Economic inequality

Economic inequality

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Encyclopedia
Economic inequality comprises all disparities in the distribution of economic assets and income
Income
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...

. The term typically refers to inequality among individuals and groups within a society, but can also refer to inequality among countries
International inequality
International inequality is inequality between countries . Economic differences between rich and poor countries are considerable...

. The issue of economic inequality is related to the ideas of equity
Equity (economics)
Equity is the concept or idea of fairness in economics, particularly as to taxation or welfare economics. More specifically it may refer to equal life chances regardless of identity, to provide all citizens with a basic minimum of income/goods/services or to increase funds and commitment for...

: equality of outcome
Equality of outcome
Equality of outcome, equality of condition, or equality of results is a controversial political concept. Although it is not always clearly defined, it is usually taken to describe a state in which people have approximately the same material wealth or, more generally, in which the general conditions...

 and equality of opportunity. The main instrument which diminishes economic inequality, progressive taxation, has been demonstrated to be effective in international comparisons of income compression and wealth distribution. It is a contested issue whether economic inequality is a negative phenomenon, both on utilitarian and moral grounds. A book published in 2009 claims that negative social phenomena such as shorter life expectancy, higher disease rates, homicide, infant mortality, obesity, teenage pregnancies, emotional depression and prison population correlate with higher socioeconomic inequality. It has been argued that a growing concentration of wealth precedes economic boom-bust cycles which are associated with rising unemployment and falling incomes, and hence a loss of social welfare. It has also been argued that growing wealth disparity creates poverty.

Economic inequality has existed in a wide range of societies and historical periods; its nature, cause and importance are open to broad debate. A country's economic structure or system (for example, capitalism
Capitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...

 or socialism
Socialism
Socialism is an economic system characterized by social ownership of the means of production and cooperative management of the economy; or a political philosophy advocating such a system. "Social ownership" may refer to any one of, or a combination of, the following: cooperative enterprises,...

), ongoing or past wars, and differences in individuals' abilities to create wealth are all involved in the creation of economic inequality.

Economic inequality can decline or increase over time. For example, inequality declined in the U.S. from 1890 to 1940 because the supply of skilled workers outpaced demand, as the high school movement
High school movement
The high school movement is a term used in educational history literature to describe the era from 1910 to 1940 during which secondary schools sprouted across the United States...

 generated skilled workers and border closure reduced the supply of low-skilled immigrants. Inequality increased in the U.S. from 1970 to 2000 with skill-biased technical change. Other factors that increased inequality after 1970 were: the decline of unions
Trade union
A trade union, trades union or labor union is an organization of workers that have banded together to achieve common goals such as better working conditions. The trade union, through its leadership, bargains with the employer on behalf of union members and negotiates labour contracts with...

 in the U.S. with the Taft-Hartley law; the rapid increase in salaries for the top 0.1 %; the increase in business income with technological innovation; the stasis in high school completion rates at about 70%; and successful changes in Republican political strategies to focus on cultural issues in elections and tax reduction in office, largely beginning with Ronald Reagan
Ronald Reagan
Ronald Wilson Reagan was the 40th President of the United States , the 33rd Governor of California and, prior to that, a radio, film and television actor....

.

There are various numerical indic
Index (economics)
In economics and finance, an index is a statistical measure of changes in a representative group of individual data points. These data may be derived from any number of sources, including company performance, prices, productivity, and employment. Economic indices track economic health from...

es for measuring economic inequality. Inequality is most often measured using the Gini coefficient
Gini coefficient
The Gini coefficient is a measure of statistical dispersion developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper "Variability and Mutability" ....

, but there are also many other methods
Income inequality metrics
The concept of inequality is distinct from that of poverty and fairness. Income inequality metrics or income distribution metrics are used by social scientists to measure the distribution of income, and economic inequality among the participants in a particular economy, such as that of a specific...

.

Magnitude of inequality in the modern world


A study by the World Institute for Development Economics Research at United Nations University
United Nations University
The United Nations University is an academic arm of the United Nations established in 1973, which serves purposes and principles of the Charter of the United Nations. The UNU undertakes research into the pressing global problems of human survival, development and welfare that are the concern of...

 reports that the richest 1% of adults alone owned 40% of global assets in the year 2000. The three richest people possess more financial
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...

 assets than the lowest 48 nations combined. The combined wealth of the "10 million dollar millionaires" grew to nearly $41 trillion in 2008. In 2001, 46.4% of people in sub-Saharan Africa
Sub-Saharan Africa
Sub-Saharan Africa as a geographical term refers to the area of the African continent which lies south of the Sahara. A political definition of Sub-Saharan Africa, instead, covers all African countries which are fully or partially located south of the Sahara...

 were living in extreme poverty
Poverty
Poverty is the lack of a certain amount of material possessions or money. Absolute poverty or destitution is inability to afford basic human needs, which commonly includes clean and fresh water, nutrition, health care, education, clothing and shelter. About 1.7 billion people are estimated to live...

. Nearly half of all Indian children are undernourished, however, even among the wealthiest fifth one third of children are malnourished.

A 2011 report by the Organisation for Economic Co-operation and Development (OECD) notes that, over the two decades prior to the onset of the global financial crisis, real disposable household incomes increased an average of 1.7% a year in its 34 member countries. However, the gap between rich and poor widened in most nations. The report's findings include: 1) Across OECD countries, the average income of the richest 10% of the population is nine times that of the poorest 10%. Additionally, with the exceptions of only France, Japan and Spain, wages of the 10% best-paid workers have risen relative to those of the 10% least-paid workers; and 2), the differential between the top and bottom 10% varies greatly from country to country: “While this ratio is much lower in the Nordic countries and in many continental European countries, it rises to around 14 to 1 in Israel, Turkey and the United States, to a high of 27 to 1 in Chile and Mexico.”

Although a discussion exists about the recent trends in global inequality, the issue is anything but clear, and this holds true for both the overall global inequality trend and for its between-country and within-country components. 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.

Causes of inequality


There are many reasons for economic inequality within societies. These causes are often inter-related. Acknowledged factors that impact economic inequality include:
  • the labor market
  • innate ability
  • taxes
  • education
  • computerization/growing technology
  • globalization
  • racism
  • gender
  • culture
  • wealth condensation
  • development patterns
  • personal preference for work, leisure and risk

The labor market


A major cause of economic inequality within modern market economies
Market economy
A market economy is an economy in which the prices of goods and services are determined in a free price system. This is often contrasted with a state-directed or planned economy. Market economies can range from hypothetically pure laissez-faire variants to an assortment of real-world mixed...

 is the determination of wages by the market. Inequality is caused by the differences in the supply and demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...

 for different types of work. In a purely capitalist mode of production
Capitalist mode of production
In Marx's critique of political economy, the capitalist mode of production is the production system of capitalist societies, which began in Europe in the 16th century, grew rapidly in Western Europe from the end of the 18th century, and later extended to most of the world...

 (i.e. where professional and labor organizations cannot limit the number of workers) the workers wages will not be controlled by these organizations, nor by the employer, but rather by the market. Wages work in the same way as prices for any other good. Thus, wages can be considered as a function of market price of skill. And therefore, inequality is driven by this price. Under the law of supply and demand, the price of skill is determined by a race between the demand for the skilled worker and the supply of the skilled worker. We would expect the price to rise when demand exceeds supply, and vice versa. Employers who offer a below market wage will find that their business is chronically understaffed. Their competitors will take advantage of the situation by offering a higher wage to snatch up the best of their labor. For a businessman who has the profit motive as the prime interest, it is a losing proposition to offer below or above market wages to workers.

A job where there are many workers willing to work a large amount of time (high supply) competing for a job that few require (low demand) will result in a low wage
Wage
A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...

 for that job. This is because competition
Competition
Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. It arises whenever two and only two strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For...

 between workers drives down the wage. An example of this would be jobs such as dish-washing or customer service. Competition amongst workers tends to drive down wages due to the expendable nature of the worker in relation to his or her particular job. A job where there are few able or willing workers (low supply), but a large need for the positions (high demand), will result in high wages for that job. This is because competition between employers for employees will drive up the wage. Examples of this would include jobs that require highly developed skills, rare abilities, or a high level of risk
Risk
Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...

. Competition amongst employers tends to drive up wages due to the nature of the job, since there is a relative shortage of workers for the particular position. Professional and labor organizations may limit the supply of workers which results in higher demand and greater incomes for members. Members may also receive higher wages through collective bargaining
Collective bargaining
Collective bargaining is a process of negotiations between employers and the representatives of a unit of employees aimed at reaching agreements that regulate working conditions...

, political influence, or corruption.

These supply and demand interactions result in a gradation of wage levels within society that significantly influence economic inequality.

Innate ability


Many people believe that differences in ability, such as intelligence
Intelligence
Intelligence has been defined in different ways, including the abilities for abstract thought, understanding, communication, reasoning, learning, planning, emotional intelligence and problem solving....

, motivation
Motivation
Motivation is the driving force by which humans achieve their goals. Motivation is said to be intrinsic or extrinsic. The term is generally used for humans but it can also be used to describe the causes for animal behavior as well. This article refers to human motivation...

, strength
Strength
- Physical ability :*Physical strength, as in people or animals*Superhuman strength, as in fictional characters*A common character attribute in role-playing gamesConflict between persons or groups:*Virtue and moral uprightness...

, or charisma
Charisma
The term charisma has two senses: 1) compelling attractiveness or charm that can inspire devotion in others, 2) a divinely conferred power or talent. For some theological usages the term is rendered charism, with a meaning the same as sense 2...

, are largely innate and play a significant role in determining an individual's wealth. Individuals with higher ability are in greater demand increasing the wage of those who have them. Individuals with high abilities might also operate more effectively within society in general, regardless of the labor market.

