Economic inequality is the difference found in various measures of economic well-being among individuals in a group, among groups in a population, or among 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. The issue of economic inequality is relevant to notions of equity, equality of outcome, and equality of opportunity.
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. 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, for example too much inequality can be destructive, because it might hinder long term growth. However, too much income equality is also destructive since it decreases the incentive for productivity and the desire to take-on risks and create wealth.
Wealth inequality can be described as the unequal distribution of assets within a population. The United States exhibits wider disparities of wealth between rich and poor than any other major developed nation.
We equate wealth with “net worth,” the sum total of your assets minus liabilities. Assets can include everything from an owned personal residence and cash in savings accounts to investments in stocks and bonds, real estate, and retirement accounts. Liabilities cover what a household owes: a car loan, credit card balance, student loan, mortgage, or any other bill yet to be paid.
The Causes of Economic Inequality
(i) Wages are determined by labor market
Wages are a function of the market price of skills required for a job . In a free market, the “market price of a skill” is determined by market demand and market supply. The market price of a skill, and hence the wage for the job that requires the skill, is low if a large number of workers (high supply) are willing and able to offer that skill but only a few employers need it (low demand). On the contrary, when there is low supply but high demand for a skill, the wage for a job requiring the skill goes up.
(ii) Education affects wages
Individuals with different levels of education often earn different wages . This is probably related to reason one: the level of education is often proportional to the level of skill. With a higher level of education, a person often has more advanced skills that few workers are able to offer, justifying a higher wage.
The impact of education on economic inequality is still profound in developed countries and cities . Although there are usually policies of free education in developed nations, levels of education received by each individual still differ, not because of financial ability but innate qualities like intelligence, drive and personal ability. For example, in Hong Kong, 12 years of free education are provided for each citizen, not covering tertiary education, offered only when students receive certain results on public exams.
Moreover, receiving the same level of education does not mean receiving education of the same quality. This accounts for the difference in abilities and hence wages for individuals all receiving, for example, 12 years of education. Therefore, it seems no matter how good the social welfare policy of a country is at preventing denial of education due to financial difficulties, differences in education, in terms of levels and quality, still play a prominent role in economic inequality.
(iii) Growth in technology widens income gap
Growth in technology arguably renders joblessness at all skill levels . For unskilled workers, computers and machinery perform a lot of tasks these workers used to be do. In many jobs, such as packaging and manufacturing, machinery works even more effectively and efficiently. Hence, jobs involving repetitive tasks have largely been eliminated. Skilled workers are not immune to the nightmare of losing jobs. The rapid development in artificial intelligence may ultimately allow computers and robots to perform knowledge-based jobs .
The impact of increasing unemployment is stagnant or decreasing wages for most workers, as there is a low demand for but high supply of labor. A small portion of society, usually the owners of capital, controls an ever-increasing fraction of the economy . The income gap between workers who earn by their skills and owners who earn by investing in capital has widened.
Although both skilled and unskilled workers are adversely affected by the technological advance, it seems unskilled workers are subject to worse outcomes . This is because the labor market may still need skilled workers to use computers and operate the advanced machines. The rightward shift in the demand for skilled labor creates an increase in the relative wages of the skilled compared to the unskilled workers. Hence, the income gap among workers also has widened.
(iv) Gender does matter
In many countries, there is a gender income gap in the labor market . For example, in America, the median full-time salary for women is 77 percent of that of men . However, women who work part time make more on average than men who work part-time . Additionally, among people who never marry or have children, women make more than men .
It may be difficult to justify such differences. According to a U.S. Census report , the wage gap is not fully explained even after accounting for key factors that affect earnings, such as discrimination and the tendency of women to consider factors other than pay when looking for work. The only thing we know for sure is that gender does contribute to a difference in wages in society and hence economic inequality.
(v) Personal factors
It is generally believed that innate abilities play a part in determining the wealth of an individual. Hence, individuals possessing different sets of abilities may have different levels of wealth, leading to economic inequality . For example, more determined individuals may keep improving themselves and striving for better achievements, which justifies a higher wage.
