row, Los Angeles.
a Beverly Hills mansion
An affluent house in Holmby Hills, Los Angeles, only miles from downtown (above).

Economic inequality covers a wide variety of topics. It can refer to either income distribution (measuring the amount of money people are paid) or the distribution of wealth (the amount of wealth people own). Besides economic inequality between countries or states, there are important types of economic inequality between different groups of people.[1]

Important types of economic measurements focus on wealth, income, and consumption. There are many methods for measuring economic inequality, with the Gini coefficient being a widely used one. Another type of measure is the Inequality-adjusted Human Development Index, which is a statistic composite index that takes inequality into account.[2] Important concepts of equality include equity, equality of outcome, and equality of opportunity.

Research suggests that greater inequality hinders the duration of growth but not its rate.[3][4] Whereas globalization has reduced global inequality (between nations), it has increased inequality within nations.[5]

Measurements[edit]

Share of income of the top 1% for selected developed countries, 1975 to 2015

In 1820, the ratio between the income of the top and bottom 20 percent of the world's population was three to one. By 1991, it was eighty-six to one.[6] A 2011 study titled "Divided we Stand: Why Inequality Keeps Rising" by the Organisation for Economic Co-operation and Development (OECD) sought to explain the causes for this rising inequality by investigating economic inequality in OECD countries; it concluded that following factors had a role:[7]

  • 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.
  • Assortative mating refers to the phenomenon of people marrying people with similar background, for example doctors marrying 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.[8]
  • In the bottom percentiles number of hours worked has decreased.[8]
  • The main reason for increasing inequality seems to be the difference between the demand for and supply of skills.[8]
  • Income inequality in OECD countries is at its highest level for the past half century. The ratio between the bottom 10% and the top 10% has increased from 1:7, to 1:9 in 25 years.[8]
  • There are tentative signs of a possible convergence of inequality levels towards a common and higher average level across OECD countries.[8]
  • With very few exceptions (France, Japan, and Spain), the wages of the 10% best-paid workers have risen relative to those of the 10% lowest paid.[8]

A 2011 OECD study investigated economic inequality in Argentina, Brazil, China, India, Indonesia, Russia and South Africa. It concluded that key sources of inequality in these countries include "a large, persistent informal sector, widespread regional divides (e.g. urban-rural), gaps in access to education, and barriers to employment and career progression for women."[8]

A study by the World Institute for Development Economics Research at United Nations University reports that the richest 1% of adults alone owned 40% of global assets in the year 2000. The three richest people in the world possess more financial assets than the lowest 48 nations combined.[9] The combined wealth of the "10 million dollar millionaires" grew to nearly $41 trillion in 2008.[10] A January 2014 report by Oxfam claims that the 85 wealthiest individuals in the world have a combined wealth equal to that of the bottom 50% of the world's population, or about 3.5 billion people.[11][12][13][14][15] According to a Los Angeles Times analysis of the report, the wealthiest 1% owns 46% of the world's wealth; the 85 richest people, a small part of the wealthiest 1%, own about 0.7% of the human population's wealth, which is the same as the bottom half of the population.[16] In January 2015, Oxfam reported that the wealthiest 1 percent will own more than half of the global wealth by 2016.[17][18] An October 2014 study by Credit Suisse also claims that the top 1% now own nearly half of the world's wealth and that the accelerating disparity could trigger a recession.[19]

In October 2015, Credit Suisse published a study which shows global inequality continues to increase, and that half of the world's wealth is now in the hands of those in the top percentile, whose assets each exceed $759,900.[20] A 2016 report by Oxfam claims that the 62 wealthiest individuals own as much wealth as the poorer half of the global population combined.[21] Oxfam's claims have however been questioned on the basis of the methodology used: by using net wealth (adding up assets and subtracting debts), the Oxfam report, for instance, finds that there are more poor people in the United States and Western Europe than in China (due to a greater tendency to take on debts).[22][23][24] Anthony Shorrocks, the lead author of the Credit Suisse report which is one of the sources of Oxfam's data, considers the criticism about debt to be a "silly argument" and "a non-issue … a diversion."[23] Oxfam's 2017 report says the top eight billionaires have as much wealth as the bottom half of the global population, and that rising inequality is suppressing wages, as businesses are focused on delivering higher returns to wealthy owners and executives.[25] In 2018, the Oxfam report said that the wealth gap continued to widen in 2017, with 82% of global wealth generated going to the wealthiest 1%.[26] The 2019 Oxfam report said that the poorest half of the human population has been losing wealth (around 11%) at the same time that a billionaire is minted every two days.[27]