Various studies have been conducted on the correlation between IQ scores and wealth or income. The book IQ and the Wealth of Nations
IQ and the Wealth of Nations
IQ and the Wealth of Nations is a controversial 2002 book by Dr. Richard Lynn, Professor Emeritus of Psychology at the University of Ulster, Northern Ireland, and Dr. Tatu Vanhanen, Professor Emeritus of Political Science at the University of Tampere, Tampere, Finland...

, written by Dr. Richard Lynn
Richard Lynn
Richard Lynn is a British Professor Emeritus of Psychology at the University of Ulster who is known for his views on racial and ethnic differences. Lynn argues that there are hereditary differences in intelligence based on race and sex....

, examines this relationship constructing a correlation of 0.82 between average IQ and GDP. Peer-reviewed research papers on the relationship have been criticised harshly. In his book The Mismeasure of Man
The Mismeasure of Man
The Mismeasure of Man , by Stephen Jay Gould, is a history and critique of the statistical methods and cultural motivations underlying biological determinism, the belief that “the social and economic differences between human groups — primarily races, classes, and sexes — arise from inherited,...

, Stephen Jay Gould
Stephen Jay Gould
Stephen Jay Gould was an American paleontologist, evolutionary biologist, and historian of science. He was also one of the most influential and widely read writers of popular science of his generation....

 criticized intelligence testing, claiming that the tests and the statistical models used to evaluate them are inherently flawed. There is also the highly contested study The Bell Curve
The Bell Curve
The Bell Curve is a best-selling and controversial 1994 book by the Harvard psychologist Richard J. Herrnstein and political scientist Charles Murray...

, which provides analysis that intelligence is substantially influenced by both genetics and environment and plays an increasing role in social stratification.

Taxes



Another cause is the rate at which income is taxed
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...

 coupled with the progressivity
Progressive tax
A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...

 of the tax system. A progressive tax
Progressive tax
A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...

 is a tax by which the tax rate increases as the taxable base amount increases. In a progressive tax system, the level of the top tax rate will have a direct impact on the level of inequality within a society, either increasing it or decreasing it. Additionally, a steeper progressivity results in an even more equal distribution of income across the board. The difference between the Gini index for an income distribution before taxation and the Gini index after taxation is an indicator for the effects of such taxation. Overall income tax rates in the United States are below the OECD
Organisation for Economic Co-operation and Development
The Organisation for Economic Co-operation and Development is an international economic organisation of 34 countries founded in 1961 to stimulate economic progress and world trade...

 average.

There is debate between politicians and economists over the role of tax policy in mitigating or exacerbating wealth inequality. Economists such as Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...

, Peter Orszag
Peter Ország
Peter Ország is a Slovak ice hockey referee, who referees in the Slovak Extraliga.-Career:He has officiated many international tournaments including the Winter Olympics. He has been named Slovak referee of the year....

, and Emmanuel Saez
Emmanuel Saez
Emmanuel Saez is a French economist. Saez is Professor of Economics at the University of California, Berkeley...

 have argued that tax policy in the post World War II era has indeed increased income inequality by enabling the wealthiest American workers far greater access to capital than lower-income Americans. Other economists and politicians, such as Paul Ryan
Paul Ryan
Paul Ryan may refer to:* Paul Ryan , member of the U.S. House of Representatives* Paul Ryan , music agent for The Agency, former Cradle of Filth guitarist* Paul Ryan , comics artist...

, do not believe tax policy has created a chasm of wealth between the wealthy, middle, and lower class Americans.

Computerization/Innovative Technology


Another factor that contributed to the already growing inequality in the 20th century was computerization and growth in technology with electricity replacing manpower. With this growing change in technology, the United States experienced increasing demand for skilled workers to use computers and operate the electrical inventions. This resulted in a rightward shift in the Demand for Skilled Labor Supply, and this created an increase in the relative wages of the skilled compared to the wages of the unskilled workers. Such a change in wages added to the inequality that was already present.

Martin Ford, author of The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future, argues that income inequality is likely to continue increasing as more jobs become susceptible to automation. As robotics and artificial intelligence develop further, even many skilled jobs may be threatened. Technologies such as machine learning may ultimately allow computers to do many knowledge-based jobs that require significant education. This may result in substantial unemployment at all skill levels, stagnant or falling wages for most workers, and increased concentration of income and wealth as the owners of capital capture an ever larger fraction of the economy. This in turn could lead to depressed consumer spending and economic growth as the bulk of the population lacks sufficient discretionary income to purchase the products and services produced by the economy; see Surplus value
Surplus value
Surplus value is a concept used famously by Karl Marx in his critique of political economy. Although Marx did not himself invent the term, he developed the concept...

.

Education


One important factor in the creation of inequality is variation in individuals' access to education. Education, especially in an area where there is a high demand for workers, creates high wages for those with this education. As a result, those who are unable to afford an education, or choose not to pursue optional education, generally receive much lower wages. During the mass high school education movement from 1910–1940, there was an increase in skilled workers which led to a decrease in the price of skilled labor. High school
High school
High school is a term used in parts of the English speaking world to describe institutions which provide all or part of secondary education. The term is often incorporated into the name of such institutions....

 education during the period was designed to equip students with necessary skill sets to be able to perform at work. In fact, it differs from the present high school education, which is regarded as a stepping stone to acquire college and advanced degrees. This decrease in wages caused a period of compression and decreased inequality between skilled and unskilled workers.

Economic neoliberalism


John Schmitt and Ben Zipperer (2006) of the CEPR point to economic liberalism
Economic liberalism
Economic liberalism is the ideological belief in giving all people economic freedom, and as such granting people with more basis to control their own lives and make their own mistakes. It is an economic philosophy that supports and promotes individual liberty and choice in economic matters and...

 and the reduction of business regulation
Regulation
Regulation is administrative legislation that constitutes or constrains rights and allocates responsibilities. It can be distinguished from primary legislation on the one hand and judge-made law on the other...

 along with the decline of union membership as one of the causes of economic inequality. In an analysis of the effects of intensive Anglo-American neoliberal policies in comparison to continental European neoliberalism, where unions have remained strong, they concluded "The U.S. economic and social model is associated with substantial levels of social exclusion, including high levels of income inequality, high relative and absolute poverty rates, poor and unequal educational outcomes, poor health outcomes, and high rates of crime and incarceration. At the same time, the available evidence provides little support for the view that U.S.-style labor-market flexibility dramatically improves labor-market outcomes. Despite popular prejudices to the contrary, the U.S. economy consistently affords a lower level of economic mobility than all the continental European countries for which data is available."

Globalization


Trade liberalization
Free trade
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...

 may shift economic inequality from a global to a domestic scale. When rich countries trade with poor countries, the low-skilled workers in the rich countries may see reduced wages as a result of the competition, while low-skilled workers in the poor countries may see increased wages. Trade economist Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...

 estimates that trade liberalisation has had a measurable effect on the rising inequality in the United States. He attributes this trend to increased trade with poor countries and the fragmentation of the means of production
Means of production
Means of production refers to physical, non-human inputs used in production—the factories, machines, and tools used to produce wealth — along with both infrastructural capital and natural capital. This includes the classical factors of production minus financial capital and minus human capital...

, resulting in low skilled jobs becoming more tradeable. However, he concedes that the effect of trade on inequality in America is minor when compared to other causes, such as technological innovation, a view shared by other experts. Lawrence Katz estimates that trade has only accounted for 5-15% of rising income inequality. Some economists, such as Robert Lawrence
Robert Z. Lawrence
Robert Zachary Lawrence , a former South African national, is the current Albert L. Williams Professor of International Trade and Investment at John F. Kennedy School of Government at Harvard University. He is also a Senior Fellow at the Peterson Institute for International Economics, and a...

, dispute any such relationship. Lawrence, in particular, argues that technological innovation and automation has meant that low-skilled jobs have been replaced by machine labor in wealthier nations, and that wealthier countries no longer have significant numbers of low-skilled manufacturing workers that could be affected by competition from poor countries.

Gender, race, and culture


The existence of different gender
Gender
Gender is a range of characteristics used to distinguish between males and females, particularly in the cases of men and women and the masculine and feminine attributes assigned to them. Depending on the context, the discriminating characteristics vary from sex to social role to gender identity...

s, races and culture
Culture
Culture is a term that has many different inter-related meanings. For example, in 1952, Alfred Kroeber and Clyde Kluckhohn compiled a list of 164 definitions of "culture" in Culture: A Critical Review of Concepts and Definitions...

s within a society is also thought to contribute to economic inequality. Some psychologists such as Richard Lynn
Richard Lynn
Richard Lynn is a British Professor Emeritus of Psychology at the University of Ulster who is known for his views on racial and ethnic differences. Lynn argues that there are hereditary differences in intelligence based on race and sex....

 argue that there are innate group differences in ability that are partially responsible for producing race and gender group differences in wealth (see also race and intelligence
Race and intelligence
The connection between race and intelligence has been a subject of debate in both popular science and academic research since the inception of intelligence testing in the early 20th century...

, sex and intelligence
Sex and intelligence
Research on sex and psychology investigates cognitive and behavioral differences between men and women. This research employs experimental tests of cognition, which take a variety of forms. Tests focus on possible differences in areas such as IQ, spatial reasoning, and emotion.Most IQ tests are...

) though this assertion is highly controversial. The concept of the gender gap
Gender gap
Gender gap may refer to:*Gender differences in a general psycho-social context*Gender pay gap*Income disparity by gender in a purely economic context*The Global Gender Gap Report*Father's rights in child custody determinations of family courts...

 also tries to explain differences in income between genders.

