Income inequality is the gap between rich
and poor i.e. is the differences in the
distribution of economic assets (wealth)
and income within or between populations or
individuals. It is the state of an economy in
which the shares of total income earned by
the rich and poor are highly unequal
According to the United Nations Human
Development Report, the ratio of the income
earned by the richest 10% to that of the
poorest 10% of the population was 15.9 in
the United States in 2007; that ratio was 4.5
in Japan, 9.4 in Canada, 17.7 in
Singapore, and 40.6 in Brazil.
Economic inequality varies between
societies, historical periods, economic structures
and systems (for example, capitalism or
socialism), ongoing and past wars, and between
individuals' abilities to create wealth. It can refer
to cross sectional descriptions of the income or
wealth at any particular period, and to the
lifetime income and wealth over longer periods
of time There are various numerical indices for
measuring economic inequality.
Economic policy makers can face a tradeoff
between promoting equity and economic
growth. As income shares become more
equal, the incentive for individuals to
accumulate skills, work hard, and take risks
might become smaller, thus shrinking the size
of the economy.
CAUSES OF INCOME INEQUALITY
• Labour market
• Policy reforms
• More regressive
• Access to education
• IN MARKET
• Gender pay gap
As development proceeds, the earnings of different groups rise differently. The
incomes of the upper-income and middle-income groups rise more rapidly than
those of the poor, during the early stages of growth through which India is passing
at present shift of population from agriculture which is a slow growing sector to the
modern large industrial sector which grows more rapidly. Again, there is the capitalintensive nature of the development of the modern sector.
Since this absorbs less labour, wages form a smaller proportion of total income.
Hence, the income spread is not wide enough. On the other hand, the capitalintensive type of growth leads to concentration of income in those few hands who
Incomes are derived from two main sources, namely, assets like
land, cattle, shares, etc., and labour. In India a few own a large chunk of income –
earning assets. Some others, who do not own, or own a part of the assets they
operate, organize finances through banks, cooperatives, etc, and acquire/hire
productive assets. These inequalities enable the few to get incomes in the form of
rent, interest and profit.
As these assets accumulate and pass on from generation to generation, the earning
capacity of these increases continuously. As for rural areas, the ownership pattern
of the most important asset, namely, land, is highly unequal. The marginal
households (with holdings less than 1 hectare), which account for as many as 72
per cent of the rural households own very little about 17 per cent of the land.
Alternatively, there are those with large holdings (of more than 10 hectares) who
are about 1 per cent of the rural households. But they have under their ownership
as much as 14 per cent of the area.
Private ownership of property and inheritance laws is mainly responsible for highly
unequal distribution of assets.
Of the large many at the bottom rung of incomes, a very great
proportion lives in the poor backward states regions, and most of the
few at the top live in the high- income states regions.
This is the geographical facet of income inequalities for the country as a
whole. Within the states also there are inequalities, perhaps larger in the
poorer states. Both these aspects are the outcome of the different
growth rates of the states, with a few having grown at a fast rate, and
many having lagged behind.
People at the bottom could raise their economic status and to an extent
reduce the distance separating them from those at the top, if they could
get work. In other words, if they did not possess adequate earning
assets, they could at least earn from their labour.
Rising income inequality is a source of social and political unrest as it can
lead to social discontent and higher crime rates, in turn undermining
investor confidence and adversely affecting the business environment and
a country's economic growth. Across a number of Arab states, high
unemployment and growing inequality has fuelled political and social
unrest from early 2011
Higher income inequality can also result in nonincome disparities such as health and education, thus
hindering a government's effort to reduce poverty. High
incidence of poverty remains a severe problem in some SubSaharan African and South Asian countries;
A widening income gap can impede the development of a
country's consumer markets as purchasing power becomes
concentrated among a small elite. In Kenya, for example, the
richest 10.0% of households (decile 10) spent on average
14.3 times more than the poorest 10.0% of households
(decile 1) in 2011.
High inequality reduces the
pool of people with access
to the resources—such as
land or education--needed
to unleash their full
productive potential. Thus
a country deprives itself of
the contributions the poor
could make to its economic
and social development.
High inequality threatens a
country’s political stability
because more people are
dissatisfied with their
economic status, which
makes it harder to reach
political consensus among
population groups with
higher and lower incomes.
increases the risks of
investing in a country and
so significantly undermines
its development potential.
High inequality limits the
use of important market
instruments such as
changes in prices and fines.
For example, higher rates
for electricity and hot
water might promote
energy efficiency , but in
the face of serious
introducing even slightly
higher rates risk causing
among the poorest citizens.
