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What is 'Income Inequality'?

Income inequality is the unequal distribution of household or individual income across the various participants in an economy. It is often presented as the percentage of income related to a percentage of the population. For example, a statistic may indicate that 70% of a country's income is controlled by 20% of that country's residents.

BREAKING DOWN 'Income Inequality'

Income inequality is often associated with the idea of income "fairness." Most people consider it "unfair" if the rich have a disproportionally larger portion of a country's income compared to the general population. The causes of income inequality can vary significantly by region, gender, education and social status. Economists are divided on the implications of income disparity and whether it is ultimately positive or negative.

Income inequality has become increasingly evident since the 1980s when 30 to 35% of national income went to the top 10% of earners. Since then, the percent of income going to the top 10% has increased to 50% creating a huge disparity between high earners and low earners. The issue has become politically and economically divisive concerning its causes and acceptable solutions. While most economists agree that the growth in disparity is attributable to unequal education, environment and social interactions, economists do not fully agree on the specific mechanisms that are driving the increase.

Contributing Factors to Income Inequality

Education is known to affect societal equality. Certain social-economic groups do not have access to quality education in the United States, particularly at the secondary school level. In countries that provide higher-quality secondary education across the economic spectrum, there is much less income disparity.

Competition for talent creates a salary divide. There is much more competition for high-quality executive talent, which has driven salaries for executives higher relative to the level of generated productivity. Big bonuses and other incentives have led to inflated executive salaries.

Stagnant wages also play a big role in inequality. The median income for low- to middle-income workers has been mostly stagnant since 2007 while executive compensation has increased. The diminished influence of labor unions has also led to flat or declining wages among workers.

Family and social interactions impact earning potential. Social and emotional skills critical to leading a quality life are not sufficiently developed in economically distressed areas with a high percentage of low-income families.

Increased demand for high-skilled workers adds to a widening wage gap. Companies are investing heavily to develop a highly skilled workforce, which is driving wages up for high-skilled workers. This leads to the de-emphasis or automation of low-skilled functions pushing down wages for low-skilled workers.

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