Culture
Culture
Culture is a term that has many different inter-related meanings. For example, in 1952, Alfred Kroeber and Clyde Kluckhohn compiled a list of 164 definitions of "culture" in Culture: A Critical Review of Concepts and Definitions...

 and religion
Religion
Religion is a collection of cultural systems, belief systems, and worldviews that establishes symbols that relate humanity to spirituality and, sometimes, to moral values. Many religions have narratives, symbols, traditions and sacred histories that are intended to give meaning to life or to...

 are thought to play a role in creating inequality by either encouraging or discouraging wealth-acquiring behavior, and by providing a basis for discrimination
Discrimination
Discrimination is the prejudicial treatment of an individual based on their membership in a certain group or category. It involves the actual behaviors towards groups such as excluding or restricting members of one group from opportunities that are available to another group. The term began to be...

. In many countries individuals belonging to certain racial and ethnic minorities are more likely to be poor. Proposed causes include cultural differences amongst different races, an educational achievement gap
Achievement gap
Achievement gap refers to the observed disparity on a number of educational measures between the performance of groups of students, especially groups defined by gender, race/ethnicity, and socioeconomic status. The achievement gap can be observed on a variety of measures, including standardized...

, and racism
Racism
Racism is the belief that inherent different traits in human racial groups justify discrimination. In the modern English language, the term "racism" is used predominantly as a pejorative epithet. It is applied especially to the practice or advocacy of racial discrimination of a pernicious nature...

.

Gender


In many countries, there is a gender income gap
Gender inequality
Gender inequality refers to disparity between individuals due to gender. Gender is constructed both socially through social interactions as well as biologically through chromosomes, brain structure, and hormonal differences. Gender systems are often dichotomous and hierarchical; binary gender...

 which favors males in the labor market. For example, the median full-time salary for U.S. women is 77% of that of U.S. men. Several factors other than discrimination may contribute to this gap. On average, women are more likely than men to consider factors other than pay when looking for work, and may be less willing to travel or relocate. Thomas Sowell
Thomas Sowell
Thomas Sowell is an American economist, social theorist, political philosopher, and author. A National Humanities Medal winner, he advocates laissez-faire economics and writes from a libertarian perspective...

, in his book Knowledge and Decisions
Knowledge and Decisions
Knowledge and Decisions is a non-fiction book by American economist Thomas Sowell. Sowell explicates social and economic knowledge and how it is transmitted through the many facets of society, and how that transmission affects decisions made. The book's central theme is drawn from F.A...

, claims that this difference is due to women not taking jobs due to marriage or pregnancy, but income studies show that that does not explain the entire difference. Men are far more likely to engage in dangerous occupations which often pay more than positions desired and sought by women. The U.S. Census's report on the wage gap reported "When we account for difference between male and female work patterns as well as other key factors, women earned, on average, 80 percent of what men earned in 2000… Even after accounting for key factors that affect earnings, our model could not explain all of the differences in earnings between men and women." The income gap in other countries ranges from 53% in Botswana to -40% in Bahrain. In the United States, among women and men who never marry or have children, women make more than men. Additionally, women who work part-time make more on average than men who work part-time.

Gender inequality
Gender inequality
Gender inequality refers to disparity between individuals due to gender. Gender is constructed both socially through social interactions as well as biologically through chromosomes, brain structure, and hormonal differences. Gender systems are often dichotomous and hierarchical; binary gender...

 and discrimination is argued to cause and perpetuate poverty and vulnerability in society as a whole. Household and intra-household knowledge and resources are key influences in individuals' abilities to take advantage of external livelihood opportunities or respond appropriately to threats. High education levels and social integration significantly improve the productivity of all members of the household and improve equity
Equity (finance)
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...

 throughout society. Gender Equity Indices seek to provide the tools to demonstrate this feature of poverty.

Diversity of preferences


Related to cultural issues, diversity of preferences within a society often contributes to economic inequality. When faced with the choice between working harder to earn more money or enjoying more leisure time, equally capable individuals with identical earning potential often choose different strategies. This leads to economic inequality even in societies with perfect equality in abilities and circumstances. The trade-off between work and leisure is particularly important in the supply side of the labor market in labor economics.

Likewise, individuals in a society often have different levels of risk aversion
Risk aversion
Risk aversion is a concept in psychology, economics, and finance, based on the behavior of humans while exposed to uncertainty....

. When equally-able individuals undertake risky activities with the potential of large payoffs, such as starting new businesses, some ventures succeed and some fail. The presence of both successful and unsuccessful ventures in a society results in economic inequality even when all individuals are identical.

Development patterns



Simon Kuznets
Simon Kuznets
Simon Smith Kuznets was a Russian American economist at the Wharton School of the University of Pennsylvania who won the 1971 Nobel Memorial Prize in Economic Sciences "for his empirically founded interpretation of economic growth which has led to new and deepened insight into the economic and...

 argued that levels of economic inequality are in large part the result of stages of development
Economic development
Economic development generally refers to the sustained, concerted actions of policymakers and communities that promote the standard of living and economic health of a specific area...

. Kuznets saw a curve-like relationship between level of income and inequality, now known as Kuznets curve
Kuznets curve
A Kuznets curve is the graphical representation of Simon Kuznets' hypothesis that economic inequality increases over time while a country is developing, and then after a certain average income is attained, inequality begins to decrease....

. According to Kuznets, countries with low levels of development have relatively equal distributions of wealth. As a country develops, it acquires more capital, which leads to the owners of this capital having more wealth and income and introducing inequality. Eventually, through various possible redistribution mechanisms such as social welfare programs, more developed countries move back to lower levels of inequality. Kuznets demonstrated this relationship using cross-sectional data
Cross-sectional data
Cross-sectional data or cross section in statistics and econometrics is a type of one-dimensional data set. Cross-sectional data refers to data collected by observing many subjects at the same point of time, or without regard to differences in time...

. However, more recent testing of this theory with superior panel data
Panel data
In statistics and econometrics, the term panel data refers to multi-dimensional data. Panel data contains observations on multiple phenomena observed over multiple time periods for the same firms or individuals....

 has shown it to be very weak. Kuznets' curve predicts that income inequality will eventually decrease given time. As an example, income inequality did fall in the United States during its High School Movement in the 1940s and after. However, recent data shows that the level of income inequality began to rise after the 1970s. This does not necessarily disprove Kuznets' theory. It may be possible that another Kuznets' cycle is occurring, specifically the move from the manufacturing sector to the service sector. This implies that it may be possible for multiple Kuznets' cycles to be in effect at any given time.

Wealth concentration



Wealth concentration is a theoretical process by which, under certain conditions, newly-created wealth
Wealth
Wealth is the abundance of valuable resources or material possessions. The word wealth is derived from the old English wela, which is from an Indo-European word stem...

 concentrates in the possession of already-wealthy individuals or entities. According to this theory, those who already hold wealth have the means to invest in new sources of creating wealth or to otherwise leverage the accumulation of wealth, thus are the beneficiaries of the new wealth. Over time, wealth condensation can significantly contribute to the persistence of inequality within society.

As an example of wealth concentration, truck drivers who own their own trucks often make more money than those who do not, since the owner of a truck can escape the rent charged to drivers by owners (even taking into account maintenance and other costs). Hence, a truck driver who has wealth to begin with can afford to buy his own truck in order to make more money. A truck driver who does not own his own truck makes a lesser wage and is therefore stuck in a Catch-22
Catch-22 (logic)
A Catch-22, coined by Joseph Heller in his novel Catch-22, is a logical paradox arising from a situation in which an individual needs something that can only be acquired with an action that will lead him to that very situation he is already in; therefore, the acquisition of this thing becomes...

, unable to buy his own truck to increase his income.

As another example of wealth concentration, savings from the upper-income groups tend to accumulate much faster than saving from the lower-income groups. Upper-income groups can save a significant portion of their incomes. On the other hand, lower-income groups barely make enough to cover their consumptions, hence only capable of saving a fraction of their incomes or even none. Assuming both groups earn the same yield rate on their savings, the return on upper-income groups’ savings are much greater than the lower-income groups’ savings because upper-income groups have a much larger base.

Related to wealth concentration are the effects of intergenerational inequality and housing inequality
Housing inequality
Housing inequality refers to the differences in the quality of housing that exist within a given society. It has implications for the options available to an individual or family and tends to focus on the negative aspects of inequality...

. The rich tend to provide their offspring with a better education, increasing their chances of achieving a high income. Furthermore, the wealthy often leave their offspring with a hefty inheritance
Inheritance
Inheritance is the practice of passing on property, titles, debts, rights and obligations upon the death of an individual. It has long played an important role in human societies...

, jump-starting the process of wealth condensation for the next generation. However, it has been contended by some sociologists such as Charles Murray
Charles Murray (author)
Charles Alan Murray is an American libertarian political scientist, author, columnist, and pundit working as a fellow at the American Enterprise Institute, a conservative think tank in Washington, DC...

 that this has little effect on one's long-term outcome and that innate ability is by far the best determinant of one's lifetime outcome.

In his 1985 book Regular Economic Cycles: Money, Inflation, Regulation and Depressions, Ravi Batra
Ravi Batra
Raveendra Nath "Ravi" Batra is an Indian-American economist, author, and professor at Southern Methodist University. Batra is the author of six international bestsellers, two of which appeared on The New York Times Best Seller list...

 argues that a growing concentration of wealth, measured as the 'share of wealth held by the richest 1 percent', is linked to bank failures and depressions. In Table 1 on page 127, there is data for this measure for the years 1810-1969, showing a rise in this measure prior to the 1929 stock market crash.
"...as the concentration of wealth rises, the number of banks with relatively shaky loans also rises. And the higher the concentration, the greater is the number of potential bank failures."
Batra predicted the same would happen if the 1% share rose again.

