Economic inequality

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 absolute inequality (where one person has all the
income, and everyone else has zero income).
Economic inequality is the difference found in various measures of economic well-being among
individuals in a group, among groups in a population, oramong countries. Economic inequality is
sometimes called income inequality, wealth inequality, or the wealth gap. Economists generally focus on
economic disparity in three metrics: wealth, income, and consumption.[1] The issue of economic
inequality is relevant to notions of equity, equality of outcome, and equality of opportunity.[2]
Economic inequality varies between societies, historical periods, economic structures and systems. The
term can refer to cross-sectional distribution of income or wealth at any particular period, or to changes
of income and wealth over longer periods of time.[3] There are various numerical indices for measuring
economic inequality. A widely used index is the Gini coefficient, but there are also many other methods.
Some studies say economic inequality is a social problem.[4] E.g., too much inequality can be
destructive,[5][6] because it might hinder long term growth.[7][8][9] Too much income equality is also
destructive since it decreases the incentive for productivity and the desire to take-on risks and create
wealth.[10][11][12][13]
Empirical measurement of inequality
Economists generally consider three metrics of economic dispersion: wealth, income,
and consumption.[1] A skilled professional may have low wealth and low income as student, low wealth
and high earnings in the beginning of the career, and high wealth and low earnings after the career.
People's preferences determine whether they consume earnings immediately or defer consumption to
the future. The distinction is also important at the level of economy:

There are economies with high income inequality and relatively low wealth inequality (such as
Japan and Italy).[1]

There are economies with relatively low income inequality and high wealth inequality (such as
Switzerland and Denmark).[1]

There are many different ways to measure income inequality and wealth inequality. Different choices lead
to different results. The Organisation for Economic Co-operation and Development (OECD) provides data
on the following eight types of income inequality:[14]

Dispersion of hourly wages among full-time (or full-time equivalent) workers

Wage dispersion among workers E.g. annual wages, including wages from part-time work or
work during only part of the year.

Individual earnings inequality among all workers Includes the self-employed.

Individual earnings inequality among the entire working-age population Includes those who are
inactive, e.g. students, unemployed, early pensioners, etc.

Household earnings inequality Includes the earnings of all household members.

Household market income inequality Includes incomes from capital, savings and private
transfers.

Household disposable income inequality Includes public cash transfers received and direct taxes
paid.

Household adjusted disposable income inequality Includes publicly provided services.

There are many challenges in comparing data between economies, or in a single economy in different
years. Examples of challenges include:

Data can be based on joint taxation of couples (e.g. France, Germany, Ireland, Netherlands,
Portugal and Switzerland) or individual taxation (e.g. Australia, Canada, Italy, Japan, New Zealand,
Spain, the UK).[14]

The tax authorities generally only collect information on income that is potentially taxable.[14]

The precise definition of gross income varies from country to country. There are differences when
it comes to inclusion of pension entitlements and other savings, and benefits such as employer
provided health insurance.[14]

Differences when it comes under-declaration of income and/or wealth in tax filings.[14]

A special event like an exit from business may lead to a very high income in one year, but much
lower income in other years of the person's lifetime.[14]

Much income and wealth in non-western countries is obtained or held extra-legally through black
market and underground activities such as unregistered businesses, informal property ownership
arrangements, etc.[15]

Measurements
A 2011 study "Divided we Stand: Why Inequality Keeps Rising by the Organisation for Economic Cooperation and Development (OECD) investigated economic inequality in OECD countries, including the
following factors:[16]

Changes in the structure of households can play an important role. Single-headed households in
OECD countries have risen from an average of 15% in the late 1980s to 20% in the mid-2000s,
resulting in higher inequality.

