When Karl Marx began to hypothesize that an economic revolution would occur, one of his primary concerns was the unequal distribution of wealth. He saw a capitalist society where there was terrible inequality. A small amount of people possessed a high percentage of all the money and income. What this did was create a larger and larger poor underclass. Marx theorized that this unequal division of wealth would eventually lead to a class revolution. While Marx's revolution failed his essential problem still exists. In America about 5% of the people possess 95% of the wealth. This leads to certain problems, foremost among them poverty and income equality. All of this eventually leads to the problem of lack of spending in an economy.
Analyzing the Problem
The most common method of analyzing economic distribution is to use the family as the basic income unit and then rank all families from lowest to highest. After the incomes are ranked, they are then divided into fifths, and then examined. This data is then plotted on the Lorenz curve- a curve that shows how much the actual distribution of income varies from an equal distribution- by adding the percentage the lowest fifth earned to that of the next highest fifth, and then plotted as the first point of the graph. This number is then added to the middle fifth and plotted as the second point. This process continues until the cumulative values of all fifths are plotted. If all families earned the same income then the graph for the Lorenz curve would be a diagonal line beginning in the lower left-hand corner and moving towards the upper right hand corner. But because all families don't receive the same income, the curve showing the actual income distribution is curved. Thus the area between the ideal diagonal line and the curve shows the degree of income inequality.
Reasons for Income Inequality
There are numerous amounts of reasons as to why incomes of various groups may be different. The first reason has to do with education. Some people have higher incomes than others do because they obtained a higher level of education. Thus they are put in better positions to get higher paying jobs that require higher levels of skills.
The second reason for income inequality has to do with the fact that some people hold more wealth than others and that the distribution of wealth is more uneven than that of income. This inequality gives the wealthy the advantage to send their children to expensive colleges and universities, and to set their children up in business so they can earn a better income.
Discrimination is another reason that there is an inequality with regards to income. Women may not be promoted to the higher positions in their business because of the "glass ceiling". Certain unions may deny immigrants or minorities membership o the grounds that certain groups are not fit for certain professions.
Another factor that influences the distribution of income is the ability that some people possess. Professional athletes and popular performers all have natural abilities that allow them to earn more income.
Finally, another reason for differences in the distribution of income is the amount of monopoly power certain groups hold. Unions have considerable power and have been able to obtain higher wages for their members. Therefore these workers are more likely to earn higher wages than a person in the same profession who is not a union member is. For white-collar workers, monopoly power comes in the form of quotas placed on the number that can enter a profession. The American Medial Association, for example, has been successful in limiting the number of people in its profession by limiting enrollments in medical schools.
Solving The Problem
There are six types of antipoverty programs, all with different channels to help the poor.
Income assistance is the first type. Basically is provides direct cash assistance to those in need. One such program is Aid to Families with Dependent Children (AFDC) under which a family in need because of the death, continuous absence, or permanent disability of a parent can receive cash payments. Individual states can determine whether a family is eligible for benefits and how large the benefits should be; this is done under the guidelines of the federal government. Another income assistance program in the Supplemental Security Income (SSI), which makes payments to blind or disabled persons age 65 or older.
The second type of antipoverty program is General Assistance, which contains programs that assist poor people but do not provide direct case assistance. One example is the food stamp program because a person will pay a fraction of the worth of a coupon administered by the government. Another general assistance program is Medicaid. Under this, the federal government pays a majority of healthcare costs and the state governments pay the rest.
The third type of antipoverty program are the social service programs. These include areas as child abuse prevention, foster care, family planning, job training, child welfare, and day care. Although the state has final say in the kids of services provided by the programs, the federal government matches part of the cost. To be eligible for federal funds, a state is free to select the social issues it wishes to address, set the eligibility requirements, and decides how the program is to be carried out.
The fourth antipoverty program is the negative income tax, which would make cash payments to certain groups below the poverty line. Under the negative income tax, the federal government would establish an income level below which people do not have to pay taxes. Then, the government would pay a certain amount of money to any person who earned less than that level. Such a program would be more cost-effective for the government than the current welfare programs are.
The fifth type of antipoverty program is enterprise zones, which are areas where companies can locate free of certain local, state, and federal tax laws and operating restrictions. The zones benefit businesses and are residents because people can find work without traveling far and rundown areas can begin to grow.
The final antipoverty program is the state-controlled workfare program. Under workfare, welfare recipients are required to exchange some of their labor for benefits. People on workfare often assist law enforcement officials or sanitation and highway crews. In New York City, many people on workfare clean subway cars and stations. The work is required of almost everyone except those with very young children, the disabled, and the elderly.
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For the economic inequality among countries, see international inequality.
See also: Social inequality and Social apartheid
Economic inequality is the difference found in various measures of economic well-being among individuals in a group, among groups in a population, or among countries. Economic inequality sometimes refers to income inequality, wealth inequality, or the wealth gap. Economists generally focus on economic disparity in three metrics: wealth, income, and consumption. The issue of economic inequality is relevant to notions of equity, equality of outcome, and equality of opportunity.