According to PolitiFact, the top 400 richest Americans "have more wealth than half of all Americans combined."[28][29][30][31] According to The New York Times on July 22, 2014, the "richest 1 percent in the United States now own more wealth than the bottom 90 percent".[15] Inherited wealth may help explain why many Americans who have become rich may have had a "substantial head start".[32][33] In September 2012, according to the Institute for Policy Studies (IPS), "over 60 percent" of the Forbes richest 400 Americans "grew up in substantial privilege".[34] A 2017 report by the IPS said that three individuals, Jeff Bezos, Bill Gates and Warren Buffett, own as much wealth as the bottom half of the population, or 160 million people, and that the growing disparity between the wealthy and the poor has created a "moral crisis", noting that "we have not witnessed such extreme levels of concentrated wealth and power since the first gilded age a century ago."[35][36] In 2016, the world's billionaires increased their combined global wealth to a record $6 trillion.[37] In 2017, they increased their collective wealth to 8.9 trillion.[38] Income inequality in the US is significantly worse than people think.[39][40]

The existing data and estimates suggest a large increase in international (and more generally inter-macroregional) component between 1820 and 1960. It might have slightly decreased since that time at the expense of increasing inequality within countries.[41] The United Nations Development Programme in 2014 asserted that greater investments in social security, jobs and laws that protect vulnerable populations are necessary to prevent widening income inequality.[42]

There is a significant difference in the measured wealth distribution and the public's understanding of wealth distribution. Michael Norton of the Harvard Business School and Dan Ariely of the Department of Psychology at Duke University found this to be true in their research, done in 2011. The actual wealth going to the top quintile in 2011 was around 84% where as the average amount of wealth that the general public estimated to go to the top quintile was around 58%.[43]

Two researchers claim that global income inequality is decreasing, due to strong economic growth in developing countries.[44] However, the OECD reported in 2015 that income inequality is higher than it has ever been within OECD member nations and is at increased levels in many emerging economies.[45] According to a June 2015 report by the International Monetary Fund:

Widening income inequality is the defining challenge of our time. In advanced economies, the gap between the rich and poor is at its highest level in decades. Inequality trends have been more mixed in emerging markets and developing countries (EMDCs), with some countries experiencing declining inequality, but pervasive inequities in access to education, health care, and finance remain.[46]

In October 2017, the IMF warned that inequality within nations, in spite of global inequality falling in recent decades, has risen so sharply that it threatens economic growth and could result in further political polarization. The Fund's Fiscal Monitor report said that "progressive taxation and transfers are key components of efficient fiscal redistribution."[47] In October 2018 Oxfam published a Reducing Inequality Index which measured social spending, tax and workers' rights to show which countries were best at closing the gap between rich and poor.[48]

Wealth distribution within individual countries[edit]

The following table shows information about individual wealth distribution in different countries, from a 2018 report by Crédit Suisse.[49]