Inflation


Some Austrian school
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...

 economists have theorized that high inflation, caused by a country's monetary policy
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...

, can contribute to economic inequality. This theory argues that inflation of the money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...

 is a coercive measure that favors those who already have an earning capacity, disfavoring those on fixed income or with savings, thus aggravating inequality. They cite examples of correlation between inflation and inequality and note that inflation can be caused independently by "printing money", suggesting causation of inequality by inflation.

Mobility


Entrenched strata of power -- whether economic, political, status, ascribed, or meritocratic -- can lead to decreased mobility
Mobility
Mobility may refer to:* Mobility * "Mobiliy" , a song by Moby* Mobility * Mobility , the ability of military units or weapon systems to move to an objective-See also:* Academic mobility* Apprentices mobility...

 by he assertion of that power, and lead to increased inequality.

Mitigating factors


Many factors constrain economic inequality - they may be divided into two classes: government sponsored, and market driven. The relative merits and effectiveness of each approach is a subject of debate.

Typical government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...

 initiatives to reduce economic inequality include:
  • Public education
    Public education
    State schools, also known in the United States and Canada as public schools,In much of the Commonwealth, including Australia, New Zealand, South Africa, and the United Kingdom, the terms 'public education', 'public school' and 'independent school' are used for private schools, that is, schools...

    : increasing the supply of skilled labor and reducing income inequality due to education differentials.
  • Progressive tax
    Progressive tax
    A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...

    ation: the rich are taxed proportionally more than the poor, reducing the amount of income inequality in society.
  • Minimum wage
    Minimum wage
    A minimum wage is the lowest hourly, daily or monthly remuneration that employers may legally pay to workers. Equivalently, it is the lowest wage at which workers may sell their labour. Although minimum wage laws are in effect in a great many jurisdictions, there are differences of opinion about...

     legislation: raising the income of the poorest workers (though probably increasing unemployment).
  • Nationalization
    Nationalization
    Nationalisation, also spelled nationalization, is the process of taking an industry or assets into government ownership by a national government or state. Nationalization usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, being...

     or subsidization
    Subsidy
    A subsidy is an assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry or an increase in the prices of its products or simply to encourage it to hire more labor A subsidy (also...

     of products: providing goods and services that everyone needs cheaply or freely (such as food
    Food
    Food is any substance consumed to provide nutritional support for the body. It is usually of plant or animal origin, and contains essential nutrients, such as carbohydrates, fats, proteins, vitamins, or minerals...

    , healthcare, and housing), governments can effectively raise the purchasing power
    Purchasing power
    Purchasing power is the number of goods/services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing...

     of the poorer members of society.


These provisions may lower inequality, but have sometimes resulted in increased economic inequality (as in the Soviet Union
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....

, where the distribution of these government benefits was controlled by a privileged class
Nomenklatura
The nomenklatura were a category of people within the Soviet Union and other Eastern Bloc countries who held various key administrative positions in all spheres of those countries' activity: government, industry, agriculture, education, etc., whose positions were granted only with approval by the...

). Political scientists have argued that public policy controlled by organizations of the wealthy have steadily eroded economic equality in the US since the 1970's..

Market forces
Market Forces
Market Forces is a science fiction novel by Richard Morgan, first published in 2004.Set in 2049 in the wake of a global economic downturn called the Domino Recessions, it follows up-and-coming executive Chris as he plunges into the profitable field of Conflict Investment...

 outside of government intervention that can reduce economic inequality include:
  • propensity to spend
    Marginal propensity to consume
    In economics, the marginal propensity to consume is an empirical metric that quantifies induced consumption, the concept that the increase in personal consumer spending occurs with an increase in disposable income...

    : with rising wealth & income, a person must spend more. In an extreme example, if one person owned everything, they would immediately need to hire people to maintain their properties, thus reducing the wealth concentration
    Wealth concentration
    Wealth Concentration, also known as wealth condensation, is a process by which, in certain conditions, newly created wealth tends to become concentrated in the possession of already-wealthy individuals or entities, a form of preferential attachment...

    .
  • Unionization: although not a market force, per se, labor organizations may reduce inequality by negotiating standard pay rates (though probably increasing unemployment). As union power has declined, and performance related pay has become more widespread, economic inequality has mirrored productive inequality.

Social cohesion



Research has shown an inverse link between income inequality and social cohesion. In more equal societies, people are much more likely to trust
Trust (sociology)
In a social context, trust has several connotations. Definitions of trust typically refer to a situation characterised by the following aspects: One party is willing to rely on the actions of another party ; the situation is directed to the future. In addition, the trustor abandons control over...

 each other, measures of social capital
Social capital
Social capital is a sociological concept, which refers to connections within and between social networks. The concept of social capital highlights the value of social relations and the role of cooperation and confidence to get collective or economic results. The term social capital is frequently...

 suggest greater community involvement, and homicide
Homicide
Homicide refers to the act of a human killing another human. Murder, for example, is a type of homicide. It can also describe a person who has committed such an act, though this use is rare in modern English...

 rates are consistently lower.

One of the earliest writers to note the link between economic equality and social cohesion was Alexis de Tocqueville
Alexis de Tocqueville
Alexis-Charles-Henri Clérel de Tocqueville was a French political thinker and historian best known for his Democracy in America and The Old Regime and the Revolution . In both of these works, he explored the effects of the rising equality of social conditions on the individual and the state in...

 in his Democracy in America
Democracy in America
De la démocratie en Amérique is a classic French text by Alexis de Tocqueville. A "literal" translation of its title is Of Democracy in America, but the usual translation of the title is simply Democracy in America...

. Writing in 1831:

Among the new objects that attracted my attention during my stay in the United States, none struck me with greater force than the equality of conditions. I easily perceived the enormous influence that this primary fact exercises on the workings of society. It gives a particular direction to the public mind, a particular turn to the laws, new maxims to those who govern, and particular habits to the governed... It creates opinions, gives rise to sentiments, inspires customs, and modifies everything it does not produce... I kept finding that fact before me again and again as a central point to which all of my observations were leading.




In a 2002 paper, Eric Uslaner and Mitchell Brown showed that there is a high correlation between the amount of trust in society and the amount of income equality. They did this by comparing results from the question "would others take advantage of you if they got the chance?" in U.S General Social Survey
General Social Survey
The General Social Survey is a sociological survey used to collect data on demographic characteristics and attitudes of residents of the United States. The survey is conducted face-to-face with an in-person interview by the National Opinion Research Center at the University of Chicago, of a...

 and others with statistics on income inequality. Similarly, a 2008 article by Andersen and Fetner finds a strong relationship between economic inequality within and across countries and tolerance for 35 democracies.

Robert Putnam
Robert Putnam
Robert David Putnam is a political scientist and professor of public policy at the Harvard University John F. Kennedy School of Government. He is also visiting professor and director of the Manchester Graduate Summer Programme in Social Change, University of Manchester...

, professor of political science at Harvard, established links between social capital
Social capital
Social capital is a sociological concept, which refers to connections within and between social networks. The concept of social capital highlights the value of social relations and the role of cooperation and confidence to get collective or economic results. The term social capital is frequently...

 and economic inequality. His most important studies (Putnam, Leonardi, and Nanetti 1993, Putnam 2000) established these links in both the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 and in Italy
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...

. On the relationship of inequality and involvement in community he says:

Community and equality are mutually reinforcing… Social capital and economic inequality moved in tandem through most of the twentieth century. In terms of the distribution of wealth and income, America in the 1950s and 1960s was more egalitarian than it had been in more than a century… [T]hose same decades were also the high point of social connectedness and civic engagement. Record highs in equality and social capital coincided. Conversely, the last third of the twentieth century was a time of growing inequality and eroding social capital… The timing of the two trends is striking: somewhere around 1965-70 America reversed course and started becoming both less just economically and less well connected socially and politically. (Putnam 2000 pp 359)



In addition to affecting levels of trust and civic engagement
Civic engagement
Civic engagement or civic participation has been defined as "Individual and collective actions designed to identify and address issues of public concern."-Forms:...

, inequality in society has also shown to be highly correlated with crime rates. Most studies looking into the relationship between crime and inequality have concentrated on homicide
Homicide
Homicide refers to the act of a human killing another human. Murder, for example, is a type of homicide. It can also describe a person who has committed such an act, though this use is rare in modern English...

s - since homicides are almost identically defined across all nations and jurisdictions. There have been over fifty studies showing tendencies for violence to be more common in societies where income differences are larger. Research has been conducted comparing developed countries with undeveloped countries, as well as studying areas within countries. Daly et al. 2001. found that among U.S
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 States
U.S. state
A U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...

 and Canadian
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...

 Provinces there is a tenfold difference in homicide rates related to inequality. They estimated that about half of all variation in homicide rates can be accounted for by differences in the amount of inequality in each province or state. Fajnzylber et al. (2002) found a similar relationship worldwide. Among comments in academic literature on the relationship between homicides and inequality are:
  • The most consistent finding in cross-national research on homicides has been that of a positive association between income inequality and homicides. (Neapolitan 1999 pp 260)
  • Economic inequality is positively and significantly related to rates of homicide despite an extensive list of conceptually relevant controls. The fact that this relationship is found with the most recent data and using a different measure of economic inequality from previous research, suggests that the finding is very robust. (Lee and Bankston 1999 pp 50)


Research by Richard G. Wilkinson and Kate Pickett has also presented evidence that both social cohesion and health problems are greater in countries or states where economic inequality is highest. For instance, crime rates, mental health problems and teen-age pregnancies are lower in countries like Japan and Finland compared to countries with greater inequality such as the US and UK.

