Economic inequality

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Economic inequality refers to disparities in the distribution of economic assets and income. The term typically refers to inequality among individuals and groups within a nation or inequality among nations.

Contents

Inequality among individuals

Economic inequality among different individuals or social groups is best measured within a single country. This is due to the fact that country-specific factors tend to obscure inter-country comparisons of individuals' incomes. A single nation will have more or less inequality depending on the social and economic structure of that country. See Wealth condensation and Zipf's law.

Measurement

Main article: Income inequality metrics

Numerical indexes measuring economic equality either look at absolute inequality - essentially, quantifying poverty - and relative inequality, which compares the well-being and numbers of the rich with those of the poor.

Gender

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Proposed causes of income inequality between men and women:

  • Sexism
  • Undervaluing the work of women, including housework
  • Differing interests between the sexes
  • Cultural influence of traditional gender roles
  • Historical inertia
  • Negotiation: Often inequality is emergent. For example, the assumption is that most firms will act to maximize profits, which means paying each worker the lowest salary or wage he or she will accept. The result is that compensation matters are intentionally kept obscure by firms; some formally disallow discussion of salaries. Matters of salaries and raises are determined in complex negotiation processes. This results in some workers being able to negotiate better salaries than others.

See also Gender gap.

Race

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Proposed causes for poverty among certain minorities:

Politics and ethics

Many accept inequality as a given, and argue that the prospect of greater material wealth provides incentives for innovation within an economy. Some modern economic theories, such as the neoclassical school, have suggested that a functioning economy requires a certain level of unemployment. These theories argue that unemployment benefits must be below the wage level to provide an incentive to work, thereby mandating inequality. Other theories, such as socialism, and Keynesianism dispute this alleged positive role of unemployment.

There are many posited solutions from those who see economic inequality as improper; these solutions usually concentrate on equality of outcome and/or equal opportunity. Aside from the ethical arguments against inequality, there is evidence that "Inequity aversion" is a shared human characteristic.

The antonym of inequality is, of course, equality, but there is debate as to what "equality" should mean. Different definitions include:

Effects

Economic inequality contributes to crime, and potentially revolution, such as the French Revolution.

"Gini coefficient as a life table function: Computation from discrete data, decomposition of differences and empirical examples (http://www.demographic-research.org/?http://www.demographic-research.org/volumes/vol8/11/)" by Vladimir Shkolnikov, Evgueni Andreev, and Alexander Z. Begun is a journal article that explores the correlation between length of life and Gini coefficient.

Inequality among nations

Disparities among nations explain much of the gap between the world's rich and poor (cf. Milanovic 2000, p.49). Some of these disparities can be better appreciated when rich and poor countries or societies are contrasted. For example, according to some estimates by Branko Milanovic from the World Bank:

  • "An American having the average income of the bottom US decile is better-off than 2/3 of world population." (Milanovic 2000, p.50)
  • "The top 10 percent of the US population has an aggregate income equal to income of the poorest 43 percent of people in the world, or differently put, total income of the richest 25 million Americans is equal to total income of almost 2 billion people." (Milanovic 2000, p.50)

Other disparities can be better appreciated when rich individuals (or corporations) are compared against poor individuals. According to some estimates, for instance:

  • "The richest 1 percent of people in the world receive as much as the bottom 57 percent, or in other words, less than 50 million richest people receive as much as 2.7 billion poor." (Milanovic 2000, p.50) (The richest 1% of people would have an average income of US$24,000.)
  • The three richest people possess more financial assets than the poorest 10% of the world's population, combined.
  • As of May 2005, the three richest people in the world have assets that exceed the combined gross domestic product of the 47 countries with the least GDP, (calculation based on data from list of countries by GDP (PPP) and list of billionaires).
  • As of May 2005, the 125 richest people in the world have assets that exceed the combined gross domestic product of all the least developed countries, (calculation based on data from list of countries by GDP (PPP) and list of billionaires).

The evolution of the income gap between poor and rich countries is related to convergence. Convergence can be defined as "the tendency for poorer countries to grow faster than richer ones and, hence, for their levels of income to converge" [1] (http://www.worldbank.org/fandd/english/0696/articles/090696.htm). Convergence is a matter of current research and debate, but most studies have shown lack of evidence for absolute convergence based on comparisons among countries (with regard to this debate see for instance Cole and Newmayer (2003) or [2] (http://ucatlas.ucsc.edu/income/debate.html)).

In any case, current differences between rich and poor countries are considerable. For example, according to UN Human Development Report 2004 [3] (http://hdr.undp.org/statistics/data/indic/indic_4_1_1.html), the GDP per capita in countries with high, medium and low human development (a classification based on the UN Human Development Index) was 24,806, 4,269 and 1,184, respectively (in PPP US$). The major component of the world's income inequality (world Gini) is comprised by two groups of countries, the “twin peaks” as they were called by Quah (1997). The first group has 13% of the world's population and receives 45% of the world PPP income. This group includes US, Japan, Germany, France and the UK, and comprises 500 million people with an income level over PPP$11,500 per year. The second group has 42% of the world's population and receives only 9% of the world PPP income. This group includes India, Indonesia and rural China, and comprises 2,1 billion people with an income level under $PPP1000 per year. (See Milanovic 2001, p.38).

Economists describe world inequality (among nations) as the "factor of 32" problem, since the ratio between developed world countries' per capita GDP and poor nations' GDP's is estimated to be about 32.

Economic inequality is generally considered to be approximately exponential as one traverses the strata of national and world societies from top-to-bottom. More sophisticated models of income distribution may apply (see Zipf's law).

Economic inequality has always existed; its very nature, cause and importance is open to broad debate. State-mandated economic polices (whether capitalism, socialism, communism or some other), wars, past and present, differing ability to create wealth among individuals are among the reasons. (see IQ and the Wealth of Nations).

See also

References

  • Milanovic, Branko (World Bank), True world income distribution, 1988 and 1993: first calculation based on household surveys alone, The Economic Journal, Volume 112 Issue 476 Page 51 - January 2002. Article: [4] (http://econwpa.wustl.edu/eps/hew/papers/0305/0305002.pdf). Actual report on which the article is based: [5] (http://econ.worldbank.org/files/978_wps2244.pdf). News coverage: [6] (http://www.guardian.co.uk/Archive/Article/0%2C4273%2C4337872%2C00.html) and [7] (http://mailman1.u.washington.edu/pipermail/pophealth/2002-January/000211.html).
  • Cole, Matthew A. and Neumayer, Eric. The pitfalls of convergence analysis: is the income gap really widening? Applied Economics Letters, 2003, vol. 10, issue 6, pages 355-357 [8] (http://econpapers.repec.org/article/tafapeclt/v_3A10_3Ay_3A2003_3Ai_3A6_3Ap_3A355-357.htm)
  • Quah, Danny (1997), "Empirics for growth and distribution: stratification, polarization and convergence clubs", London School of Economics and Political Science, Center for Economic Performance Discussion Paper No. 324, pp. 1-29. [9] (http://netec.mcc.ac.uk/WoPEc/data/Papers/cepcepdps0324.html)
  • Martin Ravallion, World Bank, 5 May 2005, Policy Research Working Paper no. WPS 3579, A poverty-inequality trade-off? (http://econ.worldbank.org/external/default/main?pagePK=64165259&theSitePK=469372&piPK=64165421&menuPK=64166093&entityID=000012009_20050505134719)

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