Why is there inequality in income?

When people in a group don’t have the same amount of money, this is called income inequality. The difference in income is more significant when the spread isn’t fair. Wealth inequality, or the unequal division of wealth, often goes hand in hand with income inequality.

There are different ways to split populations to show different levels and types of income inequality, such as different income levels between men and women or people of different races. You can look at income inequality in a population in several ways, such as with the Gini Index.

How to Understand Income Inequality

All over the world, there is wealth inequality, which means that some groups of people make more money than others. In the U.S., these gaps in income have grown more extensive in the last fifty years. Income inequality is not the same as wealth inequality. Inequality in income is about pay and wages, while inequality in wealth is about net worth.

Why there is income inequality?

Some of the things that cause income inequality are:123

As trade between countries grew, companies in the U.S. moved industry and other jobs to countries with cheaper labor costs. This is called globalization. Americans from the working class and the middle class lost stable jobs and income that could last for generations.

Technology Progress: Technology progress has been good in many ways, but some changes in the workplace, like automation, have cost blue-collar workers their jobs and lowered pay for less educated workers.

Gender and Race Bias: It has always been easy to see that women and people of color have lower incomes than men. It is generally agreed upon that, for example, men tend to make more money than women in the same job roles. Also, white men make more money than non-white men.

The wages of workers with less than a high school diploma grow less quickly than those with college degrees and graduate degrees. The news that C-Suite leaders are getting multimillion-dollar salaries and bonuses (even though the economy is terrible) drives home this income difference.

Conditions of the Economy: When the economy gets worse, things like financial chaos, unemployment, less business investment, and other things can make wages go down.

Taxes: People with higher incomes pay a more significant share of their income in taxes than people with lower incomes, but federal taxes have not stopped income inequality from getting worse. Tax policies like company taxation, capital gains tax rates, and income tax cuts may be to blame. These policies tend to help people with higher incomes more than people with lower incomes.

Things that happen when Income Inequality

Some wage inequality is average because people are different in how much they work, how talented, and how lucky they are. But the International Monetary Fund (IMF) says that too much income inequality could “erode social cohesion, lead to political polarization, and ultimately lower economic growth.”3

Income inequality can also lead to political unrest and the loss of social, educational, and economic changes that could help people improve their living standards and financial futures.

A Look at Income Inequality

Different ways of dividing income can be used to examine income inequality and differences. To study income inequality and disparity, we start by looking at how income is distributed by ethnic group.

When looking into income inequality, the different types of income groups that may be looked at are:

• Type of Person
• Ethnic Group
• Place in the world
• Job Title
• Income in the past

How to Find Out How Unequal Income Is

To find out how unequal income is, you can compare the income of a big group of high earners (like the top 10%). To the median or average income for the whole country.

Another way is to compare the income of a group of people who don’t make much (like the bottom 10%) to the middle or average income.

Someone else has started to look at the tax records of the wealthiest people to figure out things about these very wealthy people.

The Gini Index is a common way to measure how unequal income is. In the early 1900s, Italian statistician Corrado Gini came up with it to help measure and compare the amounts of income inequality in different countries. The index can be anywhere from 0 to 100. A higher level means that there is more income inequality in a country, while a lower level means that there is less.

With a Gini Index level of 63.0, the most recent data from the World Bank shows that South Africa has one of the widest gaps in wealth. The Gini Index number for the U.S. is 39.7. With a reading of 23.2.4, the Slovak Republic has the lowest Gini Index reading in the world.

How to Make Incomes More Equal

Both local and global governments are always looking into different levels of wage inequality. Through their work on financial security, long-term economic growth, and reducing poverty, the IMF and the World Bank want to help the bottom 10% of earners in every country make more money.

As part of a worldwide effort to include more people with low incomes in the financial system, new tools, and production methods are making banking services better for those people.

Also, reducing wealth inequality will be easier if leaders in politics, business, and society can agree on some basic ways to make things better:

The government should raise income when the free market doesn’t work.

It is essential to recognize that some government actions make income inequality worse.

Fiscal measures can help close the gap between rich and poor.