Population health


Recently, there has been increasing interest from epidemiologists
Epidemiology
Epidemiology is the study of health-event, health-characteristic, or health-determinant patterns in a population. It is the cornerstone method of public health research, and helps inform policy decisions and evidence-based medicine by identifying risk factors for disease and targets for preventive...

 on the subject of economic inequality and its relation to the health of populations
Population health
Population health has been defined as “the health outcomes of a group of individuals, including the distribution of such outcomes within the group.” It is an approach to health that aims to improve the health of an entire population. One major step in achieving this aim is to reduce health...

. There is a very robust correlation between socioeconomic status
Social status
In sociology or anthropology, social status is the honor or prestige attached to one's position in society . It may also refer to a rank or position that one holds in a group, for example son or daughter, playmate, pupil, etc....

 and health. This correlation suggests that it is not only the poor who tend to be sick when everyone else is healthy, but that there is a continual gradient, from the top to the bottom of the socio-economic ladder, relating status to health. This phenomenon is often called the "SES Gradient". Lower socioeconomic status has been linked to chronic stress
Stress (medicine)
Stress is a term in psychology and biology, borrowed from physics and engineering and first used in the biological context in the 1930s, which has in more recent decades become commonly used in popular parlance...

, heart disease
Heart disease
Heart disease, cardiac disease or cardiopathy is an umbrella term for a variety of diseases affecting the heart. , it is the leading cause of death in the United States, England, Canada and Wales, accounting for 25.4% of the total deaths in the United States.-Types:-Coronary heart disease:Coronary...

, ulcers
Peptic ulcer
A peptic ulcer, also known as PUD or peptic ulcer disease, is the most common ulcer of an area of the gastrointestinal tract that is usually acidic and thus extremely painful. It is defined as mucosal erosions equal to or greater than 0.5 cm...

, type 2 diabetes, rheumatoid arthritis
Rheumatoid arthritis
Rheumatoid arthritis is a chronic, systemic inflammatory disorder that may affect many tissues and organs, but principally attacks synovial joints. The process produces an inflammatory response of the synovium secondary to hyperplasia of synovial cells, excess synovial fluid, and the development...

, certain types of cancer
Cancer
Cancer , known medically as a malignant neoplasm, is a large group of different diseases, all involving unregulated cell growth. In cancer, cells divide and grow uncontrollably, forming malignant tumors, and invade nearby parts of the body. The cancer may also spread to more distant parts of the...

, and premature aging.

There is debate regarding the cause of the SES Gradient. A number of researchers (A. Leigh, C. Jencks, A. Clarkwest - see also Russell Sage working papers) see a definite link between economic status and mortality due to the greater economic resources of the wealthy, but they find little correlation due to social status
Social status
In sociology or anthropology, social status is the honor or prestige attached to one's position in society . It may also refer to a rank or position that one holds in a group, for example son or daughter, playmate, pupil, etc....

 differences.

Other researchers such as Richard G. Wilkinson, J. Lynch, and G.A. Kaplan have found that socioeconomic status strongly affects health even when controlling for economic resources and access to health care. Most famous for linking social status with health are the Whitehall studies
Whitehall Study
The original Whitehall Study investigated social determinants of health, specifically the cardiorespiratory disease prevalence and mortality rates among British male civil servants between the ages of 20 and 64. The initial prospective cohort study, the Whitehall I Study, examined over 18,000...

 - a series of studies conducted on civil servants in London
London
London is the capital city of :England and the :United Kingdom, the largest metropolitan area in the United Kingdom, and the largest urban zone in the European Union by most measures. Located on the River Thames, London has been a major settlement for two millennia, its history going back to its...

. The studies found that although all civil servants in England have the same access to health care, there was a strong correlation between social status and health. The studies found that this relationship remained strong even when controlling for health-affecting habits such as exercise, smoking
Tobacco smoking
Tobacco smoking is the practice where tobacco is burned and the resulting smoke is inhaled. The practice may have begun as early as 5000–3000 BCE. Tobacco was introduced to Eurasia in the late 16th century where it followed common trade routes...

 and drinking
Alcoholic beverage
An alcoholic beverage is a drink containing ethanol, commonly known as alcohol. Alcoholic beverages are divided into three general classes: beers, wines, and spirits. They are legally consumed in most countries, and over 100 countries have laws regulating their production, sale, and consumption...

. Furthermore, it has been noted that no amount of medical attention will help decrease the likelihood of someone getting type 2 diabetes or rheumatoid arthritis
Rheumatoid arthritis
Rheumatoid arthritis is a chronic, systemic inflammatory disorder that may affect many tissues and organs, but principally attacks synovial joints. The process produces an inflammatory response of the synovium secondary to hyperplasia of synovial cells, excess synovial fluid, and the development...

 - yet both are more common among populations with lower socioeconomic status. Lastly, it has been found that amongst the wealthiest quarter of countries on earth (a set stretching from Luxembourg
Luxembourg
Luxembourg , officially the Grand Duchy of Luxembourg , is a landlocked country in western Europe, bordered by Belgium, France, and Germany. It has two principal regions: the Oesling in the North as part of the Ardennes massif, and the Gutland in the south...

 to Slovakia
Slovakia
The Slovak Republic is a landlocked state in Central Europe. It has a population of over five million and an area of about . Slovakia is bordered by the Czech Republic and Austria to the west, Poland to the north, Ukraine to the east and Hungary to the south...

) there is no relation between a country's wealth and general population health - suggesting that past a certain level, absolute levels of wealth have little impact on population health, but relative levels within a country do.

The concept of psychosocial stress attempts to explain how psychosocial phenomena such as status
Social status
In sociology or anthropology, social status is the honor or prestige attached to one's position in society . It may also refer to a rank or position that one holds in a group, for example son or daughter, playmate, pupil, etc....

 and social stratification
Social stratification
In sociology the social stratification is a concept of class, involving the "classification of persons into groups based on shared socio-economic conditions ... a relational set of inequalities with economic, social, political and ideological dimensions."...

 can lead to the many diseases associated with the SES Gradient. Higher levels of economic inequality tend to intensify social hierarchies and generally degrade the quality of social relations - leading to greater levels of stress
Stress (medicine)
Stress is a term in psychology and biology, borrowed from physics and engineering and first used in the biological context in the 1930s, which has in more recent decades become commonly used in popular parlance...

 and stress-related diseases. Richard Wilkinson found this to be true not only for the poorest members of society, but also for the wealthiest. Economic inequality is bad for everyone's health.

The effects of inequality on health are not limited to human populations. David H. Abbott at the Wisconsin National Primate Research Center found that among many primate species, less egalitarian social structures correlated with higher levels of stress hormones among socially subordinate individuals.

Utility, economic welfare, and distributive efficiency


Economic inequality is thought to reduce distributive efficiency
Distributive efficiency
In welfare economics, distributive efficiency occurs when goods and services are received by those who have the greatest need for them. Abba Lerner first proposed the idea of distributive efficiency in his 1944 book The Economics of Control....

 within society. That is to say, inequality reduces the sum total of personal utility
Utility
In economics, utility is a measure of customer satisfaction, referring to the total satisfaction received by a consumer from consuming a good or service....

 because of the decreasing
Diminishing returns
In economics, diminishing returns is the decrease in the marginal output of a production process as the amount of a single factor of production is increased, while the amounts of all other factors of production stay constant.The law of diminishing returns In economics, diminishing returns (also...

 marginal utility
Marginal utility
In economics, the marginal utility of a good or service is the utility gained from an increase in the consumption of that good or service...

 of wealth. For example, a house may provide less utility to a single millionaire as a summer home than it would to a homeless family of five. The marginal utility
Marginal utility
In economics, the marginal utility of a good or service is the utility gained from an increase in the consumption of that good or service...

 of wealth is lowest among the richest. In other words, an additional dollar spent by a poor person will go to things providing a great deal of utility to that person, such as basic necessities like food, water, and healthcare; meanwhile, an additional dollar spent by a much richer person will most likely go to things providing relatively less utility to that person, such as luxury items. From this standpoint, for any given amount of wealth in society, a society with more equality will have higher aggregate utility. Some studies (Layard 2003;Blanchard and Oswald 2000, 2003) have found evidence for this theory, noting that in societies where inequality is lower, population-wide satisfaction and happiness tend to be higher.

Economist Arthur Cecil Pigou
Arthur Cecil Pigou
Arthur Cecil Pigou was an English economist. As a teacher and builder of the school of economics at the University of Cambridge he trained and influenced many Cambridge economists who went on to fill chairs of economics around the world...

 discussed the impact of inequality in The Economics of Welfare. He wrote:

Nevertheless, it is evident that any transference of income from a relatively rich man to a relatively poor man of similar temperament, since it enables more intense wants, to be satisfied at the expense of less intense wants, must increase the aggregate sum of satisfaction. The old "law of diminishing utility" thus leads securely to the proposition: Any cause which increases the absolute share of real income in the hands of the poor, provided that it does not lead to a contraction in the size of the national dividend from any point of view, will, in general, increase economic welfare.

In addition to the argument based on diminishing marginal utility, Pigou makes a second argument that income generally benefits the rich by making them wealthier than other people, whereas the poor benefit in absolute terms. Pigou writes:

Now the part played by comparative, as distinguished from absolute, income is likely to be small for incomes that only suffice to provide the necessaries and primary comforts of life, but to be large with large incomes. In other words, a larger proportion of the satisfaction yielded by the incomes of rich people comes from their relative, rather than from their absolute, amount. This part of it will not be destroyed if the incomes of all rich people are diminished together. The loss of economic welfare suffered by the rich when command over resources is transferred from them to the poor will, therefore, be substantially smaller relatively to the gain of economic welfare to the poor than a consideration of the law of diminishing utility taken by itself suggests. --Arthur Cecil Pigou in The Economics of Welfare


Schmidtz
David Schmidtz
David Schmidtz is Kendrick Professor of Philosophy and joint Professor of Economics at the University of Arizona. He grew up in Saskatchewan, Canada, and earned his PhD at Arizona under the direction of Joel Feinberg and Allen Buchanan and taught at Yale and Bowling Green State University before...