ADVANTAGES OF INCOME INEQUALITY
Rising income disparities around
the globe split consumers into two
primary groups, the rich and the
poor, thus providing more opportunities
for both luxury and budget goods.
Countries such as China and Russia, for
example, are now among the fastest
growing markets for luxury goods in the
Growing income disparities impede the
growth of the middle class, an
important consumer segment for
discretionary (non-essential) goods. In
Russia, for example, the share of social
class C to total population aged 15+
contracted significantly from 16.3% in
2006 to 13.5% in 2011. In China, social
class C accounted for 15.8% of
population aged 15+ in 2011, slightly
down compared to 16.2% in 2006
Low inequality (with no
private profits and minimal
differences in wages and
salaries) deprived people of
the incentives needed for
their active participation in
diligent work and vigorous
The consequences were
poor discipline and low
workers, poor quality and
limited selection of goods
and services, slow technical
eventually, slower economic
growth leading to more
Inequality is necessary to
encourage entrepreneurs to
take risks and set up new
business. Without the
prospect of substantial
rewards, there would be
little incentive to take risks
and invest in new business
education: it improves
standard of living of people
and brings prosperity. It
rewards actors of the
economy for increased
investment in future;
suppression of inequality
has an affect of discouraging
• If firms have monopoly power, they are in a position to set higher
prices to consumers. This leads to a redistribution of income from
consumers to the shareholders of monopolies. Here, the inequality is
based on an unfair distribution of power in society.
• Income has a diminishing marginal utility. The first £1,000 of
income you earn gives substantial benefits. With this first £1,000
we can buy food to eat and contribute towards your rent and
other basic necessities. Our first £1,000 has the highest utility
because it is essential to maintain life and avoid absolute poverty.
If we gain another £1,000 income this also increases your utility
(satisfaction) because we can now buy better quality food and
have improved shelter. But, the increase in utility is less than first
• However, if we are a millionaire and gain an extra £1,000. The
extra (marginal) utility is very limited. We can maybe buy a
slightly more expensive car, we can buy a yacht that is 3ft bigger.
But, the increase in utility / satisfaction is fairly limited.
• Therefore increasing income equality can lead to an overall net
gain because the poor see a bigger increase in utility than the
loss faced by high earners.
MEASUREMENT OF INEUALITY IN THE
LORENZ CURVES AND GINI COEFFICIENTS
Lorenz curve: A Lorenz curve shows the
degree of inequality that exists in the
distributions of two variables, and is often
used to illustrate the extent that income
or wealth are distributed unequally in a
Gini coefficient: A Gini coefficient is
a summary numerical measure of how
unequally one variable is related to
another. The Gini coefficient is a number
between 0 and 1, where perfect equality
has a Gini coefficint of zero, and absolute
inequality yields a Gini coefficint of 1.
HHOW TO CALCULATE GINI COEFFICIENT
Arrange the data from lowest to highest.
2. Calculate the total income: $123,500.00
3. Divide into quintiles. 10/5 = 2 earners in each quintile. Bill and Zak compose the
lowest quintile or 20% of income earners; Robert and Jose compose the second quintile
or cumulative of 40% of income earners; Ericka and Kai compose the third quintile, or a
cumulative of 60% of income earners; Juan and Harry compose the fourth quintile, or a
cumulative of 80% of income earners; and Kathleen and Emily are the fifth quintile or a
cumulative of 100% of income earners.
4. Calculate the total income and convert into % :
INCOME ( $)
5. Calculate the cumulative percentage of household income.
Calculate the area under the Lorenz Curve
using the properties of a trapezoid. The
formula is: ½(b1 + b2).2.
Subtract area under the line of perfect
equality from the area under the Lorenz
In other words, .5 - .33 = .17. This is the area
between the line of perfect equality and the
15. The Gini Coefficient is found by taking
the ratio of the area between the line of
perfect equality and the Lorenz Curve to the
area under the line of perfect equality. That
is: .17/.50 = .34. The Gini Coefficient is .34.
Distribution of Social Class in Selected Countries: 2011 -
Social Class data refer to the
number of individuals whose
incomes fall within a specified range
of the average gross income of all
individuals aged 15+ in that country
or region. Social Class A: +200%;
Social Class B: between 150% and
200%; Social Class C: between
100% and 150%; Social Class D:
between 50% and 100% and Social
Class E: less than 50% of the
average gross income.
Nonetheless, the middle class continues to expand in absolute terms in most
developing and emerging economies as a result economic and population growth.
Businesses in the non-essential goods sectors will therefore continue benefiting
from the middle income groups. India's social class C, for instance, grew by 3.9%
during 2006-2011 to reach 101 million people in 2011.
