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Economic inequality

2007 Schools Wikipedia Selection. Related subjects: Economics

   Differences in national income equality around the world as measured by
   the national Gini coefficient. The Gini coefficient is a number between
   0 and 1, where 0 corresponds with perfect equality (where everyone has
   the same income) and 1 corresponds with perfect inequality (where one
   person has all the income, and everyone else has zero income).
   Countries in red tones have societies with more income inequality than
   those in green tones.
   Enlarge
   Differences in national income equality around the world as measured by
   the national Gini coefficient. The Gini coefficient is a number between
   0 and 1, where 0 corresponds with perfect equality (where everyone has
   the same income) and 1 corresponds with perfect inequality (where one
   person has all the income, and everyone else has zero income).
   Countries in red tones have societies with more income inequality than
   those in green tones.

   Economic inequality refers to disparities in the distribution of
   economic assets and income. The term typically refers to inequality
   among individuals and groups within a society, but can also refer to
   inequality among nations. There is debate as to what equality should
   mean. Some think in terms of equality of opportunity and others in
   terms of equality of outcome.

   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 (such as capitalism,
   socialism and everything in between), ongoing or past wars, and
   individuals' different abilities to create wealth are all involved in
   the creation of economic inequality.

   Numerical indexes measuring economic inequality among individuals
   compares the well-being and numbers of the rich with those of the poor.
   Inequality is most often measured using the Gini coefficient (defined
   based on the Lorenz curve). For more details, see the article on income
   inequality metrics.

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

Causes of inequality

   There are many reasons for economic inequality within societies. These
   causes are often inter-related, non-linear, and complex. Among the
   acknowledged factors that impact economic inequality in some part are
   the labour market, innate ability, education, race, gender, culture,
   wealth condensation, and development patterns.

The labour market

   A poster printed by the Industrial Workers of the World, dramatising
   economic inequality under capitalism and aiming to gain support for
   Industrial unionism.
   Enlarge
   A poster printed by the Industrial Workers of the World, dramatising
   economic inequality under capitalism and aiming to gain support for
   Industrial unionism.

   One of the major reasons there is economic inequality within modern
   market economies is because wages are determined by a market, and are
   hence influenced by supply and demand. In this view, inequality is
   caused by the differences in the supply and demand for different types
   of work.

   A job where there are many willing workers (high supply) but only a
   small number of positions (low demand) will result in a low wage for
   that job. This is because competition between workers drives down the
   wage. An example of this would be low-skill jobs such as dish-washing
   or customer service. Because of the persistence of unemployment in
   market economies and the fact that these jobs require very little skill
   results in a very high supply of willing workers. Contrary wise, there
   is a limited number of jobs available. Competition amongst workers tend
   to drive down the wage since if any one worker demands a higher wage
   the employer can simply hire another employee at an equally low wage.

   A job where there are few willing workers (low supply) but a large
   demand for the skills these workers have will results in high wages for
   that job. This is because competition between employers will drive up
   the wage. An example of this would be high-skill jobs such as engineers
   or capable CEOs. Competition amongst employers tend to drive up wages
   since if any one employer demands a low wage, the worker can simply
   quit and easily find a new job at a higher wage.

   While the above examples tend to identify skill with high demand and
   wages, this is not necessarily the case. For example, highly skilled
   computer programmers in western countries have seen their wages
   suppressed by competition from computer programmers in India who are
   willing to accept a lower wage.

   The final results amongst these supply and demand interactions is a
   gradation of different wages representing income inequality within
   society.

Innate ability

   Many people believe that there is a connection between differences in
   innate ability, such as intelligence, strength, or charisma, and
   between an individual's level of wealth. Relating these innate
   abilities back to the labour market suggests that such innate abilities
   are in high demand relative to their supply and hence play a large role
   in increasing the wage of those who have them. Contrariwise, such
   innate abilities might also affect an individuals ability to operate
   within society in general, regardless of the labour market.

   Various studies have been conducted on the correlation between IQ
   scores and wealth/income. The book titled " IQ and the Wealth of
   Nations", written by Dr. Richard Lynn, examines this relationship with
   limited success, while other peer-reviewed research papers have also
   come across harsh criticisms on their findings. Without further
   research on the topic, incorporating statistical models that are
   universally accepted, it is fairly difficult to come towards an
   objective conclusion on whether or not there is a relationship between
   intelligence and wealth/income.

Education

   One important factor in the creation of inequality is the variable
   ability of individuals to get an education. Education, especially
   education in an area where there is a high demand for workers, creates
   high wages for those with this education. Contrariwise, those who are
   unable to afford an education generally receive much lower wages. Many
   economists believe that a major reason the world has experienced
   increasing levels of inequality since the 1980s is because of an
   increase in the demand for highly skilled workers in high-tech
   industries. They believe that this has resulted in an increase in wages
   for those with an education, but has not increased the wages of those
   without an education, leading to greater inequality.

Gender, race, and culture

   The existence of different genders, races and cultures within a society
   is also thought to contribute to economic inequality. Scientists such
   as Richard Lynn 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, sex and
   intelligence).