1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
166
167
168
169
170
171
172
173
174
Median and mean wealth per adult, in US dollars. Countries and subnational areas.
Initially in rank order by median wealth.
Country or
subnational area
Median wealth
per adult.
US dollars
Mean wealth
per adult.
US dollars
Ratio (%)
of median
to mean
Adults.
thousands
 Iceland 203,847 555,726 36.68 248
 Australia 191,453 411,060 46.58 18,433
  Switzerland 183,339 530,244 34.58 6,811
 Luxembourg 164,284 412,127 39.86 456
 Belgium 163,429 313,045 52.21 8,869
 Netherlands 114,935 253,205 45.39 13,260
 France 106,827 280,580 38.07 49,478
 Canada 106,342 288,263 36.89 28,858
 Japan 103,861 227,235 45.71 105,108
 New Zealand 98,613 289,798 34.03 3,486
 United Kingdom 97,169 279,048 34.82 50,919
 Singapore 91,656 283,118 32.37 4,552
 Spain 87,188 191,177 45.61 37,410
 Norway 80,054 291,103 27.50 4,057
 Italy 79,239 217,787 36.38 48,527
 Taiwan 78,177 212,375 36.81 19,139
 Malta 76,116 140,629 54.13 347
 Ireland 72,473 232,952 31.11 3,460
 Austria 70,074 231,368 30.29 7,075
 South Korea 65,463 171,739 38.12 41,381
 United States 61,667 403,974 15.27 242,972
 Denmark 60,999 286,712 21.28 4,450
 Qatar 59,978 121,638 49.31 2,177
 Hong Kong 58,905 244,672 24.08 6,224
 Israel 54,966 174,129 31.57 5,405
 Finland 45,606 161,062 28.32 4,327
 Greece 40,789 108,127 37.72 9,019
 Sweden 39,709 249,765 15.90 7,689
 Germany 35,169 214,893 16.37 67,470
 Slovenia 34,043 79,097 43.04 1,676
 Portugal 31,313 109,362 28.63 8,377
 Libya 26,939 61,701 43.66 4,085
 Kuwait 26,278 91,374 28.76 3,045
 United Arab Emirates 25,267 88,173 28.66 7,752
 Chile 23,812 62,222 38.27 13,166
 Seychelles 21,349 48,652 43.88 68
 Slovakia 21,203 34,781 60.96 4,339
 Estonia 18,895 57,806 32.69 1,034
 Croatia 17,131 35,951 47.65 3,342
 Czech Republic 17,018 61,489 27.68 8,529
 Mauritius 16,472 35,668 46.18 943
 China 16,333 47,810 34.16 1,085,003
 Hungary 15,026 37,594 39.97 7,826
 Aruba 14,901 45,612 32.67 79
 Oman 14,304 41,804 34.22 3,450
 Brunei 14,154 42,925 32.97 298
 Bahrain 13,385 38,882 34.42 1,153
 Saudi Arabia 12,847 43,174 29.76 22,629
 Uruguay 12,556 39,194 32.04 2,484
 Montenegro 12,060 24,746 48.74 475
 Bahamas 11,385 47,822 23.81 288
 Lithuania 11,161 24,600 45.37 2,306
 Bulgaria 11,013 23,984 45.92 5,752
 Poland 10,572 31,794 33.25 30,626
 Cyprus 10,384 100,308 10.35 909
 Costa Rica 9,813 31,717 30.94 3,490
 Barbados 8,522 28,762 29.63 213
 Panama 8,358 28,897 28.92 2,655
 Albania 8,157 16,957 48.10 2,201
 Latvia 7,540 33,958 22.20 1,557
 Georgia 7,078 16,725 42.32 2,940
 Malaysia 7,000 27,970 25.03 21,372
 Gabon 6,973 16,342 42.67 1,124
 Tonga 6,796 15,255 44.55 58
 Bosnia and Herzegovina 6,762 14,110 47.92 2,805
 South Africa 6,726 22,191 30.31 35,434
 Romania 6,658 20,321 32.76 15,582
 Samoa 6,516 18,154 35.89 105
 Iraq 6,515 14,192 45.91 19,160
 Tunisia 6,226 14,932 41.70 8,014
 Peru 6,036 22,508 26.82 20,766
 Mexico 5,784 20,620 28.05 83,850
 Jordan 5,745 13,328 43.10 5,371
 North Macedonia 5,640 12,551 44.94 1,612
 Dominica 5,548 23,937 23.18 54
 Trinidad and Tobago 5,076 15,719 32.29 1,002
 Colombia 4,937 18,239 27.07 33,751
 Serbia 4,903 10,743 45.64 6,809
 Turkmenistan 4,824 10,446 46.18 3,548
 Antigua and Barbuda 4,712 19,497 24.17 70
 El Salvador 4,616 15,219 30.33 4,024
 Mongolia 4,616 10,295 44.84 1,960
 Brazil 4,263 16,664 25.58 147,836
 Namibia 3,944 11,704 33.70 1,356
 Lebanon 3,932 33,726 11.66 4,162
 Solomon Islands 3,835 9,035 42.45 312
 Grenada 3,704 16,081 23.03 71
 Botswana 3,652 10,793 33.84 1,375
 Saint Lucia 3,525 11,146 31.63 131
 Azerbaijan 3,410 7,530 45.29 6,915
 Armenia 3,391 7,583 44.72 2,175
 Fiji 3,254 8,031 40.52 574
 Ecuador 3,211 11,068 29.01 10,507
 Argentina 3,176 11,530 27.55 29,953
 Algeria 3,175 9,077 34.98 26,565
 Angola 3,175 7,921 40.08 12,934
 Equatorial Guinea 3,057 9,398 32.53 695
 Honduras 2,887 10,675 27.04 5,417
 Russia 2,739 19,997 13.70 112,039
 Maldives 2,702 6,808 39.69 308
 Turkey 2,677 18,555 14.43 54,411
 Paraguay 2,589 9,075 28.53 4,181
 Saint Vincent and the Grenadines 2,547 10,882 23.41 75
 Jamaica 2,507 8,924 28.09 1,983
 Morocco 2,426 9,305 26.07 23,218
 Sri Lanka 2,415 5,758 41.94 14,311
 Vanuatu 2,346 5,355 43.81 152
 Belize 2,298 8,961 25.64 221
 Djibouti 2,123 5,389 39.40 569
 Papua New Guinea 2,117 6,254 33.85 4,488
 Bolivia 2,111 7,306 28.89 6,530
 Philippines 1,915 8,349 22.94 62,043
 Iran 1,899 4,779 39.74 57,018
 Vietnam 1,806 4,560 39.61 67,300
 Kyrgyzstan 1,797 4,200 42.79 3,668
 Pakistan 1,711 3,816 44.84 110,625
 Indonesia 1,597 8,919 17.91 170,221
 Laos 1,567 5,215 30.05 3,946
 Eritrea 1,499 3,412 43.93 2,462
 Guyana 1,454 4,620 31.47 475
 Swaziland 1,388 4,219 32.90 719
 Cambodia 1,365 3,404 40.10 9,598
 Zimbabwe 1,317 3,216 40.95 8,103
 São Tomé and Príncipe 1,311 2,987 43.89 96
 East Timor 1,303 2,513 51.85 584
 India 1,289 7,024 18.35 850,210
 Senegal 1,270 3,077 41.27 7,525
 Benin 1,237 2,972 41.62 5,300
 Republic of the Congo 1,219 3,361 36.27 2,546
 Suriname 1,147 5,198 22.07 368
 Ivory Coast 1,119 2,958 37.83 11,501
 Thailand 1,085 9,969 10.88 52,639
 Nicaragua 1,054 3,721 28.33 3,858
 Bangladesh 1,006 2,332 43.14 102,793
 Comoros 971 2,729 35.58 412
 Togo 917 2,324 39.46 3,800
 Cameroon 897 2,282 39.31 11,413
 Kenya 880 2,306 38.16 24,546
 Lesotho 857 2,640 32.46 1,208
   Nepal 834 2,054 40.60 17,150
 Mauritania 764 1,756 43.51 2,239
 Belarus 740 1,514 48.88 7,427
 Myanmar 739 1,515 48.78 34,334
 Haiti 619 2,472 25.04 6,300
 Tajikistan 618 1,364 45.31 4,995
 Yemen 594 1,967 30.20 14,122
 Burkina Faso 569 1,317 43.20 8,571
 Syria 500 1,190 42.02 9,477
 Mali 468 1,094 42.78 7,834
 Liberia 410 1,015 40.39 2,279
 Ghana 398 934 42.61 14,972
 Zambia 390 1,197 32.58 7,641
 Tanzania 383 865 44.28 25,944
 Niger 379 863 43.92 8,579
 Egypt 346 3,717 9.31 57,160
 Central African Republic 332 960 34.58 2,132
 Gambia 327 889 36.78 936
 Guinea 323 816 39.58 6,077
 Guinea-Bissau 296 701 42.23 909
 Chad 294 735 40.00 6,319
 Afghanistan 290 643 45.10 16,245
 Uganda 287 710 40.42 17,941
 Rwanda 254 660 38.48 6,123
 Sudan 231 530 43.58 19,846
 Nigeria 208 1,572 13.23 88,264
 Mozambique 201 482 41.70 13,360
 Madagascar 179 432 41.44 12,471
 Sierra Leone 153 355 43.10 3,596
 Kazakhstan 152 5,122 2.97 12,086
 Burundi 142 321 44.24 4,972
 Democratic Republic of the Congo 123 331 37.16 35,869
 Ethiopia 78 167 46.71 51,036
 Malawi 54 141 38.30 8,493
 Ukraine 40 1,563 2.56 35,267

