Income Inequality, and How It Is Measured

Dif­fer­ence between poverty and income inequal­ity#

Income inequal­ity is the degree to which income is dis­trib­uted unequally through­out a pop­u­la­tion. Wealth inequal­ity is how unequal the dis­tri­b­u­tion of wealth is through­out a pop­u­la­tion.

A pop­u­la­tion can be divided up in many dif­fer­ent ways to study and under­stand how income and wealth are dis­trib­uted.

The pop­u­la­tion can be divided up by age to see how income is dis­trib­uted between the old and the young.

Poverty, on the other hand, as described in the pre­vi­ous sec­tion, is when peo­ple are unable to afford the suf­fi­cient neces­si­ties to sus­tain them­selves.

Mea­sure­ments of income inequal­ity#

Let's dis­cuss some of the mea­sure­ments of income inequal­ity. Econ­o­mists mea­sure income inequal­ity using a vari­ety of cri­te­ria. The most gen­er­ally used mea­sures - the Lorenz curve, the Gini coef­fi­cient, decile ratios, the Palma ratio, and the Theil index - all have mer­its and lim­its.

The choice of what to mea­sure is also cru­cial: pre-tax and after-tax income, con­sump­tion, and wealth are help­ful indi­ca­tors, as are var­i­ous sources of income such as wages, cap­i­tal gains, taxes, and perks.

Under­stand­ing the dimen­sions of eco­nomic inequal­ity is a crit­i­cal first step in deter­min­ing the best solu­tions to com­bat it.

Mea­sure­ments of income inequal­ity: The Lorenz curve#

The Lorenz curve is one mea­sure of income inequal­ity. It graph­i­cally depicts how income is dis­trib­uted through­out a pop­u­la­tion.

As the fig­ure shows, the cumu­la­tive per­cent­age of the pop­u­la­tion is plot­ted against the cumu­la­tive per­cent­age of the income of a pop­u­la­tion. The straight line of equal­ity shows a per­fectly equal soci­ety. The Lorenz curve is below the line of equal­ity. The fur­ther away it is, the greater the income inequal­ity.

Mea­sure­ments of income inequal­ity: The Gini coef­fi­cient#

The Gini Coef­fi­cient is related to the Lorenz curve. It is the ratio of the area between the 45-degree line of equal­ity and the Lorenz curve to the whole area under the line of equal­ity.

Its val­ues range from 0 to 1. A value of 0 means that income is per­fectly shared equally across soci­ety. A value of 1 would mean that one sin­gle per­son has access to all the income in a coun­try.

The closer the Gini coef­fi­cient is to 1, the more unequal the dis­tri­b­u­tion of income.

Causes of poverty and income inequal­ity#

There are many causes of both poverty and income inequal­ity. Some causes are:

• Wages. Unequal dis­tri­b­u­tion of wages on grounds of higher edu­ca­tional achieve­ments or longer work­ing hours causes a dis­par­ity among the higher income earn­ers and lower-income earn­ers. A higher-income earner can save more, which build up more wealth com­pared to a lower-income earner whose basic needs take prece­dence.
• Wealth lev­els. A higher level of wealth even­tu­ally leads to more wealth. With more wealth, peo­ple can take on riskier invest­ments with higher returns, which raise their income fur­ther.
• Chance. This is based on good deci­sion mak­ing and luck of the peo­ple who either choose the right sort of job that increases their income or they invest in assets that increase their wealth.
• Age. Work­ing adults at the peak of their careers usu­ally earn more than peo­ple just start­ing out, and older peo­ple have had time to build up wealth and assets.
• Posi­tion in the world econ­omy. This helps explain dif­fer­ences in income and wealth between coun­tries. Devel­op­ing coun­tries may be at a dis­ad­van­tage in inter­na­tional trade and nego­ti­a­tions, which tend to favour devel­oped coun­tries.

Com­mon ques­tions#

What is the dif­fer­ence between poverty and inequal­ity?#

Poverty is when peo­ple can­not afford the suf­fi­cient neces­si­ties to sus­tain them­selves. Inequal­ity refers to the unequal dis­tri­b­u­tion of income or wealth which results in some peo­ple hav­ing more than oth­ers.

What is the rela­tion­ship between eco­nomic growth, poverty and inequal­ity?#

Eco­nomic growth pos­i­tively affects absolute poverty by rais­ing the lev­els of income. How­ever, it may not reduce rel­a­tive poverty, because the ben­e­fits of growth may not be shared equally.

How is inequal­ity mea­sured?#

Inequal­ity can be mea­sured through the Lorenz curve or the Gini Coef­fi­cient.