15.4 Income Inequality: Measurement and Causes
2 min read•june 24, 2024
is a hot topic in economics. It's about how money is spread among people in a society. Factors like education, skills, and family structure play a big role in who gets what slice of the economic pie.
We use tools like and the to measure inequality. The gives us a single number to compare inequality across different places. Understanding these measures helps us see how income gaps are changing over time.
Measuring Income Inequality
Distribution of Income and Key Factors
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- Income distribution shows how income is divided among individuals or households in an economy influenced by factors such as education, skills, experience, and wealth
- Key factors driving income inequality:
- Differences in educational attainment and skills with higher levels often leading to higher-paying jobs
- Technological advancements and globalization increasing demand for high-skilled workers while reducing demand for low-skilled jobs
- Changes in family structure and household composition such as the rise in single-parent households and assortative mating
- Institutional factors including the decline in unionization and changes in tax policies favoring high-income earners
Data Visualizations
- Quintiles divide the population into five equal groups based on income with the lowest quintile representing the poorest 20% and the highest quintile representing the richest 20% to assess the extent of inequality by comparing income shares
- Lorenz curve is a graphical representation of income distribution plotting cumulative share of income earned by cumulative share of population with perfect equality represented by a 45-degree line and greater deviation indicating higher income inequality
- Gini coefficient derived from the Lorenz curve ranges from 0 (perfect equality) to 1 (perfect inequality) calculated as the area between the Lorenz curve and the 45-degree line of perfect equality
Factors Contributing to Rising Inequality
Household Composition and Wage Disparities
- Changes in household composition:
- Increase in single-parent households which often have lower incomes compared to two-parent households
- Assortative mating tendency for people with similar education and income levels to marry each other leading to higher-income households at the top and lower-income households at the bottom
- Wage disparities:
- increasing demand for high-skilled workers leading to higher wages and reducing demand for low-skilled workers leading to stagnant or lower wages
- Globalization and trade outsourcing low-skilled jobs to countries with lower labor costs and increasing competition for low-skilled workers putting downward pressure on wages
- Decline in unionization weakening collective bargaining power especially for low-skilled workers and reducing ability to negotiate for higher wages and better working conditions
Key Terms to Review (18)
Aggregate Demand: Aggregate demand (AD) is the total demand for all final goods and services produced in an economy during a specific time period. It represents the sum of consumer spending, business investment, government spending, and net exports. Aggregate demand is a crucial macroeconomic concept that helps economists understand and predict the overall level of economic activity, employment, and inflation in an economy.
Distributional Analysis: Distributional analysis is a statistical technique used to examine the distribution of a variable, particularly income or wealth, within a population. It focuses on understanding how this variable is spread out or concentrated across different segments of the population.
Gini Coefficient: The Gini coefficient is a statistical measure that quantifies the degree of inequality in the distribution of income or wealth within a population. It ranges from 0, which represents perfect equality where everyone has the same income, to 1, which indicates complete inequality where one person has all the income and everyone else has none.
Human Capital Theory: Human capital theory is an economic concept that views education, training, and other investments in people as a form of capital that can increase an individual's productivity and earning potential. It emphasizes the importance of investing in human skills and knowledge as a means of enhancing economic growth and development.
Income Inequality: Income inequality refers to the unequal distribution of income and wealth within a population or across a society. It measures the degree to which the income or wealth of individuals or households varies across the economic spectrum.
Income Mobility: Income mobility refers to the movement of individuals or households within the income distribution over time. It measures the extent to which people's relative economic status changes, either upward or downward, over their lifetime or across generations.
Income Quintile Analysis: Income quintile analysis is a statistical method used to examine income inequality by dividing the population into five equal groups, or quintiles, based on their income levels. This analysis provides insights into the distribution of income within a given population and helps identify disparities between different income groups.
Income Redistribution: Income redistribution refers to the process of transferring income from some individuals or groups to others through government policies and programs. The goal is to reduce income inequality and provide a more equitable distribution of wealth within a society.
Income Share: Income share refers to the proportion or percentage of total income that is attributed to a specific group or segment of the population. It is a key metric used in the analysis of income inequality and the distribution of wealth within a society.
Long-Run Aggregate Supply: Long-run aggregate supply (LRAS) refers to the total quantity of output that an economy can produce when all factors of production, including capital, labor, and technology, are fully utilized. It represents the economy's potential output or the maximum level of real GDP that can be sustained in the long run without inflationary pressures.
Lorenz Curve: The Lorenz curve is a graphical representation of the distribution of income or wealth within a population. It illustrates the degree of inequality by showing the cumulative proportion of total income or wealth held by different segments of the population, ranked from the poorest to the wealthiest.
Marginal Propensity to Consume: The marginal propensity to consume (MPC) is the fraction of an additional unit of income that a consumer will spend on consumption. It represents the relationship between changes in income and changes in consumption, measuring how much of an increase in income will be spent on consumption rather than saved.
Poverty Line: The poverty line is an economic measure used to determine the minimum level of income deemed adequate to meet a person's basic needs. It is used to identify individuals and households living in poverty and is an important metric for understanding income inequality and informing government policies to reduce it.
Progressive Taxation: Progressive taxation is a system where the tax rate increases as an individual's income increases, with higher-income individuals paying a larger percentage of their income in taxes compared to lower-income individuals. This approach aims to create a more equitable distribution of the tax burden and promote social and economic equality.
Quintiles: Quintiles are a statistical measure used to divide a population into five equal groups based on a specific characteristic, such as income or wealth. They provide a way to analyze and compare the distribution of a variable within a population.
Skill-Biased Technological Change: Skill-biased technological change refers to the phenomenon where technological advancements disproportionately benefit skilled workers over unskilled workers, leading to an increase in the demand for skilled labor and a widening of the wage gap between skilled and unskilled workers. This concept is particularly relevant in understanding changes in labor markets and the causes of income inequality.
Social Stratification: Social stratification refers to the hierarchical arrangement of individuals and groups within a society based on factors such as wealth, income, social status, education, and power. It is a fundamental feature of social organization that shapes the distribution of resources, opportunities, and life chances within a population.
Wealth Distribution: Wealth distribution refers to the way in which the total wealth of a society or economy is divided among its members. It examines the disparities in the ownership and control of assets, such as real estate, financial investments, and other valuable possessions, across different segments of the population.