Income distribution within individual countries[edit]

Countries' income inequality according to their most recent reported Gini index values (often 10+ years old) as of 2014:
red = high, green = low inequality

A Gini index value above 50 is considered high; countries including Brazil, Colombia, South Africa, Botswana, and Honduras can be found in this category. A Gini index value of 30 or above is considered medium; countries including Vietnam, Mexico, Poland, The United States, Argentina, Russia and Uruguay can be found in this category. A Gini index value lower than 30 is considered low; countries including Austria, Germany, Denmark, Slovenia, Sweden and Ukraine can be found in this category.[50]

Various proposed causes of economic inequality[edit]

There are various reasons for economic inequality within societies. Recent growth in overall income inequality, at least within the OECD countries, has been driven mostly by increasing inequality in wages and salaries.[7]

Economist Thomas Piketty argues that widening economic disparity is an inevitable phenomenon of free market capitalism when the rate of return of capital (r) is greater than the rate of growth of the economy (g).[51]

Labour market[edit]

A major cause of economic inequality within modern market economies is the determination of wages by the market. Where competition is imperfect; information unevenly distributed; opportunities to acquire education and skills unequal; market failure results. Since many such imperfect conditions exist in virtually every market, there is in fact little presumption that markets are in general efficient. This means that there is an enormous potential role for government to correct such market failures.[52]

