Income Inequality Definition: Examples and How It's Measured

What Is Income Inequality?

Income inequality refers to how unevenly income is distributed throughout a population. The less equal the distribution, the greater the income inequality. Income inequality is often accompanied by wealth inequality, which is the uneven distribution of wealth.

Populations can be divided up in different ways to show different levels and forms of income inequality, such as income inequality by gender or race. Different measures, such as the Gini Index, can be used to analyze the level of income inequality in a population.

Understanding Income Inequality

Income inequality, or the imbalance of income earned by a group people, exists in countries throughout the world. In the U.S., these differences in income have become pronounced over the past fifty years. Income inequality is not the same as wealth inequality; the former involves salaries/wages while the latter involves net worth.

Causes of Income Inequality

Some of the factors that affect income inequality include:

Globalization: The increase in trade among nations resulted in the move of manufacturing and other jobs by corporations in the U.S. to countries where labor costs were cheaper. For working-class and middle-class Americans, this meant that secure, even generational, jobs and income disappeared.

Advances in Technology: While a boon in many ways, certain workplace technological advancements, such as automation, have led to the loss of jobs for blue-collar workers and lower wages for less educated workers.

Gender and Race Bias: Income disparities have always been clearly visible for women and people of color. It's widely acknowledged that, for example, male employees typically earn more than female employees in the same job positions. Likewise, white males earn more than non-white males.

Education: Workers with less than a high-school education experience less growth in wages than those with college educations and post graduate degrees. The announcements of multi-million dollar salaries and bonuses (even in troubling economic times) going to C-Suite executives drives this income disparity home.

Economic Conditions: When economic conditions weaken, financial turmoil, unemployment, slowing business investment, and more can affect incomes.

Taxation: Although high-income earners pay a larger percentage of their income in taxes than lower-income earners, federal taxation has not put the brakes on increasing income inequality. That may be due to certain tax policies, e.g., those related to corporate taxation, the capital gains tax rates, and income tax cuts, that benefit those with higher income more than those with lower income.

Consequences of Income Inequality

Some degree of income inequality is to be expected because of basic differences in talent, effort, and simple chance. However, according to the International Monetary Fund (IMF), too much income inequality could "erode social cohesion, lead to political polarization, and ultimately lower economic growth."

Political upheaval and the disappearance of social, educational, and economic opportunities to improve standards of living and financial futures can also be consequences of income disparity.

Analysis of Income Inequality

Income inequality and income disparity can be analyzed through a variety of segmentations. Income distributions by demographic segmentation form the basis for studying income inequality and income disparity.

The different types of income segmentations studied when analyzing income inequality may include:

• Gender
• Ethnicity
• Geographic location
• Occupation
• Historical income

How to Measure Income Inequality

One way to measure income inequality is to compare the income of a large group of high earners (for example, the top 10%) to the national median or average. Another approach compares the income of a lower-earning group (say, the bottom 10%) to the median or average.

Other researchers have begun looking at tax records of those with the highest incomes to draw conclusions about these most affluent slices of society.

A frequently used tool for measuring income inequality is the Gini Index. It was developed by Italian statistician Corrado Gini in the early 1900s to help quantify and more easily compare income inequality levels across countries of the world. The index can range from 0 to 100, with a higher level indicating greater income inequality among a country’s population and a lower level indicating less.

The latest available data from the World Bank shows South Africa reporting one of the highest income inequality dispersions with a Gini Index level of 63.0. The United States has a Gini Index level of 39.7. The Slovak Republic has the World Bank’s lowest Gini Index reading at 23.2.

How to Reduce Income Inequality

Dispersions of income inequality are an ongoing area of analysis for both local and global governing institutions. The IMF and World Bank have a goal to help improve the income of the lowest 10% of earners in all countries through their missions relating to financial stability, long-term economic development, and poverty reduction.

Globally, new innovations in financial technologies and production are helping to improve the banking services for the world’s lowest-income earners, as a worldwide initiative for financial inclusion is underway.

In addition, income inequality will be addressed more successfully when political, economic, and social leaders can agree on basic approaches to its improvement:

• Governments should step in when the free market is ineffective in increasing income.
• Governmental policies that promote income inequality must be acknowledged.
• Fiscal actions can improve income disparities.
• Universal health care could provide some increase in income equality.
• Improving the stability of other social programs such as Social Security and Medicaid could also relieve cost concerns for an enormous number of individuals.
• Better access to educational opportunities could improve socio-economic mobility.

Income Inequality in the United States

Income inequality in the U.S. has been increasing since the 1970s. Throughout the 20th century and up to the present, this inequality has been exacerbated by government tax and labor policies and ongoing discrimination by race and gender. A weakening middle class has also contributed to income inequality.

The organizations below conduct research and produce analysis reports on various examples of income inequality, income disparity, and income distributions in the U.S.

Urban Institute

In an analysis of 50 years of economic data, the Urban Institute showed that the poorest got poorer while the richest got much richer.

Between 1963 and 2016:

• The poorest 10% of Americans went from having zero assets to being $1,000 in debt.
• Families in the middle-income segment more than doubled their prior average wealth.
• Families in the top 10% had more than five times their prior wealth.
• Families in the top 1% had more than seven times their prior wealth.

The Urban Institute also researches the racial and ethnic wealth gap in the U.S. The organization reported that White families in 1963 had amassed a median wealth of approximately $45,000 more than families of color. By 2019, the median wealth for White families increased to approximately $153,000 more than Latinx families and $165,000 more than Black families.

Federal Reserve

The Federal Reserve provides a quarterly Distributional Financial Accounts report. This report shows wealth distributions for U.S. households. As of the fourth quarter of 2022, the Federal Reserve showed the following distributions of wealth across the U.S.

Economic Policy Institute

The Economic Policy Institute released a 2018 report showing a general trend toward increasing incomes of the top earners following the 2008 recession. Between 2009 and 2015, the Economic Policy Institute shows that the incomes of those in the top 1% grew faster than the incomes of the other 99% in 43 states and Washington D.C.

There can be many factors associated with this trend, including salary stagnation for wage-earning Americans, tax cuts for the richest Americans, a loss of manufacturing jobs, and a soaring stock market that inflated the worth of corporate executives and hedge fund managers.

Post-recession, companies are also investing heavily to hire and keep workers with specialized skills in fields such as engineering and healthcare. This has caused reductions or new automation takeovers in other functions, pushing down wages for workers in less competitive jobs.

Furthermore, EPI data tracks wages by segment on a regular basis. As of 2022, it showed the following averages for Whites, Blacks, and Hispanics.

Institute for Women’s Policy Research

Income inequality is an economic concept that tends to hit some segments of populations harder than others, with significant wage gaps often identified for women, Blacks, and Hispanics working in the U.S. 

According to a study of incomes for full-time workers by the Institute for Women's Policy Research, in 2021 women of all races and ethnicities were paid an average of 83.1% of the salaries paid to men. When both part- and full-time incomes are included, women earn just 77.3 cents for each dollar a man earned.

The same report also broke down earnings by race and gender. It noted that, compared to the median weekly earnings of White men working full-time, Hispanic women earned 58.4% of that amount, Black women earned 63.1%, and White women earned 79.6%.

Pew Research Center

Data from the Pew Research Center also identifies income inequalities by gender. In 2022, according to its latest analysis of hourly earnings of full- and part-time employees, women earned an average of 82% of what men earned. This is not much of an improvement over the pay gap in 2002, when women earned 80% as much as men.

The Bottom Line

Income inequality is the disparity of incomes across a population. Some income inequality is always to be expected because people bring different degrees of talent, effort, and luck to their endeavors. But large imbalances in income have been caused and maintained by discrimination, taxation policies, the downfall of labor unions, troublesome economic conditions such as slow growth and high inflation, and more.

Countries must address income inequality to combat the disproportionate prosperity, financial hardship, and loss of social and economic opportunities that can lead to social discontent and political instability.