In developed economies, rapid population ageing will continue putting pressures on
public expenditure, while high unemployment, budget spending cuts and economic
slowdown are major factors contributing to greater income disparities in the future.
The implementation of a fiscal austerity plan in the United Kingdom in 2010 in order
to cut the country's large budget deficit (8.4% of GDP in 2011) has added to an
increase in income disparity going forward, with the country's Gini coefficient
forecast to rise from 33.7% in 2011 to 35.0% by 2020.
Many developed countries
have seen a
worsening income distributi
on as continued population
ageing burdens public
health expenditure, while
debts as a result of the
global economic downturn
of 2008-2009 reduced state
resources to assist the poor.
The median age of the
increased from 28.2 years
in 2006 to 29.4 in 2011 -
Income distribution in
developing nations is
uneven as the benefits of
economic growth is
distributed, especially true
in natural resources-rich
nations where export
revenues are controlled by
a small elite. During 20062011, Indonesia and Russia
saw the highest increases
in income inequality levels
worldwide, from a Gini
coefficient of 33.0% and
41.6% in 2006 to 37.7% .
47.3% in 2011, respectively;
While Latin America
remains the most unequal
region in the world, it has
also seen some of the
in income disparity during
2006-2011, in part due to
the growing popularity of
socialist and welfarefocused governments.
Bolivia, for example, saw its
Gini coefficient decline
from 59.2% in 2006 to
55.5% in 2011.
The incidence of poverty is much
The gini coefficient in 2009 was
0.543, having perceived in decline over
The richest quintile receives more than
30 times more than the poorest
Brazil implements a regressive tax
system which burdens the poor. The tax
load of those in higher income brackets
earning more than 30 times the income
wage a month amounted to 26.3%.In
juxtaposition, those with twice the
minimum wage were taxed twice the
Poverty level is lower.
The gini coefficient is fluctuating with
0.463 in around 2000, 0.497 in mid
2000s and 0.466 on late 2000s.
The richest 20% (quintile)of the
population receives more than 5 times
the poorest quintile.
Low income households suffer the most
from loan repayment obligations.
2002-2003: moderate decline in income
inequality due to redistribution policies
by increasing the transfers to lower
middle class, and increasing the tax
burden on upper middle class.
• inequality and social
stratification lead to
higher levels of
psychosocial stress and s
tatus anxiety which can
life, parenting problems
• In recent years, life
expectancy (i.e. the
pattern of higher
income-longer life) has
dropped among middle
class earners and
plateaued among the
richest 30 countries). For
instance, Americans live
no longer on average
(about 77 years in 2004)
than Greeks (78 years)
Zealanders (78), though
the USA is almost twice
• higher rates of health
and social problems
illness, homicides, teena
births, incarceration, chi
ld conflict, drug
use), lower rates of
social goods (life
shows an inverse link
inequality and social
cohesion. In more equal
societies, people are
much more likely
to trust each
other, enjoying the
goodwill, fellowship with
lower homicide rates.
HEALTH AND SOCIAL COHESION
• Tendencies for violence
to be more common in
societies where income
differences are larger.
About half of all
variation in homicide
rates can be accounted
for by differences in the
amount of inequality in
each province or state.
Economic inequality is
significantly related to
rates of homicide
despite an extensive list
of conceptually relevant
controls. Higher income
inequality led to less of
all forms of
social, cultural, and civic
participation among the
less wealthy. When
inequality is higher the
poor do not shift to less
expensive forms of
PUBLIC EDUCATION: increasing the supply of skilled labor and reducing income inequality due to
MINIMUM WAGE LEGISLATION : raising the income of the poorest workers (for the ones that
don't lose their jobs due to the minimum wage).
NATIONALIZATION OR SUBSIDISATION OF PRODUCTS: providing goods and services that everyone
needs cheaply or freely (such as food, healthcare, and housing), governments can effectively raise
the purchasing power of the poorer members of society.
PROGRESSIVE TAXATION: the rich are taxed proportionally more than the poor, reducing the
amount of income inequality in society if the change in taxation does not cause changes in
UNIONIZATION: 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.
Tax and transfer systems play a key role in lowering overall income inequality. Three quarters of
the average reduction in inequality they achieve across the OECD is due to transfers. However, the
redistributive impact of cash transfers varies widely across countries, reflecting both the size and
progressivity of these transfers. In some countries(e.g. Australia, the United Kingdom to a lesser
extent), cash transfers are small in size but highly targeted on those in need. In some others (e.g.
France or Germany), large transfers redistribute income mainly over the life-cycle rather than
across individuals, and their progressivity is often low.