Taxes[edit]

Another cause is the rate at which income is taxed coupled with the progressivity of the tax system. A progressive tax is a tax by which the tax rate increases as the taxable base amount increases.[53][54][55][56][57] In a progressive tax system, the level of the top tax rate will often have a direct impact on the level of inequality within a society, either increasing it or decreasing it, provided that income does not change as a result of the change in tax regime. Additionally, steeper tax progressivity applied to social spending can result in a more equal distribution of income across the board.[58] Taxes credits such as the Earned Income Tax Credit can also decrease income inequality.[59] The difference between the Gini index for an income distribution before taxation and the Gini index after taxation is an indicator for the effects of such taxation.[60]

Education[edit]

Illustration from a 1916 advertisement for a vocational school in the back of a US magazine. Education has been seen as a key to higher income, and this advertisement appealed to Americans' belief in the possibility of self-betterment, as well as threatening the consequences of downward mobility in the great income inequality existing during the Industrial Revolution.

An important factor in the creation of inequality is variation in individuals' access to education.[61] Education, especially in an area where there is a high demand for workers, creates high wages for those with this education,[62] however, increases in education first increase and then decrease growth as well as income inequality. As a result, those who are unable to afford an education, or choose not to pursue optional education, generally receive much lower wages. The justification for this is that a lack of education leads directly to lower incomes, and thus lower aggregate savings and investment. Conversely, education raises incomes and promotes growth because it helps to unleash the productive potential of the poor.

Economic liberalism, deregulation and decline of unions[edit]

John Schmitt and Ben Zipperer (2006) of the CEPR point to economic liberalism and the reduction of business regulation along with the decline of union membership as one of the causes of economic inequality. In an analysis of the effects of intensive Anglo-American liberal policies in comparison to continental European liberalism, where unions have remained strong, they concluded "The U.S. economic and social model is associated with substantial levels of social exclusion, including high levels of income inequality, high relative and absolute poverty rates, poor and unequal educational outcomes, poor health outcomes, and high rates of crime and incarceration. At the same time, the available evidence provides little support for the view that U.S.-style labor market flexibility dramatically improves labor-market outcomes. Despite popular prejudices to the contrary, the U.S. economy consistently affords a lower level of economic mobility than all the continental European countries for which data is available."[63]

More recently, the International Monetary Fund has published studies which found that the decline of unionization in many advanced economies and the establishment of neoliberal economics have fueled rising income inequality.[64][65]

Information technology[edit]

The growth in importance of information technology has been credited with increasing income inequality.[66] Technology has been called "the main driver of the recent increases in inequality" by Erik Brynjolfsson, of MIT.[67] In arguing against this explanation, Jonathan Rothwell notes that if technological advancement is measured by high rates of invention, there is a negative correlation between it and inequality. Countries with high invention rates — "as measured by patent applications filed under the Patent Cooperation Treaty" — exhibit lower inequality than those with less. In one country, the United States, "salaries of engineers and software developers rarely reach" above $390,000/year (the lower limit for the top 1% earners).[68]

Globalization[edit]

Change in real income between 1988 and 2008 at various income percentiles of global income distribution.[69]

Trade liberalization may shift economic inequality from a global to a domestic scale.[70] When rich countries trade with poor countries, the low-skilled workers in the rich countries may see reduced wages as a result of the competition, while low-skilled workers in the poor countries may see increased wages. Trade economist Paul Krugman estimates that trade liberalisation has had a measurable effect on the rising inequality in the United States. He attributes this trend to increased trade with poor countries and the fragmentation of the means of production, resulting in low skilled jobs becoming more tradeable.

LSE anthropologist Jason Hickel contends that globalization and "structural adjustment" set off the "race to the bottom", a significant driver of surging global inequality. Another driver Hickel mentions is the debt system which advanced the need for structural adjustment in the first place.[71]

Gender[edit]

The gender gap in median earnings of full-time employees according to the OECD 2015[72]

In many countries, there is a gender pay gap in favor of males in the labor market. Several factors other than discrimination may contribute to this gap. On average, women are more likely than men to consider factors other than pay when looking for work, and may be less willing to travel or relocate.[73][74] Thomas Sowell, in his book Knowledge and Decisions, claims that this difference is due to women not taking jobs due to marriage or pregnancy, but income studies show that does not explain the entire difference. A U.S. Census's report stated that in US once other factors are accounted for there is still a difference in earnings between women and men.[75] The income gap in other countries ranges from 53% in Botswana to -40% in Bahrain.[76]

Economic development[edit]

A Kuznets curve

Economist Simon Kuznets argued that levels of economic inequality are in large part the result of stages of development. According to Kuznets, 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. Eventually, through various possible redistribution mechanisms such as social welfare programs, more developed countries move back to lower levels of inequality.

Wealth concentration[edit]

As of 2019, Jeff Bezos is the richest person in the world.

Wealth concentration is the process by which, under certain conditions, newly created wealth concentrates in the possession of already-wealthy individuals or entities. Accordingly, 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. Over time, wealth concentration can significantly contribute to the persistence of inequality within society. Thomas Piketty in his book Capital in the Twenty-First Century argues that the fundamental force for divergence is the usually greater return of capital (r) than economic growth (g), and that larger fortunes generate higher returns.[77]

Rent seeking[edit]

Economist Joseph Stiglitz argues that rather than explaining concentrations of wealth and income, market forces should serve as a brake on such concentration, which may better be explained by the non-market force known as "rent-seeking". While the market will bid up compensation for rare and desired skills to reward wealth creation, greater productivity, etc., it will also prevent successful entrepreneurs from earning excess profits by fostering competition to cut prices, profits and large compensation.[78] A better explainer of growing inequality, according to Stiglitz, is the use of political power generated by wealth by certain groups to shape government policies financially beneficial to them. This process, known to economists as rent-seeking, brings income not from creation of wealth but from "grabbing a larger share of the wealth that would otherwise have been produced without their effort"[79]

Finance industry[edit]

Jamie Galbraith argues that countries with larger financial sectors have greater inequality, and the link is not an accident.[80][81]

Mitigating factors[edit]

Countries with a left-leaning legislature generally have lower levels of inequality.[82][83] Many factors constrain economic inequality – they may be divided into two classes: government sponsored, and market driven. The relative merits and effectiveness of each approach is a subject of debate.

Typical government initiatives to reduce economic inequality include:

  • Public education: increasing the supply of skilled labor and reducing income inequality due to education differentials.[84]
  • Progressive taxation: the rich are taxed proportionally more than the poor, reducing the amount of income inequality in society if the change in taxation does not cause changes in income.[85]

Market forces outside of government intervention that can reduce economic inequality include:

  • propensity to spend: 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.[86] On the other hand, Maialeh (2017) points out on the fact that decreasing propensity to consume when increasing income results in higher savings, which strengthen market position of the wealthy social strata even further.[87]

Research shows that since 1300, the only periods with significant declines in wealth inequality in Europe were the Black Death and the two World Wars.[88] Historian Walter Scheidel posits that, since the stone age, only extreme violence, catastrophes and upheaval in the form of total war, Communist revolution, pestilence and state collapse have significantly reduced inequality.[89][90] He has stated that "only all-out thermonuclear war might fundamentally reset the existing distribution of resources" and that "peaceful policy reform may well prove unequal to the growing challenges ahead."[91][92]

Effects[edit]

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

  • Social cohesion: Research has shown an inverse link between income inequality and social cohesion. In more equal societies, people are much more likely to trust 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.
  • Crime: In more equal societies homicide rates are consistently lower. A 2016 study finds that interregional inequality increases terrorism.[95]
  • Welfare: Studies have found evidence that in societies where inequality is lower, population-wide satisfaction and happiness tend to be higher.[96][97]
  • Debt: Income inequality has been the driving factor in the growing household debt,[98][99] 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.[100]
  • Economic growth: Inequality leads to a lower level of economic growth when human capital is neglected for high-end consumption.[101]
  • Civic participation: Higher income inequality led to less of all forms of social, cultural, and civic participation among the less wealthy.[102]
  • Political instability: One study finds that income inequality increases political instability: "more unequal societies are more politically unstable".[103]

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 on inequality. In all studies analyzed, the subjects preferred fair distributions 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. Already very young children seem to prefer fairness over equality.[104]

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.[104]

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.[104]

In many societies, such as the USSR, the distribution led to protests from wealthier landowners.[105] 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.[104]

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.[106]

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.[107]

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.[108]

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).

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:

The liberal champions of equality under the law were fully aware of the fact that men are born unequal and that it is precisely their inequality that generates social cooperation and civilization. Equality under the law was in their opinion not designed to correct the inexorable facts of the universe and to make natural inequality disappear. It was, on the contrary, the device to secure for the whole of mankind the maximum of benefits it can derive from it. Henceforth no man-made institutions should prevent a man from attaining that station in which he can best serve his fellow citizens.