Assortative mating refers to the phenomenon of people marrying people with similar background,
for example doctors marrying doctors rather than nurses. OECD found out that 40% of couples
where both partners work belonged to the same or neighbouring earnings deciles compared with
33% some 20 years before.[14]

In the bottom percentiles number of hours worked has decreased.[14]

The main reason for increasing inequality seems to be the difference between the demand for
and supply of skills.[14]

Income inequality in OECD countries is at its highest level for the past half century. The ratio
between the bottom 10% and the top 10% has increased from 1:7, to 1:9 in 25 years.[14]

There are tentative signs of a possible convergence of inequality levels towards a common and
higher average level across OECD countries.[14]

With very few exceptions (France, Japan, and Spain), the wages of the 10% best-paid workers
have risen relative to those of the 10% lowest paid.[14]

A
2011
OECD
study
investigated
economic
inequality
in Argentina, Brazil, China, India, Indonesia, Russia and South Africa. It concluded that key sources of
inequality in these countries include "a large, persistent informal sector, widespread regional divides (e.g.
urban-rural), gaps in access to education, and barriers to employment and career progression for
women."[14]
A study by the World Institute for Development Economics Research at United Nations University reports
that the richest 1% of adults alone owned 40% of global assets in the year 2000. The three richest
people in the world possess more financial assets than the lowest 48 nations combined.[17] The combined
wealth of the "10 million dollar millionaires" grew to nearly $41 trillion in 2008.[18] A January 2014 report
by Oxfam claims that the 85 wealthiest individuals in the world have a combined wealth equal to that of
the bottom 50% of the world's population, or about 3.5 billion people.[19][20][21][22][23] According to a Los
Angeles Times analysis of the report, the wealthiest 1% owns 46% of the world's wealth; the 85 richest
people, a small part of the wealthiest 1%, own about 0.7% of the human population's wealth, which is the
same as the bottom half of the population.[24] More recently, in January 2015, Oxfam reported that the
wealthiest 1 percent will own more than half of the global wealth by 2016.[25][26] An October 2014 study
by Credit Suisse also claims that the top 1% now own nearly half of the world's wealth and that the
accelerating disparity could trigger a recession.[27] In October 2015, Credit Suisse published a study which
shows global inequality continues to increase, and that half of the world's wealth is now in the hands of
those in the top percentile, whose assets each exceed $759,900.[28] A 2016 report by Oxfam claims that
the 62 wealthiest individuals own as much wealth as the poorer half of the global population
combined.[29] Oxfam's claims have however been questioned on the basis of the methodology used: by
using net wealth (adding up assets and subtracting debts), the Oxfam report, for instance, finds that there
are more poor people in the United States and Western Europe than in China (due to a greater tendency
to take on debts).[30][31][32][33][34] Anthony Shorrocks, the lead author of the Credit Suisse report which is
one of the sources of Oxfam's data, considers the criticism about debt to be a "silly argument" and "a nonissue . . . a diversion."[31]
According to PolitiFact the top 400 richest Americans "have more wealth than half of all Americans
combined."[35][36][37][38] According to the New York Times on July 22, 2014, the "richest 1 percent in the
United States now own more wealth than the bottom 90 percent".[23] Inherited wealth may help explain
why many Americans who have become rich may have had a "substantial head start".[39][40] In September
2012, according to the Institute for Policy Studies, "over 60 percent" of the Forbes richest 400
Americans "grew up in substantial privilege".[41]
The existing data and estimates suggest a large increase in international (and more generally intermacroregional) component between 1820 and 1960. It might have slightly decreased since that time at
the expense of increasing inequality within countries.[42]

The United Nations Development Programme in 2014 asserted that greater investments in social security,
jobs and laws that protect vulnerable populations are necessary to prevent widening income
inequality....[43]
There is a significant difference in the measured wealth distribution and the publics understanding of
wealth distribution. Michael Norton of the Harvard Business School and Dan Ariely of the Departement of
Psychology at Duke University found this to be true in their research, done in 2011. The actual wealth
going to the top quintile in 2011 was around 84% where as the average amount of wealth that the general
public estimated to go to the top quintile was around 58%.[44]
Global income inequality is decreasing, due to strong economic growth in developing countries.[45] Income
inequality is higher than it has ever been within OECD member nations and is at increased levels in many
emerging economies.[46] According to a June 2015 report by the International Monetary Fund:
Widening income inequality is the defining challenge of our time. In advanced economies, the gap
between the rich and poor is at its highest level in decades. Inequality trends have been more mixed in
emerging markets and developing countries (EMDCs), with some countries experiencing declining
inequality, but pervasive inequities in access to education, health care, and finance remain.[47]