 (2006) argues that maximizing the sum of individual utilities does not necessarily imply that the maximum social utility is achieved. For example:

A society that takes Joe Rich’s second unit [of corn] is taking that unit away from someone who . . . has nothing better to do than plant it and giving it to someone who . . . does have something better to do with it. That sounds good, but in the process, the society takes seed corn out of production and diverts it to food, thereby cannibalizing itself


Ravi Batra
Ravi Batra
Raveendra Nath "Ravi" Batra is an Indian-American economist, author, and professor at Southern Methodist University. Batra is the author of six international bestsellers, two of which appeared on The New York Times Best Seller list...

 has stated that growing wealth disparity causes poverty.

Why does rising wealth disparity create poverty? My answer is that it causes overproduction and hence unemployment and destitution. It is all a matter of supply and demand. Inequality goes up when official economic policy does not allow wages to catch up with the ever-growing labor productivity, so that profits soar and rising productivity increasingly raises the incomes and bonuses of business executives.

Aspirational consumption and household risks


Firstly, certain costs are difficult to avoid and are shared by everyone, such as the costs of housing
House
A house is a building or structure that has the ability to be occupied for dwelling by human beings or other creatures. The term house includes many kinds of different dwellings ranging from rudimentary huts of nomadic tribes to free standing individual structures...

, pensions, education
Education
Education in its broadest, general sense is the means through which the aims and habits of a group of people lives on from one generation to the next. Generally, it occurs through any experience that has a formative effect on the way one thinks, feels, or acts...

 and health care
Health care
Health care is the diagnosis, treatment, and prevention of disease, illness, injury, and other physical and mental impairments in humans. Health care is delivered by practitioners in medicine, chiropractic, dentistry, nursing, pharmacy, allied health, and other care providers...

. If the state
Sovereign state
A sovereign state, or simply, state, is a state with a defined territory on which it exercises internal and external sovereignty, a permanent population, a government, and the capacity to enter into relations with other sovereign states. It is also normally understood to be a state which is neither...

 does not provide these services, then for those on lower incomes, the costs must be borrowed and often those on lower incomes are those who are worse equipped to manage their finances. Secondly, aspirational consumption describes the process of middle income earners aspiring to achieve the standards of living enjoyed by their wealthier counterparts and one method of achieving this aspiration is by taking on debt. The result leads to even greater inequality and potential economic instability.

Economic incentives


Many people accept inequality as a given, and argue that an increased gap between rich and poor increases the incentive
Incentive
In economics and sociology, an incentive is any factor that enables or motivates a particular course of action, or counts as a reason for preferring one choice to the alternatives. It is an expectation that encourages people to behave in a certain way...

s for competition
Competition
Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. It arises whenever two and only two strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For...

 and innovation
Innovation
Innovation is the creation of better or more effective products, processes, technologies, or ideas that are accepted by markets, governments, and society...

 within an economy.

Some modern economic theories, such as the neoclassical
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...

 school, have suggested that a functioning economy entails a certain level
NAIRU
In monetarist economics, particularly the work of Milton Friedman, on which also worked Lucas Papademos and Franco Modigliani in 1975,NAIRU is an acronym for Non-Accelerating Inflation Rate of Unemployment, and refers to a level of unemployment below which inflation rises.It is widely used in...

 of unemployment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...

. These theories argue that unemployment benefits must be below the wage
Wage
A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...

 level to provide an incentive to work, thereby mandating inequality and that additionally, it is impossible to lower unemployment down to zero. Hypotheses such as socialism
Socialism
Socialism is an economic system characterized by social ownership of the means of production and cooperative management of the economy; or a political philosophy advocating such a system. "Social ownership" may refer to any one of, or a combination of, the following: cooperative enterprises,...

, dispute this positive role of unemployment.

Many economists believe that one of the main reasons that inequality might induce economic incentive is because material well-being and conspicuous consumption
Conspicuous consumption
Conspicuous consumption is spending on goods and services acquired mainly for the purpose of displaying income or wealth. In the mind of a conspicuous consumer, such display serves as a means of attaining or maintaining social status....

 are related to status
Social status
In sociology or anthropology, social status is the honor or prestige attached to one's position in society . It may also refer to a rank or position that one holds in a group, for example son or daughter, playmate, pupil, etc....

. In this view, high stratification of income (high inequality) creates high amounts of social stratification
Social stratification
In sociology the social stratification is a concept of class, involving the "classification of persons into groups based on shared socio-economic conditions ... a relational set of inequalities with economic, social, political and ideological dimensions."...

, leading to greater competition for status
Social status
In sociology or anthropology, social status is the honor or prestige attached to one's position in society . It may also refer to a rank or position that one holds in a group, for example son or daughter, playmate, pupil, etc....

.
One of the first writers to note this relationship was Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

 who recognized "regard" as one of the major driving forces behind economic activity. From The Theory of Moral Sentiments
The Theory of Moral Sentiments
The Theory of Moral Sentiments was written by Adam Smith in 1759. It provided the ethical, philosophical, psychological, and methodological underpinnings to Smith's later works, including The Wealth of Nations , A Treatise on Public Opulence , Essays on Philosophical Subjects , and Lectures on...

 in 1759:
[W]hat is the end of avarice and ambition, of the pursuit of wealth, of power, and pre-eminence? Is it to supply the necessities of nature? The wages of the meanest labourer can supply them... [W]hy should those who have been educated in the higher ranks of life, regard it as worse than death, to be reduced to live, even without labour, upon the same simple fare with him, to dwell under the same lowly roof, and to be clothed in the same humble attire? From whence, then, arises that emulation which runs through all the different ranks of men, and what are the advantages which we propose by that great purpose of human life which we call bettering our condition? To be observed, to be attended to, to be taken notice of with sympathy, complacency, and approbation, are all the advantages which we can propose to derive from it. It is the vanity, not the ease, or the pleasure, which interests us (Theory of Moral Sentiments, Part I, Section III, Chapter II).


Modern sociologists and economists such as Juliet Schor
Juliet Schor
Juliet Schor is a Professor of sociology at Boston College. She studies trends in working time and leisure, consumerism, the relationship between work and family, women's issues and economic justice. She received her undergraduate degree from Wesleyan University and her Ph.D in economics from the...

 and Robert H. Frank
Robert H. Frank
Robert H. Frank is the Henrietta Johnson Louis Professor of Management and a Professor of Economics at the Samuel Curtis Johnson Graduate School of Management at Cornell University. He contributes to the "Economic View" column, which appears every fifth Sunday in The New York Times.-Career:Frank...

 have studied the extent to which economic activity is fueled by the ability of consumption to represent social status. Schor, in The Overspent American, argues that the increasing inequality during the 1980s and 1990s strongly accounts for increasing aspirations of income, increased consumption, decreased savings, and increased debt. In Luxury Fever Robert H. Frank argues that people's satisfaction with their income is much more strongly affected by how it compares with others than its absolute level.

The classical theory


Initial theories stated that inequality had a positive effect on economic development. The marginal propensity to save increases with wealth and inequality increases savings, capital accumulation, and economic growth.

The neoclassical theory


The neoclassical theory ignores the relevance of income distribution for macroeconomic analysis. It interprets the observed relationship between inequality and economic growth as a reflection of the growth process on the distribution of income.

The modern theory


The modern theory suggests that income distribution plays an important role in the determination of aggregate economic activity and economic growth.

The credit market imperfection approach, developed by Galor and Zeira (1993), demonstrates that inequality in the presence of credit market imperfections has a long lasting detrimental effect on human capital formation and economic development.

The political economy approach, developed by Alesian and Rodrik 1994) and Persson and Tabellini (1994), argues that inequality is harmful for economic development because inequality generates a pressure to adopt redistributive policies that have an adverse effect on investment and economic growth.

Ravi batra has argued that a growing concentration of wealth precedes economic boom-bust cycles which are associated with rising unemployment and falling incomes, and hence a loss of social welfare.

Evidence


Perotti (1996) examines of the channels through which inequality may affect economic growth. He shows that in accordance with the credit market imperfection approach, inequality is associated with lower level of human capital formation and higher level of fertility, while lower level of human capital is associated with lower growth and lower levels of economic growth. In contrast, his examination of the political economy channel refutes the political economy mechanism. He demonstrates that inequality is associated with lower levels of taxation, while lower levels of taxation, contrary to the theories, are associated with lower level of economic growth

In their study for the World Institute for Development Economics Research, Giovanni Andrea Cornia and Julius Court (2001) reach policy conclusions as to the optimal distribution of income. They conclude that too much equality (below a Gini coefficient
Gini coefficient
The Gini coefficient is a measure of statistical dispersion developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper "Variability and Mutability" ....

 of .25) negatively impacts growth due to "incentive traps, free-riding, labour shirking, [and] high supervision costs". They also claim that high levels of inequality (above a Gini coefficient
Gini coefficient
The Gini coefficient is a measure of statistical dispersion developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper "Variability and Mutability" ....

 of .40) negatively impacts growth, due to "incentive traps, erosion of social cohesion, social conflicts, [and] uncertain property rights". They advocate for policies which put equality at the low end of this "efficient" range.