Another example is intelligence . A lot of people believe that smarter people tend to have higher income and hence more wealth. This is debatable. In the book IQ and the Wealth of Nations, Dr. Richard Lynn opined that there is a correlation of 0.82 between average IQ and GDP. However, Stephen Jay Gould, in the book The Mismeasure of Man, criticized it for employing the wrong methods of evaluation.
In addition to innate abilities, diversity of preferences, within a society or among different societies, contributes to the difference in wealth . When it comes to working harder or having fun, equally capable individuals may have totally different priorities, resulting in a difference in their incomes. Their saving patterns may also differ, leading to different levels of accumulated wealth.
Inequality is a vicious cycle
“The rich get richer, the poor get poorer” is not just a cliche. The concept behind it is a theoretical process called “wealth concentration.” Under certain conditions, newly created wealth is concentrated in the possession of already-wealthy individuals . The reason is simple: People who already hold wealth have the resources to invest or to leverage the accumulation of wealth, which creates new wealth. The process of wealth concentration arguably makes economic inequality a vicious cycle.
The effects of wealth concentration may extend to future generations . Children born in a rich family have an economic advantage, because of wealth inherited and possibly education, which may increase their chances of earning a higher income than their peers. These advantages create another round of the vicious cycle.
The French economist Thomas Picketty recently published a book, Capital in the Twenty-First Century . Picketty’s thesis supports the previous proposition. It is a 700-page book on the topic of income inequality. The rich collection of statistics in the book shows that in almost every country (examined by Picketty), the wealth gap has widened since 1980. Picketty holds the view that inequality will remain as long as the aforementioned wealth concentration process persists through generations. However, Picketty argued that global inequality has probably decreased, as there has been rapid growth in Asia partly at the expense of lower-to-middle income earners in developed countries. The statistics show economic inequality is not just the top 10 percent of the population is richer than the bottom 20 percent. Rather, it is “1 percent versus the remaining 99 percent,” i.e. the top 1 percent of the population has the vast majority of wealth in the economy and control of financial markets.
Other factors :
- Corruption , Culture , Religion & stagnant wages with raise of inflation
- Inequality of economic opportunity Educational inequality
- Inherited wealth
- Little / Non-redistributive government policies
- Unequal parental resources
Income Inequality vs. Wealth Inequality
In the past few years, economic inequality has become a mainstream political issue. We often hear politicians speak about “income inequality.” We should be speaking about wealth inequality, instead.
If you think about it for a moment, it’s pretty odd that “income inequality” has become the shorthand term for our big national discussion about class war. (It’s become so common that I’ve used it myself quite a bit, though I’m going to try to speak more specifically in the future.) Income inequality refers to a very specific thing: the widening gap between annual incomes in America. But annual income is simply a measure of how much you have coming in (or how much you happen to be declaring on your tax forms) in a single year. A much more useful topic of discussion—one that does a far better job of getting to the heart of what we really mean when we talk about economic inequality—is wealth inequality. Income inequality only matters insofar as it effects wealth inequality, anyhow. And if we’re not careful, focusing on income inequality can lead us astray from the larger goal of creating a fairer and more economically equal society.
Person A and Person B both have an income of $25,000 per year. But A has a net worth of $1 million, and B has a net worth of $0. Here we have no income inequality, and yet Person A flourishes, while Person B struggles to survive. This is a very simple illustration of why wealth is what really matters, rather than income. Add to that the myriad complex financial schemes that very rich people can use to minimize their taxable income, and the reason for focusing on wealth becomes even more clear. For all of the derision aimed at Thomas Piketty’s proposed solution to inequality (a global wealth tax), it is worth noting that his solution would have at least addressed wealth in its totality, rather than just income.