   The idea of the gender gap tries to explain the reasons there are
   different levels of income for different genders. Culture and religion
   are thought to play a role in creating inequality by either encouraging
   or discouraging wealth-acquiring behaviour and providing a basis for
   discrimination. It is felt that in many countries individuals belonging
   to certain racial and ethnic minorities are found more often among the
   poor than others. For those countries where this can be established,
   among the proposed causes for this discrepancy we find cultural
   differences amongst different races, an educational achievement gap,
   and racism.

Development patterns

   A stylized Kuznets curve
   Enlarge
   A stylized Kuznets curve

   Simon Kuznets argued that levels of economic inequality are in large
   part the result of stages of development. Kuznets saw a curve-like
   relationship between level of income and inequality. This relationship
   is now known as Kuznets curve. Supposedly, 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 a variety of possible redistribution mechanisms
   such as trickle down effects and social welfare programs, more
   developed countries move back to lower levels of inequality. Kuznets
   showed this relationship as empirically strong using cross-sectional
   data. However, more recent testing of this theory with superior panel
   data has shown it to be very weak.

Wealth condensation

   Wealth condensation is a theoretical process by which, in certain
   conditions, newly-created wealth tends to become concentrated in the
   possession of already-wealthy individuals or entities. This is
   reflected in the common saying 'the rich get richer and the poor get
   poorer' . 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 condensation, truck drivers who own their own
   trucks consistently 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, unable to buy his
   own truck to increase his income.

   Related to wealth condensation are the effects of inter generational
   inequality. It has been noted that the rich tend to provide their
   offspring with a better education, increasing their chances of
   achieving a high amount of income. Furthermore, the wealthy often leave
   their offspring with a hefty inheritance, jump starting the process of
   wealth condensation for the next generation.

Mitigating factors

   There are many factors that tend to constrain the amount of economic
   inequality within society. Progressive taxation, where the rich are
   taxed more than poor, is effective at reducing the amount of income
   inequality in society. The Nationalization or subsidization of
   essential goods and services such as food, healthcare, education, and
   housing is also thought to reduce the amount of inequality in society -
   by providing goods and services that everyone needs for cheap or free,
   governments can effectively increase the disposable income of the
   poorer members of society.

   Some have suggested that the rich do not value a dollar as much as the
   poor because of the decreasing marginal utility of wealth. They argue
   that this causes a redistribution of income towards the poor. This is
   popularly known as the " trickle down effect", and its effects are
   thought to be strongest in a booming "heated" economy.

   It has also been suggested that any economic disparity will generate
   pressure for its own removal. Workers will be encouraged to unionize
   and will elect progressive politicians. This is often accomplished
   through the democratic system. However this can constrained by the
   ability of the wealthy to influence political power. Because of this,
   it is often thought that democracies tend to be more effective at
   countering inequality than dictatorships.

Effects of inequality

Social cohesion

   Research has shown a clear link between income inequality and social
   cohesion. In more equal societies, people are much more likely to trust
   each other, measures of social capital suggest greater community
   involvement, and homicide rates are consistently lower.

   One of the earliest writers to note the link between economic equality
   and social cohesion was Alexis de Tocqueville in his 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."

   Income inequality and the social capital index in 50 U.S. states.
   Equality is correlated with higher levels of social capital
   Enlarge
   Income inequality and the social capital index in 50 U.S. states.
   Equality is correlated with higher levels of social capital

   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 and others with statistics on income
   inequality.

   Robert Putnam, professor of political science at Harvard, established
   links between social capital and economic inequality. His most
   important studies (Putnam, Leonardi, and Nanetti 1993, Putnam 2000)
   established these links in both the United States and in Italy. 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,
   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 homicides - since homicides are almost
   identically defined across all nations and juristictions. There have
   been over fifty studies showing tendencies for violence to be more
   common in societies where income differnces 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 States and Canadian Provinces there is a ten-fold
   difference in homicide rates related to inequality. They estimated that
   about half of all variations 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:
     * "[T]he 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)
     * "[E]conomic 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)

Population health

   Income inequality and mortality in 282 metropolitan areas of the United
   States. Mortality is correlated with both income and inequality.
   Enlarge
   Income inequality and mortality in 282 metropolitan areas of the United
   States. Mortality is correlated with both income and inequality.

   Recently, there has been increasing interest from epidimiologists on
   the subject of economic inequality and its relation to the health of
   populations ( Population health). There is a very robust correlation
   between socioeconomic status 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, heart disease, ulcers, type 2
   diabetes, rheumatoid arthritis, certain types of cancer, and premature
   aging.

   Despite the reality of the SES Gradient, there is debate as to its
   cause. 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
   better-off, but they find little correlation due to social status
   differences.