Later studies restricted their analysis to the reduced form relationship between inequality and growth. Forbes (2000) and Barro (2000) examined the effect of inequality on economic growth in a panel of countries. They find a positive and zero effect, respectively, of an increase in inequality on economic growth. These findings appear to have no bearing on the validity of the theories and are not very informative about the overall effect of inequality. First, these studies examine the effect of inequality beyond its effects through education, fertility, and investment. For instance, Barro (2000) has found that, once controls for education, fertility, and investment are introduced, there is no relationship between inequality and economic growth in the entire sample. His findings, therefore, suggest that inequality does not have a direct effect on growth beyond its effects through education, fertility and investment. In particular, if the control for fertility is dropped in Barro (2000), the effect of inequality on growth is significantly negative, as predicted by the theory. Moreover, these studies examine the effect of inequality in the short run (i.e., the effect of inequality on the average growth rate in the subsequent 5–10 years), while as suggested by the theories, inequality is likely to have a long-run effect (e.g., via the human capital formation).

The United Nations Research Institute for Social Development
United Nations Research Institute For Social Development
The United Nations Research Institute for Social Development is "an autonomous United Nations agency that carries out research on the social dimensions of contemporary problems affecting development"...

 (UNRISD)’s 2010 report comes to multiple conclusions, some of which concur with and others that challenge the findings of previous research. The report claims that inequality has risen partly due to neoliberal economic policies
Neoliberalism
Neoliberalism is a market-driven approach to economic and social policy based on neoclassical theories of economics that emphasizes the efficiency of private enterprise, liberalized trade and relatively open markets, and therefore seeks to maximize the role of the private sector in determining the...

 that have made it difficult to have high rates of economic growth without increasing inequality. The report acknowledges that there has been a decrease of inequality in the Middle East, North Africa, and sub-Saharan Africa, but the level is still high in these regions overall (above a Gini coefficient
Gini coefficient
The Gini coefficient is a measure of statistical dispersion developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper "Variability and Mutability" ....

 of .40). It also notes that in a study done by the International Labour Organization
International Labour Organization
The International Labour Organization is a specialized agency of the United Nations that deals with labour issues pertaining to international labour standards. Its headquarters are in Geneva, Switzerland. Its secretariat — the people who are employed by it throughout the world — is known as the...

 (ILO), over two-thirds of the 85 countries surveyed experienced a rise in income inequality between 1990 and 2000.

The report looks to the functional distribution of income of a country as an indicator of inequality as well as the Gini coefficient
Gini coefficient
The Gini coefficient is a measure of statistical dispersion developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper "Variability and Mutability" ....

. The functional distribution of income looks at how income is distributed between wage earners and profit earners: the larger the share of GDP wage earners share, the more equal the situation. The report notes that a high growth rate contributes to income inequality when a small portion of the population - profit earners – earns the majority of the money. This is common in situations in which a rise economic growth is caused by a specific sector, such as the technological sector. This picture becomes more muddled in developing countries when one takes into account large informal sectors; these workers earn profits rather than wages, so it’s difficult to say if an increase in the share of profit income is helping or harming income inequality.

The UNRISD report also states, in contradiction to Pagano’s research, that growth and equity can be “mutually reinforcing” when supported by “well-thought-out economic and social policies”. It explains that reducing poverty through growth is difficult when inequality is rampant; wealth and land tends to concentrate in small groups, which in turn excludes the poor from economic participation. The poor have less disposal income to spend and as a result effective aggregate demand lowers, limiting the size of the domestic market. This in turn makes it harder for a country to industrialize, thereby hindering its development.

Marxism


Marxism
Marxism
Marxism is an economic and sociopolitical worldview and method of socioeconomic inquiry that centers upon a materialist interpretation of history, a dialectical view of social change, and an analysis and critique of the development of capitalism. Marxism was pioneered in the early to mid 19th...

 favors an eventual society where distribution is based on an individual's needs rather than his ability to produce, inheritance, or other such factors. In such a system inequality would be minimal.

Marxists believe economic equality is necessary for political freedom - saying that when there is economic inequality then political inequality is assured - in such a society currency would be eliminated, the means of production
Means of production
Means of production refers to physical, non-human inputs used in production—the factories, machines, and tools used to produce wealth — along with both infrastructural capital and natural capital. This includes the classical factors of production minus financial capital and minus human capital...

 owned in common and non labour jobs eliminated (those whose income depends on rent/profit or surplus value).
Marxists believe that once the means of production are owned in common and worked for utility rather than profit, that all workers receive a voice in a democratic workplace and the money incentive removed, economic equality will be achieved. However, a few economists such as Ludwig von Mises have pointed out what they believe are several logical inconsistencies of this theory.

Marxist Leninists
Leninism
In Marxist philosophy, Leninism is the body of political theory for the democratic organisation of a revolutionary vanguard party, and the achievement of a direct-democracy dictatorship of the proletariat, as political prelude to the establishment of socialism...

 believe that, during the transitional period between capitalism
Capitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...

 and socialism
Socialism
Socialism is an economic system characterized by social ownership of the means of production and cooperative management of the economy; or a political philosophy advocating such a system. "Social ownership" may refer to any one of, or a combination of, the following: cooperative enterprises,...

, workers will be paid based on "to each according to labour" as opposed to "to each according to need".

Meritocracy


Meritocracy
Meritocracy
Meritocracy, in the first, most administrative sense, is a system of government or other administration wherein appointments and responsibilities are objectively assigned to individuals based upon their "merits", namely intelligence, credentials, and education, determined through evaluations or...

 favors an eventual society where an individual's success is a direct function of his merit, or contribution. Therefore, economic inequality is beneficial (this is a value judgment
Value judgment
A value judgment is a judgment of the rightness or wrongness of something, or of the usefulness of something, based on a comparison or other relativity. As a generalization, a value judgment can refer to a judgment based upon a particular set of values or on a particular value system...

) inasmuch as it reflects individual skills and effort, and detrimental (this is a value judgment
Value judgment
A value judgment is a judgment of the rightness or wrongness of something, or of the usefulness of something, based on a comparison or other relativity. As a generalization, a value judgment can refer to a judgment based upon a particular set of values or on a particular value system...

) inasmuch as it represent inherited or unjustified wealth or opportunities. From a meritocratic point of view, measuring economic equality as one parameter, not distinguishing these two opposite contributing factors, serves no good (this is a value judgment
Value judgment
A value judgment is a judgment of the rightness or wrongness of something, or of the usefulness of something, based on a comparison or other relativity. As a generalization, a value judgment can refer to a judgment based upon a particular set of values or on a particular value system...

) purpose.

Liberalism


Most modern Social Liberals
Social liberalism
Social liberalism is the belief that liberalism should include social justice. It differs from classical liberalism in that it believes the legitimate role of the state includes addressing economic and social issues such as unemployment, health care, and education while simultaneously expanding...

 believe that, although the Capitalist economic system should be fundamentally preserved, the status quo regarding the 'income gap' must be reformed in order to achieve overall equality. Classical liberals and libertarians generally do not take a stance on wealth inequality, but believe in equality under the law
Legal egalitarianism
Equality before the law or equality under the law or legal egalitarianism is the principle under which each individual is subject to the same laws....

 regardless of whether it leads to unequal wealth distribution. Ludwig von Mises
Ludwig von Mises
Ludwig Heinrich Edler von Mises was an Austrian economist, philosopher, and classical liberal who had a significant influence on the modern Libertarian movement and the "Austrian School" of economic thought.-Biography:-Early life:...

 (1966) explains:
The liberal champions of equality under the law were fully aware of the fact that men are born unequal and that it is precisely their inequality that generates social cooperation and civilization. Equality under the law was in their opinion not designed to correct the inexorable facts of the universe and to make natural inequality disappear. It was, on the contrary, the device to secure for the whole of mankind the maximum of benefits it can derive from it. Henceforth no man-made institutions should prevent a man from attaining that station in which he can best serve his fellow citizens.


Libertarian Robert Nozick
Robert Nozick
Robert Nozick was an American political philosopher, most prominent in the 1970s and 1980s. He was a professor at Harvard University. He is best known for his book Anarchy, State, and Utopia , a right-libertarian answer to John Rawls's A Theory of Justice...

 argued that government redistributes wealth by force (usually in the form of taxation), and that the ideal moral society would be one where all individuals are free from force. However, Nozick recognized that some modern economic inequalities were the result of forceful taking of property, and a certain amount of redistribution would be justified to compensate for this force but not because of the inequalities themselves. John Rawls
John Rawls
John Bordley Rawls was an American philosopher and a leading figure in moral and political philosophy. He held the James Bryant Conant University Professorship at Harvard University....

 argued in A Theory of Justice
A Theory of Justice
A Theory of Justice is a book of political philosophy and ethics by John Rawls. It was originally published in 1971 and revised in both 1975 and 1999. In A Theory of Justice, Rawls attempts to solve the problem of distributive justice by utilising a variant of the familiar device of the social...

 that inequalities in the distribution of wealth are only justified when they improve society as a whole, including the poorest members. Rawls does not discuss the full implications of his theory of justice. Some see Rawls's argument as a justification for capitalism
Capitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...

 since even the poorest members of society theoretically benefit from increased innovations under capitalism; others believe only a strong welfare state
Welfare state
A welfare state is a "concept of government in which the state plays a key role in the protection and promotion of the economic and social well-being of its citizens. It is based on the principles of equality of opportunity, equitable distribution of wealth, and public responsibility for those...

 can satisfy Rawls's theory of justice.

Classical liberal Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...

 believed that if government action is taken in pursuit of economic equality that political freedom would suffer. In a famous quote, he said:
A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.