I point this out on the occasion of a new study that says that, contrary to popular narrative, income inequality has not grown during the Obama administration—roughly the same period as the Great Recession and the subsequent recovery. It calls the perception that income inequality has grown during this time a “statistical gimmick.” Specifically, the researcher, Stephen Rose, says, “While the richest 1 percent of households saw their after-tax incomes decline by 27 percent from 2007 to 2011, earnings of those in the bottom 95 percent of the income ladder dropped just 1 or 2 percent.” Rose attributes the difference between his findings and previous announcements about growing inequality during this same general time period to the use of different sets of years and different definitions of “income” in certain data sets.
Though this study was announced in the New York Times under the eye-grabbing headline “Inequality Has Actually Not Risen Since the Financial Crisis,” we should put this all into perspective before it spirals out into a new right wing talking point:
A) Even if income inequality has not risen since the financial crisis, income inequality is still at near-historic levels, and has been rising for three decades, and is generally very worrisome.
B) Even if income inequality has not risen since the financial crisis, wealth inequality may have risen since the financial crisis.
C) Income inequality is already very bad whether or not it has risen in the very recent past.
D) More importantly, wealth inequality is already very bad whether or not income inequality is rising or falling at the present moment.
This latest study is actually meant to be used to point out that the Obama administration’s policies were successful in ameliorating some of the impact of the recession on the less-than-rich. But we all know that it will be lightly skimmed and then used to dismiss the very idea that economic inequality is still a pressing issue. Let’s not allow that to happen.
Tax the rich. Tax the wealth of the rich. And don’t believe the hype.
Read more on the book : Why nation fail
News from ST :
Income + wealth inequality = More trouble for society
Much attention given to inequality in Singapore in recent years has focused on income inequality. There is a good reason: Singapore’s income gap, as measured by the Gini coefficient for income, is one of the widest among developed countries at 0.478.
The Gini measures how income is distributed in a society. The closer the Gini is to 1, the more unequal the distribution of income.
To narrow this gap, the Government has made efforts to raise wages at the bottom and increase taxes on wealth at the top. Among other things, it has given cash handouts and supplemented incomes with Workfare Income Supplements for low-income earners.
It is also working with tripartite partners to boost incomes for low-wage sectors. It recently required cleaning companies to follow wage guidelines for cleaners’ starting pay.
In addition, the Government has started extracting a bigger pound of flesh from the rich through the tax system. Last year’s Budget introduced more taxes on high-end assets, including luxury cars and homes.
Some analysts are predicting more such moves to help lessen the income divide in this year’s Budget on Feb 21.
But the income gap is only one part of what separates the rich from the poor. Another – possibly more alarming – factor fuelling economic and social inequality is wealth inequality, according to a number of recent studies.
Income often refers to earnings from work, although it can include income from other sources such as rent. Wealth measures income accumulated over time, so it tends to have a cumulative effect over years. Wealth also includes assets in the form of property, stocks and inheritances. All these can grow in value separately from income.
A person with zero income can be very wealthy. A person may have $10 million in assets (and is hence considered wealthy) but can have zero income in a particular year – if he is not working and does not collect rent or dividends from his assets. Income and wealth must be taken together for a fuller picture of a household’s true economic power.
American think-tank Pew Research Centre last December published a report on wealth inequality which said: “Most researchers agree that wealth is much more unevenly distributed than income.”
It cited data showing that the top one-fifth of United States families earned about 60 per cent of all income but owned nearly 90 per cent of all wealth.
A separate report by the International Monetary Fund (IMF) last October said that the ratio of private wealth to national income in the world has more than doubled since 1970. This means wealth is growing more quickly than incomes.
“Household wealth is very unequally distributed – even more so than income,” the report said. “In advanced economies, the top 10 per cent own, on average, more than half of the wealth (up to 75 per cent in the US),” it added.
This means wealth is “arguably, a better indicator of ability to pay than annual income”, the report said.
Another reason the wealth gap is as significant as – if not more significant than – the income gap is that a build-up in wealth can become entrenched over time and is harder to redistribute.