Robert Nozick argued that government redistributes wealth by force (usually in the form of taxation), and that the ideal moral society would be one where all individuals are free from force. However, Nozick recognized that some modern economic inequalities were the result of forceful taking of property, and a certain amount of redistribution would be justified to compensate for this force but not because of the inequalities themselves. John Rawls argued in A Theory of Justice[109] that inequalities in the distribution of wealth are only justified when they improve society as a whole, including the poorest members. Rawls does not discuss the full implications of his theory of justice. Some see Rawls's argument as a justification for capitalism since even the poorest members of society theoretically benefit from increased innovations under capitalism; others believe only a strong welfare state can satisfy Rawls's theory of justice.

Classical liberal Milton Friedman believed that if government action is taken in pursuit of economic equality then political freedom would suffer. In a famous quote, he said:

A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.

Economist Tyler Cowen has argued that though income inequality has increased within nations, globally it has fallen over the 20 years leading up to 2014. He argues that though income inequality may make individual nations worse off, overall, the world has improved as global inequality has been reduced.[110]

Social justice arguments[edit]

Patrick Diamond and Anthony Giddens (professors of Economics and Sociology, respectively) hold that 'pure meritocracy is incoherent because, without redistribution, one generation's successful individuals would become the next generation's embedded caste, hoarding the wealth they had accumulated'.

They also state that social justice requires redistribution of high incomes and large concentrations of wealth in a way that spreads it more widely, in order to "recognise the contribution made by all sections of the community to building the nation's wealth." (Patrick Diamond and Anthony Giddens, June 27, 2005, New Statesman)[111]

Pope Francis stated in his Evangelii gaudium, that "as long as the problems of the poor are not radically resolved by rejecting the absolute autonomy of markets and financial speculation and by attacking the structural causes of inequality, no solution will be found for the world's problems or, for that matter, to any problems."[112] He later declared that "inequality is the root of social evil."[113]

When income inequality is low, aggregate demand will be relatively high, because more people who want ordinary consumer goods and services will be able to afford them, while the labor force will not be as relatively monopolized by the wealthy.[114]

Effects on social welfare[edit]

In most western democracies, the desire to eliminate or reduce economic inequality is generally associated with the political left. One practical argument in favor of reduction is the idea that economic inequality reduces social cohesion and increases social unrest, thereby weakening the society. There is evidence that this is true (see inequity aversion) and it is intuitive, at least for small face-to-face groups of people.[citation needed] Alberto Alesina, Rafael Di Tella, and Robert MacCulloch find that inequality negatively affects happiness in Europe but not in the United States.[115]

It has also been argued that economic inequality invariably translates to political inequality, which further aggravates the problem. Even in cases where an increase in economic inequality makes nobody economically poorer, an increased inequality of resources is disadvantageous, as increased economic inequality can lead to a power shift due to an increased inequality in the ability to participate in democratic processes.[116]

Capabilities approach[edit]

The capabilities approach – sometimes called the human development approach – looks at income inequality and poverty as form of "capability deprivation".[117] Unlike neoliberalism, which "defines well-being as utility maximization", economic growth and income are considered a means to an end rather than the end itself.[118] Its goal is to "wid[en] people's choices and the level of their achieved well-being"[119] through increasing functionings (the things a person values doing), capabilities (the freedom to enjoy functionings) and agency (the ability to pursue valued goals).[120]

When a person's capabilities are lowered, they are in some way deprived of earning as much income as they would otherwise. An old, ill man cannot earn as much as a healthy young man; gender roles and customs may prevent a woman from receiving an education or working outside the home. There may be an epidemic that causes widespread panic, or there could be rampant violence in the area that prevents people from going to work for fear of their lives.[117] As a result, income inequality increases, and it becomes more difficult to reduce the gap without additional aid. To prevent such inequality, this approach believes it is important to have political freedom, economic facilities, social opportunities, transparency guarantees, and protective security to ensure that people aren't denied their functionings, capabilities, and agency and can thus work towards a better relevant income.

Policy responses intended to mitigate[edit]

No business which depends for existence on paying less than living wages to its workers has any right to continue in this country.

President Franklin Delano Roosevelt, 1933[121]

A 2011 OECD study makes a number of suggestions to its member countries, including:[8]

  • Well-targeted income-support policies.
  • Facilitation and encouragement of access to employment.
  • Better job-related training and education for the low-skilled (on-the-job training) would help to boost their productivity potential and future earnings.
  • Better access to formal education.