Arguments based on social justice


Patrick Diamond and Anthony Giddens (professors of Economics and Sociology, respectively) hold that
pure meritocracy
Meritocracy
Meritocracy, in the first, most administrative sense, is a system of government or other administration wherein appointments and responsibilities are objectively assigned to individuals based upon their "merits", namely intelligence, credentials, and education, determined through evaluations or...

 is incoherent because, without redistribution, one generation's successful individuals would become the next generation's embedded caste, hoarding the wealth they had accumulated.


They also state that social justice
Social justice
Social justice generally refers to the idea of creating a society or institution that is based on the principles of equality and solidarity, that understands and values human rights, and that recognizes the dignity of every human being. The term and modern concept of "social justice" was coined by...

 requires redistribution of high incomes and large concentrations of wealth in a way that spreads it more widely, in order to "recognise the contribution made by all sections of the community to building the nation's wealth." (Patrick Diamond and Anthony Giddens
Anthony Giddens
Anthony Giddens, Baron Giddens is a British sociologist who is known for his theory of structuration and his holistic view of modern societies. He is considered to be one of the most prominent modern contributors in the field of sociology, the author of at least 34 books, published in at least 29...

, 27 June 2005, New Statesman)

Claims that inequality lowers social welfare


In most western democracies, the desire to eliminate or reduce economic inequality is generally associated with the political left. One practical argument in favor of reduction is the idea that economic inequality reduces social cohesion and increases social unrest, thereby weakening the society.

There is evidence that this is true (see inequity aversion
Inequity aversion
Inequity aversion is the preference for fairness and resistance to incidental inequalities. The social sciences that study inequity aversion include sociology, economics, psychology, anthropology and ethology.-Human studies:...

) and it is intuitive, at least for small face-to-face groups of people. Alberto Alesina
Alberto Alesina
Alberto Francesco Alesina is an Italian political economist. He has published much-cited books and articles in major economics journals.-Background and professional life:...

, Rafael Di Tella
Rafael di Tella
Rafael di Tella is an Argentine fencer. He competed at the 1988 and 1992 Summer Olympics.-References:...

, and Robert MacCulloch find that inequality negatively affects happiness
Happiness
Happiness is a mental state of well-being characterized by positive emotions ranging from contentment to intense joy. A variety of biological, psychological, religious, and philosophical approaches have striven to define happiness and identify its sources....

 in Europe but not in the United States.

It has also been argued that economic inequality invariably translates to political inequality, which further aggravates the problem. Even in cases where an increase in economic inequality makes nobody economically poorer, an increased inequality of resources is disadvantageous, as increased economic inequality can lead to a power shift due to an increased inequality in the ability to participate in democratic processes.

The capabilities approach


Developed by Amartya Sen
Amartya Sen
Amartya Sen, CH is an Indian economist who was awarded the 1998 Nobel Prize in Economic Sciences for his contributions to welfare economics and social choice theory, and for his interest in the problems of society's poorest members...

, the capabilities approach – sometimes called the human development approach - looks at income inequality and poverty as form of “capability deprivation”. Unlike neoliberalism
Neoliberalism
Neoliberalism is a market-driven approach to economic and social policy based on neoclassical theories of economics that emphasizes the efficiency of private enterprise, liberalized trade and relatively open markets, and therefore seeks to maximize the role of the private sector in determining the...

, which “defines well-being as utility maximization”, economic growth and income are considered a means to an end rather than the end itself. Its goal is to “wid[en] people’s choices and the level of their achieved well-being” through increasing functionings (the things a person values doing), capabilities (the freedom to enjoy functionings) and agency (the ability to pursue valued goals).

When a person’s capabilities are lowered, they are in some way deprived of earning as much income as they would otherwise. An old, ill man cannot earn as much as a healthy young man; gender role
Gender role
Gender roles refer to the set of social and behavioral norms that are considered to be socially appropriate for individuals of a specific sex in the context of a specific culture, which differ widely between cultures and over time...

s and customs may prevent a woman from receiving an education or working outside the home. There may be an epidemic that causes widespread panic, or there could be rampant violence in the area that prevents people from going to work for fear of their lives. As a result, income and economic inequality increases, and it becomes more difficult to reduce the gap without additional aid. To prevent such inequality, this approach believes it’s important to have political freedom, economic facilities, social opportunities, transparency guarantees, and protective security to ensure that people aren’t denied their functionings, capabilities, and agency and can thus work towards a better relevant income. How does this help an old, ill man earn more?

See also

  • Income inequality in the United States
    Income inequality in the United States
    Income inequality in the United States of America refers to the extent to which income is distributed in an uneven manner in the US. Data from the United States Department of Commerce, CBO, and Internal Revenue Service indicate that income inequality among households has been increasing...

  • Inequality-adjusted Human Development Index
  • Poverty
    Poverty
    Poverty is the lack of a certain amount of material possessions or money. Absolute poverty or destitution is inability to afford basic human needs, which commonly includes clean and fresh water, nutrition, health care, education, clothing and shelter. About 1.7 billion people are estimated to live...

     and Cycle of poverty
    Cycle of poverty
    In economics, the cycle of poverty is the "set of factors or events by which poverty, once started, is likely to continue unless there is outside intervention."...

  • Occupy movement
    Occupy movement
    The Occupy movement is an international protest movement which is primarily directed against economic and social inequality. The first Occupy protest to be widely covered was Occupy Wall Street in New York City, taking place on September 17, 2011...


General references


Books
  • Ravi Batra (1985): Regular Economic Cycles: Money, Inflation, Regulation and Depressions, St. Martin's Press, 1985, ISBN 0-0312-03260-9
  • Wiemer Salverda, Brian Nolan, Timothy M. Smeeding (editors, 2009): The Oxford Handbook of Economic Inequality. Oxford University Press. ISBN 978-0-19-923137-9
  • Patrick Diamond and Anthony Giddens (2005), The New Egalitarianism, Polity Press
  • A.B. Atkinsons and F. Bourguignon (1998), Handbook of Income Distribution, Elsevier
  • Peter Lambert (2002). Distribution and Redistribution of Income. Manchester University Press, 3rd edition. ISBN 0-7190-5732-9
  • Richard Lynn
    Richard Lynn
    Richard Lynn is a British Professor Emeritus of Psychology at the University of Ulster who is known for his views on racial and ethnic differences. Lynn argues that there are hereditary differences in intelligence based on race and sex....

     and Tatu Vanhanen
    Tatu Vanhanen
    Tatu Vanhanen is a Professor Emeritus of Political Science at the University of Tampere in Tampere, Finland...

     (2002), IQ and the Wealth of Nations
    IQ and the Wealth of Nations
    IQ and the Wealth of Nations is a controversial 2002 book by Dr. Richard Lynn, Professor Emeritus of Psychology at the University of Ulster, Northern Ireland, and Dr. Tatu Vanhanen, Professor Emeritus of Political Science at the University of Tampere, Tampere, Finland...

    , University of Helsinki, Westport, CT: Praeger. ISBN 0-275-97510-X
  • Arthur Cecil Pigou
    Arthur Cecil Pigou
    Arthur Cecil Pigou was an English economist. As a teacher and builder of the school of economics at the University of Cambridge he trained and influenced many Cambridge economists who went on to fill chairs of economics around the world...

    . The Economics of Welfare. I.VIII.3.
  • Benjamin I. Page and Lawrence R. Jacobs (2009), Class War?: What Americans Really Think about Economic Inequality, University of Chicago Press ISBN 978-0-226-64455-4
  • Amartya Sen
    Amartya Sen
    Amartya Sen, CH is an Indian economist who was awarded the 1998 Nobel Prize in Economic Sciences for his contributions to welfare economics and social choice theory, and for his interest in the problems of society's poorest members...

     and James Foster (1997). On Economic Inequality (Radcliffe Lectures). Oxford University Press. ISBN 0-19-828193-5.
  • Richard G. Wilkinson (2005), The Impact of Inequality - how to make sick societies healthier, The New Press, ISBN 1-56584-925-6 (hc.)
  • Richard G. Wilkinson and Kate Pickett (2009), The Spirit Level: Why more equal societies almost always do better, Allen Lane, ISBN-978-1-846-14039-6
  • Séverine Deneulin and Lila Shahani (2009). An Introduction to the Human Development and Capability Approach. Sterling, VA: Earthscan.
  • Amartya Sen
    Amartya Sen
    Amartya Sen, CH is an Indian economist who was awarded the 1998 Nobel Prize in Economic Sciences for his contributions to welfare economics and social choice theory, and for his interest in the problems of society's poorest members...

     (1999). Development as Freedom. New York: Anchor Books.


Papers
  • Kaldor, N., 1955, Alternative Theories of Distribution,” Review of Economic Studies, 23(2), 83-100.
  • Galor, O., and J., Zeira, 1993, "Income Distribution and Macroeconomics," Review of Economic Studies, 60(1), 35-52..
  • Andersen, Robert and Tina Fetner. 2008. ‘Economic Inequality and Intolerance: Attitudes toward Homosexuality in 35 Democracies,’ American Journal of Political Science, 52 (4):942-958..
  • Ravallion, Martin (2005). World Bank
    World Bank
    The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...

    , 5 May, Policy Research Working Paper no. WPS 3579, A poverty-inequality trade-off?
  • Sala-Martin, Xavier (2006)."The World Distribution of Income: Falling Poverty and… Convergence, Period," Quarterly Journal of Economics," 121(2), May, pp. 351–397.
  • Fukuda-Parr, Sakiko. 2003. “The Human Development Paradigm: Operationalizing Sen’s Ideas on Capabilities.” Feminist Economics 9(2/3): 301–17.

External links


This paper describes the relationship between poverty and inequality and discusses some of the evidence found. Written by Fernando Bonilla.