For example, a rich family with houses worth $10 million can pass them on to their children, who may use those houses as collateral or capital to buy more property or build businesses to accumulate another $20 million for their descendants. And the cycle goes on.
So while wealth inequality has received less mention in Singapore than income inequality so far, it is arguably an even more important challenge facing our society.
Mind the gap
So how wide is the wealth gap in Singapore?
There are no official numbers on wealth distribution in Singapore. But piecing together different data gives some clues.
A global wealth report released by Credit Suisse last October said Singapore’s median wealth per adult (aged 20 and above) was US$90,466 (S$114,925), which means half of Singapore’s adults had more, and half had less than that amount. But the mean wealth per adult was US$281,764. This adds up the total amount of wealth held by every adult, divided by the number of adults.
This gap between the median and the mean is one of the biggest in the rich world, according to the Credit Suisse report. It implies that much of the wealth in Singapore is in the hands of a few. Unlike the median, the mean can go up significantly if the total wealth is pulled up by a few super-rich individuals.
Indeed, the report showed that the top 1 per cent of Singapore’s wealthiest hold more than a quarter of the country’s wealth.
It also illustrated the wealth gap in another way. Some 4.4 per cent of Singapore adults have more than US$1 million in wealth, while 20 per cent have less than US$10,000, the report said.
Of the other 215 countries surveyed, only Denmark and France had both a larger percentage of adults at the very top and at the very bottom, indicating a wider wealth gap than Singapore.
What are some reasons for this vast gulf in wealth?
One could be the property price surge. This is significant given that nine in 10 households here own their homes and the home makes up half of a household’s net wealth in Singapore.
While reports from third parties such as Credit Suisse shed some light on the wealth gap, they are not comprehensive.
Associate Professor Poh Eng Hin, who is assistant dean of accountancy at the Nanyang Business School, suggests that government agencies track wealth more closely and release the data.
This could come from a combination of numbers from the Monetary Authority of Singapore, the Inland Revenue Authority of Singapore and household balance sheet data collected by the Department of Statistics.
Panel studies that track wealth of the same family or individual over time would also give a better sense of wealth inequality in Singapore, he added.
Getting a handle
Inequality in wealth has an impact on social mobility. There are reasons to believe that wealth mobility could be even lower than income mobility. That is, the chances of someone from a nonwealthy family staying nonwealthy is high, the Credit Suisse report pointed out.
Also, an increase in wealth, unlike incomes, is not necessarily directly a result of work. This raises questions about how truly meritocratic Singapore can be. This is why – even though the goal for Singapore is not to equalise outcomes, but to equalise the starting opportunities in life – there is a strong economic and moral case for higher wealth taxes.
Apart from helping to reduce inequality, it can also be an efficient and effective way to raise revenue for public coffers, the IMF said in its report last October. “In principle, taxes on wealth also offer significant revenue potential at relatively low efficiency costs.”
The IMF also said increasing progressivity in property taxes is one of the best ways to tax the wealthy, which is exactly what Singapore is doing. This means taxing second and third homes more than the first, and taxing more costly properties at a higher rate.
Raising taxes is always a sensitive political and economic issue.
But with tax revenues needing a boost to match higher government spending on social safety nets – such as the recently announced Pioneer Generation Package – raising taxes on the wealthy is likely to be more effective than raising taxes on incomes alone.
Singapore should not be afraid to take the lead in this area.
Last year, Hong Kong’s South China Morning Post said Singapore’s Budget – and its imposition of higher wealth taxes – posed questions for Hong Kong’s own fiscal options: “The Singapore way may not be ours, but it does raise the question whether our top tier of wealth or income should be seen to pay more to help bridge inequality. It is a debate in which the wealthy should take part, in the interests of the city in which they prospered.”
The same can be said for Singapore. After so much focus on income inequality, it is time to kick-start a discussion on how the wealthy can contribute more to bridge inequality.
Date: FEB 11, 2014, 12:04