Income Inequality: Causes, Impacts, and How to Measure

Income inequality amplifies the greater social inequality present in our social framework. It refers to the disparity in the incomes of different people, cultures, and societies based on different demographics. Income inequality only considers earnings in the form of salary, wages, rent, profit, interest, yields, and so many other returns from the sale of one’s products, offering labor, or investing in capital. Income inequality performs and indicates almost as similar as wealth inequality. However, while income inequality measures periodical earnings, wealth inequality considers the value of one’s fixed and current assets.

Causes of Income Inequality

Why would two people have different incomes?

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The conventional explanation is the development of in-born talents, abilities, and determination that has greater monetary value than someone without them. However, economists have arrived at a myriad of socio-economic, political, and cultural factors that determine income inequality. Remember, income inequality is always an indicator of a fragmented society, culturally and socially, economics set aside.

1. Educational level

The major indicator of income inequality in a perfectly natural environment, education has gradually crept into the society as a significant determinant of the quality of life. High-end jobs are accorded to C-suite officers who rake in millions, while unskilled laborers who are un-dependent on education live on peanuts.

2. Globalization

Income inequality across the world has been associated with historical events like colonization, facilitated by global intervention by other countries. Even currently, the existing transport infrastructure has seamlessly facilitated the moving of raw materials for processing in developed countries, while goods come back to be sold in the same countries. Globalization is a sensational factor, since different people harbor dissimilar perspectives to its impact of income inequality.

3. Technology

Technological advancements have only benefited the developed and rich while the poor manual laborers reel from joblessness.

4. Social bias

There has been unlimited concerns of historical injustices meted out to particular segments of the society to particular races, genders, and ethnicity. Socio-cultural bias has bore the blame for income inequality in highly-polarized places like the USA and some parts of Europe, and the issue has as a result been highly politicized.

Political power – In smaller samples, political power has generated significant affluence for particular groups of individuals across generations. Individuals equipped with political influence can access quality education, sufficient resources, and the requisite networks to advance their careers and businesses. Moreover, political power has been analyZed in the sense of ethnicities, races, and geographies which have greater political power than others.

How to Measure Income Inequality

The Census organization of the US lists over five methods of determining inequality, namely: the Atkinson Index, Equivalence Adjustment of Income, Gini Index, Mean Log Deviation, and Theil Index. We may look at all of these and several others in a snippet, but first things first let’s look at the top two measurement methods: Gini Index and Percentile Ratios

1. Gini Index

The Gini Index is the most commonly used method of determining inequality. The Gini Coefficient is derived from the Lorenz Curve, where the cumulative share of a particular community is mapped against the share of people in the population. Perfect equality rests at zero (the 45 degree line), as the income distribution matches with the population as it advances. The gini coefficient is calculated by dividing the area between the curve and 45 degree line with the total area under the perfect line. A gini index of 1 represents a very unequal population.

2. Percentile Ratios

Also known as the 90/10 ratio. The income of people in the upper 10% is calculated against the income of the bottom 90%, and the resulting percentile determines income inequality in the said place. The Palma’s formula divides the owners of the top 10% of the gross national income, and divided by 40% of the lowest in the income levels. The Palma index skips the middle class, a class that has been found to compose 50% of the income, with the other 50% shared between the upper and lower classes.

3. Subsidiary measurement methods

Atkinson’s model determines the role played and contributions made to income inequality by both ends. Equivalent adjustment of income measures the distribution of income in households, but with special consideration made to the households members to determine the economies of scale adopted by the said household. The Mean Log Deviation measures income inequality too, and just like with the gini coefficient, in MLD zero is a situation of perfect equality while 1 indicates high inequality levels. All these inequality measurements have specific distinctive objectives and ways of arriving at inequality measurements. They are unique both in the process and the outcome as well.

Remedies to Income Inequality

Solving income inequality involves addressing the key causes of socio-economical differences within the society. The following are some of the possible solutions:

Increasing minimum wage – only the poor bear the brunt of minimum wage, while the rich gain from a lower minimum wage as they are the employers. Hence, by raising the minimum wage, economic privilege will be shifted to the employee who will have better working standards and a higher income for themselves.
Progressive taxation – this involves a rising trend of tax rate as income levels progress. Progressive taxes is when the poor pay less taxes per income while the rich pay higher taxes per amount of income. That way, the poor are incentivized to grow from their state.
Provision of equal and available education to all. Education has arguably been a major determinant of economic prosperity among the past generations until recently, when technology took over. Equal education access may not provide similar skills and knowledge, but gives everyone an opportunity to learn if they wish so.
Open access to capital – individuals with entrepreneurial energies have to be allowed access to requisite forms of capital- financial, raw material, assets, and human resources. This way, these resources will not be only available for those with financial and political influence.
Fostering gender and racial equality – it is an uphill task to regulate a socio-cultural aspect of the society more than the economical part of it. However, societies should do all they can to achieve a society free of bias in education, employment, and business along lines of gender, race, or ethnicity.

The main role in controlling income inequality sits with the government of the day as it possesses requisite powers to accentuate efforts on job and business opportunities, and the level of income derived from these activities.

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