What Is Income Inequality?

Income inequality is an extreme disparity of income distributions with a high concentration of income usually in the hands of a small percentage of a population. When income inequality occurs there is a large gap between the wealth of one population segment compared to another. There can be varying types of income disparity segregations and analysis used to understand income inequality. 

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Income Inequality

Income Inequality Explained

Income inequality and income disparity segregations can be analyzed through a variety of segmentations. Segmentations of income disparity analysis are used for analyzing different types of income distributions. 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 distributions for:

  • Male vs. female
  • Ethnicity
  • Geographic location
  • Occupation
  • Historical income

Key Takeaways

  • Income inequality studies help to show the disparity of incomes among different population segments.
  • Some of the most common types of income disparities studied include those among males vs. females and different ethnicities.
  • Case studies and analysis of income inequality, income disparity, and income distributions are provided regularly by a variety of top sources.
  • The Gini Index is a popular way to compare income inequalities universally across the globe.

Case Studies and Analysis

There are several prominent case studies and analysis reports providing insight on income inequality, income disparity, and income distributions in the U.S. and across the world.

Urban Institute

The Urban Institute is one source for insight on income inequality. In an analysis of 50 years of economic data by the Urban Institute, the institution 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 the prior wealth
  • Families in the top 1% had more than seven times their prior wealth

Federal Reserve

The Federal Reserve provides a quarterly Distributional Financial Accounts report. This report shows income distributions for U.S. households. As of the second quarter of 2019, the Federal Reserve showed the following distributions of income across the U.S.:

Federal Reserve 2Q19 Income Distributions
Federal Reserve 2Q19 Income Distributions.

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 shown reductions or new automation takeovers in other functions, pushing down wages for workers in less competitive jobs.

Furthermore, EPI data tracks wages by segments on a regular basis. As of 2018, it showed the following averages for whites, blacks, and Hispanics:

Average Hourly Income by Race
Average Hourly Income by Race.

Institute for Women’s Studies

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, African Americans, and Hispanics working in the U.S. According to a study of 2017 income numbers by the Institute for Women's Studies, women of all races and ethnicities were paid an average 81.8% of the salaries paid to men. Historically, that's the narrowest that the gap has ever been. It has been improving year by year since 1980 when women made about 64% as much as men.

Pew Research Center

Data from the Pew Research Center also identifies income inequalities among men vs. women. The Pew Research Center shows that the gender income inequality gap has been narrowing for all workers age 16+ with women reportedly making 85% of the average salaries for men. Income disparity has varied however among workers ages 25 to 34. Within this group, women were making approximately 95% of men’s salaries in 2010 but this has fallen significantly to 89% in 2018.

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

Considerations for a Global View

The Gini Index 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 showing greater income inequality among a country’s population and vice versa. Data from the World Bank shows South Africa reporting one of the highest income inequality dispersions with a Gini Index level of 63.0. According to the World Bank, the United States reports a Gini Index level of 41.5. Ukraine shows the World Bank’s lowest Gini Index reading at 25.0.

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 income of the lowest 10% of earners in all countries seeking to provide comprehensive global support. Globally, new innovations in financial technologies and productions are also helping to improve the banking services of the world’s lowest-income earners as a worldwide initiative for financial inclusion is underway.