Economic inequality

Economic inequality is the unequal distribution of wealth, income, and assets in society. Economic inequality has existed in some form for much of human history but advances in technology and the Industrial Revolution seemingly increased rates of income inequality. Studying and measuring economic inequality poses challenges because all people do not use the same metrics to measure it and data can be difficult to collect. However, economic inequality has far-reaching implications on society, so understanding inequality is essential. Research has indicated that economic inequality increased throughout the world between the 1970s and 2020s. However, research also indicates that extreme poverty has decreased during that same period.

Overview

Economic inequality deals with the unequal distribution of economic resources, including wealth, income, and assets. Wealth and income inequality are subsets of inequality that help shape economic inequality. Income inequality is the unequal distribution of income in a society. Income is money received for work and from investments. Therefore, it includes wages, salaries, and gains made from investments. Wealth inequality is another important factor that influences economic inequality. It refers to the unequal distribution of wealth in a society. Wealth is the value of a person’s assets minus the value of his or her liabilities. Net worth is a common way to measure a person’s wealth, as this measurement finds the market value of all a person’s assets, both physical and intangible, and subtracts a person’s debts.

Wealth inequality can be a more important determining factor in economic inequality than income inequality because wealth can be leveraged to gain more economic power. For example, a person who wants a loan to start a business may need a form of collateral to obtain a loan from a financial institution. A person with a high income but little wealth may have difficulty obtaining the loan because he or she may not have collateral. However, someone with a smaller income but more assets may be able to obtain the loan more easily.

The ownership of assets is itself an important factor in determining economic inequality. This is true because the market value of assets can change over time. For example, homes that people own are generally high-value assets. The value of homes in the United States rose dramatically between the 1970s and the 2020s. Many people who purchased homes in the 1970s and 1980s in the United States saw a dramatic increase in their value by the 2020s. This increase in value outpaced increases in inflation, so their wealth dramatically increased, even though the homeowners had not done anything to increase it. This type of dramatic change in asset values also significantly affects economic inequality. Because of this phenomenon, some social scientists have begun studying asset inequality, the unequal distribution of assets, as part of overall economic inequality.

Social class is another factor that greatly influences a person’s likelihood of experiencing economic inequality. Social stratification is the idea that people in society belong to different groups based on their economic status; this hierarchical structure comprises social classes. People in the higher classes, or at the top of the hierarchy, generally hold and have access to the most economic resources. Conversely, those in the lowest classes or at the bottom of the hierarchy, generally hold and have access to the fewest economic resources. This indicates that the likelihood of experiencing economic inequality is related to one’s social class. The idea that social class relates to economic inequality is supported by research. However, the research also suggests that how closely the two are linked can fluctuate over time. For example, evidence from sociological studies suggests that in the twenty-first century, income inequality tracked more closely to one’s social class than it did in the late twentieth century. This trend indicates that social class is related to economic inequality, but their correlation degree can change over time.

People may change their likelihood of experiencing income inequality if they rise to a higher social class. However, a person’s ability to move between social classes is largely determined by the society in which a person lives. Closed societies are those in which it is difficult for people to move up or down in social class. Societies with caste systems are the epitome of closed societies because people are born into specific class roles and cannot change them. The roles in caste systems determine people’s occupations and social roles, thus determining the likelihood that they will experience economic inequality. Open societies are those in which people can move up or down in social class based on their skills and work. A meritocracy is an example of an open society as this type of society allows people with the most skills and who put in the most work to rise in social class. Although social scientists mostly agree about the idea of social stratification, people use different labels for social classes. Many social class models include an upper class, a middle class, a lower class, and a working class. Some models use more classes to help explain variations in certain societies.

Applications

Measuring inequality is challenging in part because of varying views about inequality. These differing views about inequality motivate some groups to want to research and document inequality and other groups to avoid measuring it. Measuring economic inequality is also difficult because researchers studying economic inequality also face challenges in collecting accurate, appropriate data. For example, researchers might find it challenging to draw conclusions when comparing inequality in two groups because they might not have the appropriate data to make comparisons. For example, researchers have limited data sets from the past and can use only the data they have available from different periods to make their analyses. Furthermore, collecting data about income and consumption, particularly of people in the highest economic classes, can be challenging.

Although measuring inequality is challenging, most social scientists agree that it is important to measure it to reduce inequality. One major reason that societies should measure inequality is that economic inequality can make it more difficult to produce economic growth. More equal distribution of wealth and income creates a healthier overall economy. Furthermore, reducing economic inequality often reduces the number of people experiencing extreme poverty, and people can best reduce inequality by understanding it through measurements and data.

Researchers who track inequality use different measurements and data to understand inequality and its causes. One tool used by many researchers to measure inequality is the Gini index. The Gini index is a tool that measures income distribution across a population. The Italian statistician Corrado Gini developed the index in 1912, and researchers have used it to measure economic inequality since that time. The index is an imperfect tool for measuring economic inequality largely because of limits on available data and because it measures only one aspect of people’s economic well-being. Nevertheless, it is useful because it uses data that is available from many groups. A higher Gini index indicates greater economic inequality, with people in the top economic class having higher incomes. In the early 2020s, the United States had a Gini Coefficient of roughly 41.1, which represented a high level of economic inequality in a developed nation.

People measure economic inequality in the same group and between groups. For example, researchers study economic inequality in the United States to determine inequality among groups of people in the United States. Researchers break down how groups are affected by economic inequality. Researchers have found that certain social groups, such as specific races or genders, are affected by economic inequality at different rates. Such findings indicate that economic inequality is related to other types of social inequality, such as racial and gender inequality. People also measure economic inequality among countries. Such measurements help researchers understand how economic resources are allocated throughout the world and whether that allocation changes over time.