Progressive taxation reduces absolute income inequality when the higher rates on higher-income individuals are paid and not evaded, and transfer payments and social safety nets result in progressive government spending.[122][123][124] Wage ratio legislation has also been proposed as a means of reducing income inequality. The OECD asserts that public spending is vital in reducing the ever-expanding wealth gap.[125]

The economists Emmanuel Saez and Thomas Piketty recommend much higher top marginal tax rates on the wealthy, up to 50 percent, 70 percent or even 90 percent.[126] Ralph Nader, Jeffrey Sachs, the United Front Against Austerity, among others, call for a financial transactions tax (also known as the Robin Hood tax) to bolster the social safety net and the public sector.[127][128][129]

The Economist wrote in December 2013: "A minimum wage, providing it is not set too high, could thus boost pay with no ill effects on jobs....America's federal minimum wage, at 38% of median income, is one of the rich world's lowest. Some studies find no harm to employment from federal or state minimum wages, others see a small one, but none finds any serious damage."[130]

General limitations on and taxation of rent-seeking are popular across the political spectrum.[131]

Public policy responses addressing causes and effects of income inequality in the US include: progressive tax incidence adjustments, strengthening social safety net provisions such as Aid to Families with Dependent Children, welfare, the food stamp program, Social Security, Medicare, and Medicaid, organizing community interest groups, increasing and reforming higher education subsidies, increasing infrastructure spending, and placing limits on and taxing rent-seeking.[132]

A 2017 study in the Journal of Political Economy by Daron Acemogu, James Robinson and Thierry Verdier argues that American "cutthroat" capitalism and inequality gives rise to technology and innovation that more "cuddly" forms of capitalism cannot.[133] As a result, "the diversity of institutions we observe among relatively advanced countries, ranging from greater inequality and risk-taking in the United States to the more egalitarian societies supported by a strong safety net in Scandinavia, rather than reflecting differences in fundamentals between the citizens of these societies, may emerge as a mutually self-reinforcing world equilibrium. If so, in this equilibrium, 'we cannot all be like the Scandinavians,' because Scandinavian capitalism depends in part on the knowledge spillovers created by the more cutthroat American capitalism."[133] A 2012 working paper by the same authors, making similar arguments, was challenged by Lane Kenworthy, who posited that, among other things, the Nordic countries are consistently ranked as some of the world's most innovative countries by the World Economic Forum's Global Competitiveness Index, with Sweden ranking as the most innovative nation, followed by Finland, for 2012–2013; the U.S. ranked sixth.[134]

See also[edit]

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Further reading[edit]

Books
Articles

Historical[edit]

  • Crayen, Dorothee, and Joerg Baten. "New evidence and new methods to measure human capital inequality before and during the industrial revolution: France and the US in the seventeenth to nineteenth centuries." Economic History Review 63.2 (2010): 452-478. online
  • Hickel, Jason (2018). The Divide: Global Inequality from Conquest to Free Markets. W. W. Norton & Company. ISBN 978-0393651362.
  • Hoffman, Philip T., et al. "Real inequality in Europe since 1500." Journal of Economic History 62.2 (2002): 322-355. online
  • Morrisson, Christian, and Wayne Snyder. "The income inequality of France in historical perspective." European Review of Economic History 4.1 (2000): 59-83. online
  • Lindert, Peter H., and Steven Nafziger. "Russian inequality on the eve of revolution." Journal of Economic History 74.3 (2014): 767-798. online
  • Nicolini, Esteban A., and Fernando Ramos Palencia. "Decomposing income inequality in a backward pre‐industrial economy: Old Castile (Spain) in the middle of the eighteenth century." Economic History Review 69.3 (2016): 747-772.
  • Piketty, Thomas, and Emmanuel Saez. "The evolution of top incomes: a historical and international perspective." American economic review 96.2 (2006): 200-205. online
  • Piketty, Thomas, and Emmanuel Saez. "Income inequality in the United States, 1913–1998." Quarterly journal of economics 118.1 (2003): 1-41. online
  • Saito, Osamu. "Growth and inequality in the great and little divergence debate: a Japanese perspective." Economic History Review 68.2 (2015): 399-419. Covers 1600-1868 with comparison to Stuart England and Mughal India.
  • Scheidel, Walter (2017). The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century. Princeton: Princeton University Press. ISBN 978-0691165028.
  • Stewart, Frances. "Changing perspectives on inequality and development." Studies in Comparative International Development 51.1 (2016): 60-80. covers 1801 to 2016.
  • Sutch, Richard. "The One Percent across Two Centuries: A Replication of Thomas Piketty's Data on the Concentration of Wealth in the United States." Social Science History 41.4 (2017): 587-613. Strongly rejects all Piketty's estimates for US inequality before 1910 for both top 1% and top 10%. online
  • Van Zanden, Jan Luiten. "Tracing the beginning of the Kuznets curve: Western Europe during the early modern period." Economic History Review 48.4 (1995): 643-664. covers 1400 to 1800.
  • Wei, Yehua Dennis. "Geography of inequality in Asia." Geographical Review 107.2 (2017): 263-275. covers 1981 to 2015.

External links[edit]