Income equality might get a little better with universal health care.

Many people could feel less stressed about costs if other social programs, like Social Security and Medicaid, were more stable.

Better access to educational options could help people move up in society.

The difference in income in the U.S.

Since the 1970s, there has been more and more income inequality in the U.S. From the early 1900s to the present, unfair tax and work policies by the government, as well as ongoing racial and gender abuse, have made this inequality even worse. Income inequality is also caused by a middle class that is getting smaller.2

This list shows some groups that study and write reports on income inequality, disparity, and sharing in the United States.

The Urban Institute

The Urban Institute looked at economic data from the past 50 years and found that the poorest people got poorer while the wealthiest became much more prosperous.5

From 1963 to 2016:

The ten percent of Americans with the least money went from having nothing to having $1,000 in debt.

The average wealth of middle-income families more than doubled from before.

Families in the top 10% were worth five times as much as before.

Families in the top 1% were worth seven times as much as before.

The U.S. racial and ethnic income gap is another thing that the Urban Institute looks into. In 1963, the group said that the average income of white families was about $45,000 more than that of black families. In 2019, the median income of White families was about $153,000 more than that of Latinx families and $165,000 more than that of Black families.6

The Federal Reserve

The Federal Reserve sends out a Distributional Financial Accounts report every three months. This report shows how wealth is spread among U.S. families. As of the fourth quarter of 2022, the Federal Reserve showed that income was spread in the U.S. in the following ways.

Institute for Economic Policy

In 2018, the Economic Policy Institute put out a study that showed that, after the 2008 recession, the incomes of the wealthiest people were generally going up. They found that in 43 states and Washington, D.C., between 2009 and 2015, the wages of the wealthiest 1% grew faster than those of the bottom 99%8.

This trend may be caused by several things, such as Americans’ wages staying the same, tax cuts for the wealthiest Americans, the loss of manufacturing jobs, and a rising stock market that made directors and hedge fund managers more valuable.

After the recession, businesses also spend a lot to hire and keep skilled workers in healthcare and engineering. Because of this, machines in other areas have cut or taken over jobs, which has pushed down wages for people who work in jobs that aren’t as competitive.

Also, EPI data regularly keeps track of wages by section. The statistics for Whites, Blacks, and Hispanics are shown below as of 2022.9

Center for Women’s Policy Research

Some groups are more likely to be affected by income inequality than others. For example, there are often significant wage gaps for women, Black people, and Hispanic people who work in the U.S.

The Institute for Women’s Policy Research looked at full-time worker wages and found that in 2021, women of all races and ethnicities were paid an average of 83.1% of what men were paid. Even when part-time and full-time jobs are considered, women only make 77.3 cents for every dollar a man makes.10

It also showed how much people made based on their race and gender. It said that Hispanic women made 58.4% of what full-time White men made, Black women made 63.1%, and White women made 79.6%.10

The Pew Research Center

According to data from the Pew Research Center, there are also differences in pay between men and women. Its most recent look at the hourly wages of full- and part-time workers showed that women made 82% of what men made on average in 2022. This isn’t much better than the pay gap in 2002 when men and women made 80% more than each other.11

An income gap is the difference in how much money different groups make.

What’s wrong with unequal income?

Lack of financial stability for large parts of a community can lead to potentially harmful social and economic upheaval, financial hardships, and lower living standards.

Three things that happen when incomes are unequal

Some of the effects of income inequality are people having a hard time paying their bills, staying poor, and being depressed, which can lead to social and political unrest.

How can we fix the difference in income?

To lower income inequality, both the public and private sectors need to deal with the problems. Such as discrimination, unfair taxes, wage stagnation, and other issues that cause significant differences in pay.

Conclusion

• Inequality in income can make it hard for people to get ahead financially and raise their living standards. It can also cause political and social upheavals.
• Studies of income inequality help show how different groups of people have different amounts of money.
• Researchers look at how income is distributed based on gender, race, area, and job when they study income inequality.
• Many good sites regularly publish case studies and analyses of income inequality, income disparity, and income distributions.
• The Gini Index is a common way to look at differences in income worldwide.