The concepts of economic inequality, income and wealth

Economic inequality refers to the uneven spread of income and wealth across a population. It highlights differences in financial resources available to various groups within society.

Economic inequality

Economic inequality is the uneven allocation of income and wealth among individuals or households.

Household income

Household income is the total payments a household receives over a set period from using factors of production, including rent from property, wages from employment, interest from savings, and profit from business activities.

Wealth

Wealth is the net value of what a household owns at a particular moment, calculated as the worth of assets minus any debts owed. Assets can include items like bank savings, shares, bonds, properties, vehicles, and other valuables.

Distinctions between income and wealth, including levels of inequality

Income and wealth are related but separate ideas. For instance, someone who has retired might possess considerable wealth from owning a valuable property but receive only a small regular income.

Key differences between income and wealth

• Households can draw on wealth to spend more than their current income allows, or they might spend less than they earn to build up their wealth over time.
• On average, wealth tends to exceed income. Data from 2016 across Organisation for Economic Co-operation and Development (OECD) countries showed average household income at $27,000 annually, while average net household wealth reached $71,500.

Patterns of inequality in income and wealth

• Wealth shows greater inequality than income. In OECD nations, the level of wealth inequality is typically double that of income inequality.
• Wealth can produce additional income, meaning that growing wealth gaps often lead to wider income gaps as well.
• In the USA, wealth inequality is particularly high, with the top 10% of households holding 75% of total wealth, while the bottom 40% hold just over 3%.
• Lower wealth inequality appears in countries like Japan, Poland, Greece, and Belgium, where the top 10% own slightly more than 45% of total wealth.
• Some nations with high wealth inequality, such as the Netherlands and Denmark, maintain relatively even income distribution.

Equality compared to equity in income distribution

Equality and equity are distinct ideas when considering how income is shared in society. While equality means everyone receives the same, equity focuses on fairness, which can vary based on societal views.

Equality

Equality involves identical distribution of income or resources to all individuals, regardless of circumstances.

Equity

Equity refers to a fair distribution, which might not be equal but takes into account factors like needs or contributions. Different cultures have varying ideas of what counts as fair.

There is broad agreement that very high levels of inequality are unjust, but opinions differ on the ideal level of income distribution. Equity is often seen as reducing inequality in the portions of income that people receive, aiming for a more balanced society.

The Lorenz curve as a measure of income distribution

The Lorenz curve is a visual tool used to illustrate how income is distributed across a population. It helps compare actual distributions against a scenario of perfect equality.

Features of the Lorenz curve

• The curve plots the cumulative percentage of the population (on the horizontal axis) against the cumulative percentage of total income they receive (on the vertical axis).
• A straight diagonal line on the graph represents perfect equality, where each portion of the population receives the same share of income.
• Greater income inequality causes the curve to bow further away from the diagonal line to the right.
• Reduced inequality moves the curve closer to the diagonal.

Constructing a Lorenz curve

Lorenz curves are built using data on income shares, often divided into quintiles (groups of 20% of the population). This shows the cumulative income received by increasing percentages of the population, from the lowest earners upwards.

The Gini coefficient and global inequality patterns

The Gini coefficient provides a numerical measure of income inequality, derived from the Lorenz curve. It summarises the degree of inequality in a single value.

Formula for the Gini coefficient

$\text{Gini coefficient}=\frac{\text{area A}}{\text{area A}+\text{area B}}$

Where:

• Area A = The space between the Lorenz curve and the diagonal line of equality
• Area B = The space below the Lorenz curve up to the bottom-right corner of the graph

Interpreting the Gini coefficient

• Values range from 0 (complete equality, where everyone has the same income) to 1 (extreme inequality, where one person has all the income).
• Typical real-world values fall between 0.25 and 0.60.
• Low Gini coefficients appear in Northern European countries like Sweden, Norway, Denmark, and Austria, indicating more even distributions.
• High Gini coefficients occur in places like Lesotho, South Africa, and parts of Latin America.
• Among advanced economies, the USA has relatively high income inequality, with its Gini coefficient rising from 0.38 to 0.45 by 2020.
• China's Gini coefficient is approaching 0.47, reflecting increasing inequality.