Economic inequality varies between societies, historical periods, economic structures and systems. The term can refer to cross-sectional distribution of income or wealth at any particular period, or to changes of income and wealth over longer periods of time. There are various numerical indices for measuring economic inequality. A widely used index is the Gini coefficient, but there are also many other methods.
Research suggests that greater inequality hinders long term growth. Whereas globalization has reduced global inequality (between nations), it has increased inequality within nations.
Empirical measurements of inequality
The first set of income distribution statistics for the United States covering the period from (1913–48) was published in 1952 by Simon Kuznets, Shares of Upper Income Groups in Income and Savings. It relied on US federal income tax returns and Kuznets’s own estimates of US national income, National Income: A Summary of Findings (1946). Others who contributed to development of accurate income distribution statistics during the early 20th century were John Whitefield Kendrick in the United States, Arthur Bowley and Colin Clark in the UK, and L. Dugé de Bernonville in France.
Economists generally consider three metrics of economic dispersion: wealth, income, and consumption. A skilled professional may have low wealth and low income as student, low wealth and high earnings in the beginning of the career, and high wealth and low earnings after the career. People's preferences determine whether they consume earnings immediately or defer consumption to the future. The distinction is also important at the level of economy:
- There are economies with high income inequality and relatively low wealth inequality (such as Japan and Italy).
- There are economies with relatively low income inequality and high wealth inequality (such as Switzerland and Denmark).
There are different ways to measure income inequality and wealth inequality. Different choices lead to different results. The Organisation for Economic Co-operation and Development (OECD) provides data on the following eight types of income inequality:
- Dispersion of hourly wages among full-time (or full-time equivalent) workers
- Wage dispersion among workers – E.g. annual wages, including wages from part-time work or work during only part of the year.
- Individual earnings inequality among all workers – Includes the self-employed.
- Individual earnings inequality among the entire working-age population – Includes those who are inactive, e.g. students, unemployed, early pensioners, etc.
- Household earnings inequality – Includes the earnings of all household members.
- Household market income inequality – Includes incomes from capital, savings and private transfers.
- Household disposable income inequality – Includes public cash transfers received and direct taxes paid.
- Household adjusted disposable income inequality – Includes publicly provided services.
There are many challenges in comparing data between economies, or in a single economy in different years. Examples of challenges include:
- Data can be based on joint taxation of couples (e.g. France, Germany, Ireland, Netherlands, Portugal and Switzerland) or individual taxation (e.g. Australia, Canada, Italy, Japan, New Zealand, Spain, the UK).
- The tax authorities generally only collect information on income that is potentially taxable.
- The precise definition of gross income varies from country to country. There are differences when it comes to inclusion of pension entitlements and other savings, and benefits such as employer provided health insurance.
- Differences when it comes under-declaration of income and/or wealth in tax filings.
- A special event like an exit from business may lead to a very high income in one year, but much lower income in other years of the person's lifetime.
- Much income and wealth in non-western countries is obtained or held extra-legally through black market and underground activities such as unregistered businesses, informal property ownership arrangements, etc.
A 2011 study "Divided we Stand: Why Inequality Keeps Rising” by the Organisation for Economic Co-operation and Development (OECD) investigated economic inequality in OECD countries, including the following factors:
- 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.
- In the bottom percentiles number of hours worked has decreased.
- The main reason for increasing inequality seems to be the difference between the demand for and supply of skills.
- 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.
- There are tentative signs of a possible convergence of inequality levels towards a common and higher average level across OECD countries.
- 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.
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."
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. The combined wealth of the "10 million dollar millionaires" grew to nearly $41 trillion in 2008. 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. 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. More recently, in January 2015, Oxfam reported that the wealthiest 1 percent will own more than half of the global wealth by 2016. 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. 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. A 2016 report by Oxfam claims that the 62 wealthiest individuals own as much wealth as the poorer half of the global population combined. 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).[unreliable source?][unreliable source?] 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." 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. 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%.
According to PolitiFact the top 400 richest Americans "have more wealth than half of all Americans combined." 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".Inherited wealth may help explain why many Americans who have become rich may have had a "substantial head start". 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". 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." In 2016, the world's billionaires increased their combined global wealth to a record $6 trillion.
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.
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....
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%.
Two researchers claim that global income inequality is decreasing, due to strong economic growth in developing countries. 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. 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.
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."
Wealth distribution within individual countries
Main article: List of countries by distribution of wealth
|Distribution of adults (%) by wealth range (USD)||Gini|
|under 10K||10K – 100K||100K – 1M||> 1M||Total|
|United States of America||239,279||301,140||44,911||31||33||31||6||100||85|
|Hong Kong, China||6,052||153,312||32,384||30||50||18||2||100||83|
|Central African Republic||2,370||800||241||99||1||0||0||100||75|
|Sao Tome and Principe||86||2,721||959||94||6||<1||0||100||73|
|Papua New Guinea||3,752||8,470||2,821||81||18||1||0||100||72|
|Antigua and Barbuda||63||19,011||6,281||59||38||3||0||100||72|
|St. Kitts and Nevis||34||23,613||8,185||56||39||5||<1||100||72|
|St. Vincent and the Grenadines||71||10,196||3,492||74||25||1||0||100||72|
|United Arab Emirates||3,777||126,791||51,882||20||51||28||1||100||71|