When educators are focused on recognizing and responding to other people’s trauma, they can sometimes overlook their own needs. When professionals focus on other people’s trauma, they can experience secondary traumatic stress (STS)—a common reaction in people who help individuals undergoing trauma. Teachers often listen to students discuss traumatic experiences. STS can have negative consequences, such as professional burnout, mental and physical health problems, and strained relationships. Educators should use appropriate stress-management routines or seek professional help if they experience STS.

Viewpoints

Views concerning social inequality are extremely wide-ranging. People not only disagree about the causes and solutions of inequality but also about the fundamental ideas regarding why groups have unequal outcomes. People disagree about whether inequality is an individual or a social problem. Some believe that certain individuals try harder and deserve more, while others do not try as hard and deserve less. Others contend that societies create systems that cause inequality among different groups. Ideas about whether social inequality is an individual or a social problem run along a continuum, with one end of the spectrum asserting that inequality will always exist because of natural differences among individuals and because people’s contributions to society are not equal. On the other end of the spectrum are those who contend that social systems largely create social inequality. These individuals contend that inequality is not inevitable or the result of major variations in the characteristics of groups.

People cannot disagree fundamentally that types of inequality exist because data indicates not all groups in society have the same outcomes. For example, Americans cannot argue that racial inequality does not exist because data shows that people of some races have different economic, health, and social outcomes. All other factors being equal, a White American is more likely than a Black American to have good health, a higher income, and more wealth. Although one cannot deny the existence of such unequal outcomes, people do disagree about the causes of such inequalities.

People have thought about economic inequality for as long as it has existed. For example, the philosopher Aristotle spoke about inequality and believed that extreme inequality caused people at both ends of the economic spectrum to become inefficient in their work. He believed that reducing inefficiency helped society in general. Many future philosophers and economists shared Aristotle’s view, though many had different ideas about reducing inequality. Jean-Jacques Rousseau was a Genevan philosopher who wrote about inequality in the 1700s and asserted that one of government’s most important roles was to “prevent extreme inequality of fortunes.” Rousseau supported the idea of reducing economic inequality by arguing that it allows people with the most economic resources to shape laws and government in their own view. He argued that societies with more economic equality had fairer laws.

Karl Marx, the German philosopher famous for his political philosophy, also wrote about economic inequality in the 1800s. Marx was concerned about economic inequality, but his solution for inequality was to replace capitalism with another form of government. Marx did not address inequality under capitalism because he did not believe that capitalism was a sustainable economic model. Max Weber was a philosopher who also wrote about inequality in the 1800s but came to different conclusions about inequality and the best ways of addressing it than Marx did. Like Marx, Weber believed that social stratification had an important effect on economic inequality but also argued that one’s status, social power, or political power, also played a role in determining one’s economic status. Weber asserted that individuals could create change in the allocation of economic resources through social action and not only class conflict, as Marx had believed.

In the early twenty-first century, French economist Thomas Picketty published the book Capital in the Twenty-First Century. which posited that economic inequality had risen throughout the late twentieth and early twenty-first centuries. In his analysis of the data, Picketty argues that the economic inequality that developed between the 1700s and 2000s is a natural result of capitalism. He also argues that economic inequality will persist because of capitalism unless governments impose income taxes, possibly reaching up to 80 percent of a person’s income. He acknowledges, however, that such a tax would be politically impossible.

Picketty’s statistical findings, if not his analysis of the data, were supported by other research conducted around the same time. Measurements of the Gini index seemed to support Picketty’s claims, as the Gini index showed an overall steady increase from the 1800s to the 2020s. This indicates that, at least according to one measurement, economic inequality increased between the early nineteenth and twenty-first centuries. For example, Albertini found that blue-collar workers in the early twenty-first century had lost wealth to white-collar workers compared to the same two groups of workers in the late twentieth century. Albertini also found that managers in blue-collar positions and managers in white-collar positions had a much wider gap in wages in the early twenty-first century compared to the wage gap of the late twentieth century.

Although people with more progressive ideologies often cited Picketty’s research and analysis, economists with more conservative ideologies disagreed with the analysis. For example, American economists Kevin Murphy and Robert Topel argued against Picketty’s analysis of the data. Murphy and Topel acknowledged the existence of economic inequality but argue that economic inequality is not a natural result of capitalism and can be solved through means other than taxing income. Instead, Murphy and Topel assert that inequality developed between the late twentieth and early twenty-first centuries because of a skills gap in the labor market. Between the 1970s and 2010s, many more people in the economies that Picketty studied (among those of the United States and the United Kingdom) received a college education. Murphy and Topel believed that the income gap occurred because employers were willing to pay higher wages to workers whose skills fit their needs.

In a 2024 publication, the Federal Reserve Bank of St. Louis studied wealth inequality in the United States. It noted there were 131 million families in the United States who held about $139 trillion in household wealth. The wealth distribution among American families was such that 13 million families (10% of all families) owned 70% of the nation’s household wealth. The share for the next 52 million families (40% of families) was 24%. The remaining 65 million families (50%) owned 2 percent of the wealth of the US.

The study did note positive trends. This included an overall increase in household wealth in the United States. Furthermore, several racial groups had notable percentage gains. This included Black and Hispanic families, including those where members had less than a bachelor’s degree. Nonetheless, the wealth gap between White, Black, and Hispanic families had grown significantly.

About the Author

Elizabeth Mohn earned a BS in communications in 2006. She has developed social sciences content for more than a decade.

Bibliography

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