   Other researchers such as Richard 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
   - a series of studies conducted on civil servants in London. The
   studies found that, despite the fact that 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 stayed strong even when controlling for health-affecting
   habits such as exercise, smoking and drinking. 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 -
   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 to Slovakia)
   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
   phenomenon such as status and social stratification can lead to the
   many diseases associated with the SES Gradient. Higher levels of
   economic inequality tend to intensify social hierarchies and generally
   degrades the quality of social relations - leading to greater levels of
   stress 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.

   Inequality does not only affect the health of human populations. David
   H. Abbott at the Wisconsin National Primate Research Centre 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 within
   society. That is to say, inequality reduces the sum total of personal
   utility because of the decreasing marginal utility 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 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 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 the wealthier than other people while the poor benefit in
   absolute terms. As 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 necesaries 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

Economic incentives

   Many people accept inequality as a given, and argue that the prospect
   of greater material wealth provides incentives for competition and
   innovation within an economy.

   Some modern economic theories, such as the neoclassical school, have
   suggested that a functioning economy requires a certain level of
   unemployment. These theories argue that unemployment benefits must be
   below the wage level to provide an incentive to work, thereby mandating
   inequality. Other theories, such as socialism, and Keynesianism dispute
   this alleged positive role of unemployment.

   Many economists believe that one of the main reasons that inequality
   might induce economic incentive is because material wellbeing and
   conspicuous consumption are related to status. In this view, high
   stratification of income (high inequality) creates high amounts of
   social stratification, leading to greater competition for status. One
   of the first writers to note this relationship was Adam Smith who
   recognized "regard" as one of the major driving forces behind economic
   activity. From The Theory of Moral Sentiments 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 and Robert H.
   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.

Economic growth

   Several recent economists have investigated the relationship between
   inequality and economic growth using econometrics. Robert Barro wrote a
   paper arguing that inequality reduces growth in poor countries and
   promotes growth in rich ones. A number of other researchers have
   derived conflicting results, some concluding there is a negative effect
   of inequality on growth and others a postive. Patrizio Pagano used
   Granger causality, a technique that can determine two way interaction
   between two variables, to attempt to explain these previous findings.
   Pagano's reseach suggested that inequality had a negative effect on
   growth while growth increased inequality. The two-way interaction
   largely explains the contradiction in past research.

Perspectives regarding economic inequality

   There are various schools of thought regarding economic inequality.

Marxism

   Marxism favors an eventual communist society where distribution is
   based on an individual's needs rather than his ability to produce,
   social class, inheritance, or other such factors. In such a system
   inequality would be low or non-existent assuming everyone had the same
   "needs."

Liberalism

   Classical liberals and libertarians generally do not take a stance on
   wealth inequality, but believe in equality under the law regardless of
   whether it leads to unequal wealth distribution. Ludwig von Mises
   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 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 argued in his A
   Theory of Justice that inequalities in the distribution of wealth are
   only justified when they improve society as a whole, including the
   least well off members. Rawls does not go into the full implications of
   his theory of justice.

   Some see Rawls's argument as a justification for capitalism since even
   the poorest members of society theoretically benefit from increased
   innovations under capitalism while others believe only a strong welfare
   state can statisfy Rawls's theory of justice.

Arguments based on social justice

   Patrick Diamond and Anthony Giddens (professors of Economics and
   Sociology, respectively) hold that "pure meritocracy 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 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, 27 June 2005, New Statesman)

Claims economic inequality weakens societies

   In most western democracies, the desire to eliminate or reduce economic
   inequality is generally associated with the political left. The main
   practical argument in favour 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) and it is
   intuitively true, at least for small face-to-face groups of people.
   Related to this, Alberto Alesina, Rafael Di Tella, and Robert
   MacCulloch find that inequality negatively affects happiness in Europe
   but not in the United States.

   Also, there is the argument that economic inequality invariably
   translates to political inequality, which further aggravates the
   problem.

   The main disagreement between the western democratic left and right, is
   basically a disagreement on the importance of each effect, and the
   where the proper balance point should be. Both sides generally agree
   that the causes of economic inequality based on non-economic
   differences (race, gender, etc.) should be minimized. There is, of
   course, strong disagreement on how this minimization should be
   achieved.

Arguments that inequality is not a primary concern

   The acceptance of economic inequality is generally associated with the
   political right. One argument in favor of the acceptance of economic
   inequality is that, as long as the cause is mainly due to differences
   in behavior, the inequality provides incentives that push the society
   towards economically healthy and efficient behaviour, and is therefore
   beneficial. In addition, capitalists see orderly competition and
   individual initiative as crucial to economic prosperity and accordingly
   believe that economic freedom are more important than economic
   equality.

   Another argument is that more inequality does not necessarily mean more
   poverty, and that although poverty is bad, inequality is not bad in
   itself. Thus, a policy can be considered good if it makes some wealthy
   people more wealthy without making anyone more poor, although it
   increases the total amount of inequality.

   A third argument is that capitalism, especially free market capitalism,
   results in voluntary transactions among parties. Since the transactions
   are voluntary, each party at least believes that they are better off
   after the transaction. According to the subjective theory of value,
   both parties will indeed be better off after the transaction (assuming
   there is no fraud or extortion involved).

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