Economic inequality, also known as wealth inequality, is defined as the quantifiable gap between a range of economic yardsticks which measure the welfare of individuals in a group, among groups within a population, or among entire nations. Broadly speaking, economists calculate economic inequality using three metrics: wealth distribution, distribution of income, and rates of consumption.

Economic inequality manifests itself differently depending on the society, historical period, and type of economy in question. It can cover the cross-sectional distribution of income for a specific period, or the lifetime income and wealth over extended periods. Economic inequality can be measured using several numerical indices – one of the most popular among them is the Gini coefficient (also known as the Gini index and Gino ratio). The Gini coefficient is the brainchild of Italian statistician and sociologist Corrado Gini, and was originally published in his work “Variability and Mutability” in 1912. The Gini coefficient was devised by Gini as a means of accurately measuring wealth or income disparity.

The Gini coefficient scale ranges from zero to one; a rating of zero denotes complete equality across all metrics, whereas a rating of one denotes absolute economic inequality, representing a scenario were a single person holds all of a group or nation’s income. When applying the Gini coefficient to big groups, like a whole country, a rating of, or around one is highly unlikely and rarely seen.

 

Types of Economic Inequality

Economic inequality can be divided into three main types:

  1. Income disparity

    2. Income disparity, or income inequality, refers to the uneven level of income distribution within a given group. Income does not only refer to money obtained in a monthly salary. Rather, it includes all money that a person receives – from employment (wages, bonuses, etc.), investment (interest awarded to a bank account, stocks or shares dividends, private pensions, etc.), and state benefits such as state pensions.

    Income disparity can be measured in relation to an individual or a multi-person household where the collective incomes of the residents are considered. A household’s income, excluding tax, which also includes all money obtained via social security, is called gross income. Household income after tax and the above-mentioned social benefits is called net income.

  2. Pay inequality

    3. An individual’s pay is not the same as their income. Pay is defined as the money distributed from an employer to an employee by the hour, month or year – bonuses also fall under the bracket of pay. Pay inequality refers to the imbalance between different people’s pay and can be measured within a single business or across an entire nation.

  3. Wealth inequality

    4. Wealth describes the combined number of assets held by an individual or a household. This can include things like financial assets, such as bonds and shares, property and privately arranged pensions. Wealth inequality occurs when assets are spread out unevenly within a group.

 

Economic Inequality and Equality: A Fine Balancing Act

 

It may sound counterintuitive, but very high levels of, or absolute equality can prove detrimental. When there is too much equality, innovation suffers. People in this scenario are less inclined to take entrepreneurial risks, something which contributes to continued growth. This also leads to reduced productivity. Essentially, absolute equality can see a country drift into its comfort zone – even leading to economic stagnation or worse, regression. As such, there is a fine line between enjoying the harmonious benefits of economic equality and allowing it to negatively impact the future progress of a country. With this in mind, it can be argued that states should strive toward having some levels of economic inequality in their society. This has led to constant studies and discussions among economists regarding how to achieve the Goldilocks level of equality, and what an optimal amount of equality looks like in practice.

 

Expand Your Knowledge with the GED Team

 

If our take on economic inequality has whet your appetite for learning more about wealth distribution statistics, then why not read our impulse paper ‘The Impact of Income Inequality on Economic Growth’. This paper questions the impact of increasing income inequality by examining the existing economic state of play in Germany and several other developed countries.

Here at GED, we’re driven by our commitment to spreading knowledge as far as possible. We encourage our readers to be as inquisitive as we are, which is why we make our insightful and award-winning studies and data visualisation tools available for free on our website. Get started on building your understanding of global economic dynamics by reading the GED perspective on EU competition law.

Related Posts: