# Understanding Income Inequality: Key Causes and Measurements

![Income Inequality](https://www.investopedia.com/thmb/Q0NCXv1iSIi9edd36opDXvxvRRQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/income-inequality.asp-Final-274ca61a88f043e1b2f1ce02167fe944.jpg)

*— Investopedia / Sabrina Jiang*

## What Is Income Inequality?

Income inequality describes the uneven distribution of income across a population, highlighting disparities not only in earnings but also in opportunities. It often mirrors [wealth](https://www.investopedia.com/terms/w/wealth.asp) inequality, where assets and resources are unevenly allocated.

These disparities can be analyzed across various demographics, such as gender and race, using tools like the [Gini Index](https://www.investopedia.com/terms/g/gini-index.asp). This index helps quantify income inequality, revealing significant variations within and across nations, underscoring why understanding and addressing this issue is crucial.

### Key Takeaways

*   Income inequality occurs when income is distributed unevenly across a population, often measured using the Gini Index, where higher numbers indicate greater inequality.
*   Factors contributing to income inequality include globalization, technological advancements, gender and race bias, education disparities, and tax policies that favor high-income earners.
*   High levels of income inequality can erode social cohesion, fuel political polarization, and threaten economic growth, according to the International Monetary Fund.
*   Addressing income disparities requires political, economic, and social cooperation to tackle root causes like discrimination and unfair taxation.
*   In the United States, income inequality has been rising since the 1970s, exacerbated by tax and labor policies, discrimination, and a weakened middle class.

## Examining Global 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.

### Key Drivers Behind Income Inequality

Factors contributing to 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. This shift led to a loss of stable, long-term jobs and income for working- and middle-class Americans.

**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 gaps have consistently been evident 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:** Despite high-income earners paying more in taxes, federal taxation hasn't stopped rising 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.  

### Impact of Income Inequality on Society

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)](https://www.investopedia.com/terms/i/imf.asp), too much income inequality could "erode social cohesion, lead to political polarization, and ultimately lower economic growth."

 Income disparity can also lead to [political unrest](https://www.investopedia.com/caste-discrimination-and-consequences-8421061) and fewer opportunities for social, educational, and economic advancement.

### Methods for Analyzing Income Inequality

Income inequality and [income disparity](https://www.investopedia.com/articles/investing/110215/brief-history-income-inequality-united-states.asp) can be analyzed through a variety of segmentations. Demographic segmentation forms the basis for analyzing income inequality.

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

*   Gender
*   Ethnicity
*   Geographic location
*   Occupation
*   Historical income

## Measuring Income Inequality: Tools and Techniques

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 method is to compare the income of the lowest-earning group 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](https://www.investopedia.com/news/measuring-inequality-forget-gini-go-palma/) 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 ranges from 0 to 100; higher values indicate more inequality, and lower values signify less.

The latest available data from the [World Bank](https://www.investopedia.com/terms/w/worldbank.asp) 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 39.8. The Slovak Republic has the World Bank’s lowest Gini Index reading at 24.1.

## Strategies for Reducing 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.

Innovations in financial technology and production are improving banking services for low-income earners as part of a global push for financial inclusion.

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.

## Exploring Income Inequality Trends in the U.S.

Income inequality in the U.S. has been increasing since the 1970s. Since the 20th century, government tax, labor policies, and ongoing racial and gender discrimination have worsened this inequality. 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 60 years of economic data, the Urban Institute showed that the poorest got poorer while the [richest got much richer](https://www.investopedia.com/signs-you-are-rich-8773791).

Between 1963 and 2022:

*   The poorest 10% of Americans went from having $23 in debt to having $450 in wealth.
*   Families in the [middle-income segment](https://www.investopedia.com/articles/personal-finance/090316/7-middle-income-jobs-pay-over-35000.asp) almost quadrupled their prior [average wealth](https://www.investopedia.com/average-net-worth-of-each-class-11678402).
*   Families in the top 10% had more than six 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](https://www.investopedia.com/the-racial-wealth-gap-5105010) 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 Latino/Latina families and $165,000 more than Black families.

### Federal Reserve

The [Federal Reserve](https://www.investopedia.com/terms/f/federalreservebank.asp) provides a quarterly Distributional Financial Accounts report. This report shows wealth distributions for U.S. households. As of the first quarter of 2024, the Federal Reserve showed the following distributions of wealth across the U.S.

### Economic Policy Institute

In December 2023, the Economic Policy Institute released a report on disparities between wage growth across different income levels. For those in the bottom 90%, wages grew just 32.9% from 1979 to 2022. For those in the top 1%, wages grew 171.7%. For those in the top 0.1%, wages grew 344.4%.

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. However, it's noteworthy that wage inequality may also shrink due to declines in the stock market, which occurred in 2022.

Post-recession, companies are also investing heavily to hire and keep workers with specialized skills in fields such as engineering and [healthcare](https://www.investopedia.com/terms/h/health_care_sector.asp). 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 2023, it showed the following averages for white, Black, and Hispanic workers.

### 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](https://www.investopedia.com/history-gender-wage-gap-america-5074898) often identified for women, Black people, and Hispanic people working in the U.S. 

According to a study of incomes for full-time workers by the Institute for Women's Policy Research, in 2022 women of all races and ethnicities were paid an average of 83% of the salaries paid to men. When both part- and full-time incomes are included, women earn just 77.4 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 61.4% of that amount, Black women earned 67.4%, and White women earned 84.2%.

### Pew Research Center

Data from the Pew Research Center also identifies [income inequalities by gender](https://www.investopedia.com/wage-gaps-by-gender-5082675). 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.

> **Important**
>
> An income gap refers to the difference in income earned between demographic segments.

## Why Is Income Inequality a Problem?

It's a serious problem because the lack of financial stability for large portions of a population can promote potentially destructive social and economic upheaval generally, as well as [financial hardships](https://www.investopedia.com/terms/p/poverty-gap.asp) and lower standards of living, in particular.

## What Are 3 Effects of Income Inequality?

Financial hardship for many, persistent poverty, and a dispirited populace that could be ripe for social and political unrest are just a few of the effects of income inequality.

## How Can We Fix Income Inequality?

To reduce income inequality, governments and private sectors must address its various causes, including discrimination, unfair taxation, wage stagnation, and more that lead to large imbalances in compensation.

## 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.

> **Article Sources**
>
> 1.  Tax Policy Center. "[Briefing Book; How Do Taxes Affect Income Inequality?](https://www.taxpolicycenter.org/briefing-book/how-do-taxes-affect-income-inequality)"
>     
> 2.  Center for American Progress. "[The American Middle Class, Income Inequality, and the Strength of Our Economy](https://www.americanprogress.org/article/the-american-middle-class-income-inequality-and-the-strength-of-our-economy/)."
>     
> 3.  International Monetary Fund. "[The IMF and Income Inequality](https://www.imf.org/en/Topics/Inequality/introduction-to-inequality)."
>     
> 4.  The New Yorker. "[Richer and Poorer](https://www.newyorker.com/magazine/2015/03/16/richer-and-poorer)."
>     
> 5.  The CIA World Factbook. "[Country Comparisons: Gini Index Coefficient - Distribution of Family Income](https://www.cia.gov/the-world-factbook/field/gini-index-coefficient-distribution-of-family-income/country-comparison/)."
>     
> 6.  The World Bank. "[Gini Index - South Africa, Slovak Republic, United States](https://data.worldbank.org/indicator/SI.POV.GINI?locations=ZA-SK-US&most_recent_value_desc=true)."
>     
> 7.  Urban Institute. "[Nine Charts About Wealth Inequality in America (Updated)](https://apps.urban.org/features/wealth-inequality-charts/)."
>     
> 8.  Urban Institute. "[How Policymakers Can Ensure the COVID-19 Pandemic Doesn’t Widen the Racial Wealth Gap](https://www.urban.org/urban-wire/how-policymakers-can-ensure-covid-19-pandemic-doesnt-widen-racial-wealth-gap)."
>     
> 9.  Board of Governors of the Federal Reserve System. "[Distribution of Household Wealth in the U.S. since 1989](https://www.federalreserve.gov/releases/z1/dataviz/dfa/distribute/table/)."
>     
> 10.  Economic Policy Institute. "[Wage Enequality Fell in 2022 Because Stock Market Declines Brought Down Pay of the Highest Earners.](https://www.epi.org/blog/wage-inequality-fell-in-2022-because-stock-market-declines-brought-down-pay-of-the-highest-earners-but-top-1-wages-have-skyrocketed-171-7-since-1979-while-bottom-90-wages-have-seen-just-32-9-growth/)"
>      
> 11.  Economic Policy Institute. "[State of Working America Data Library](https://www.epi.org/data/#?subject=wage-avg&r=*)."
>      
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>      
> 13.  Pew Research Center. "[Gender Pay Gap in U.S. Hasn’t Changed Much in Two Decades](https://www.pewresearch.org/fact-tank/2023/03/01/gender-pay-gap-facts/)."