What is economic inequality?

Transition to a market economy is accompanied by a period of greater economic uncertainty. Women are likely to suffer substantial disadvantages from this uncertainty compared to men as they are, for example, more likely to lose their job. This not only implies a monetary loss for the entire family, but also degrades female bargaining power within the household, possibly further aggravating their well-being. When intrahousehold inequality—an unequal distribution of resources among family members—exists, female poverty might be significantly larger than what can be deduced using standard household-based poverty measures.

High levels of economic inequality may lead to lower economic growth and can have negative social and political impacts. Recent empirical research shows that income and wealth inequalities in Eastern Europe since the fall of socialism increased significantly more than previously suggested. Currently, the average Gini index (a common measure) of inequality in Eastern Europe is about 3 percentage points higher than in the rest of Europe. This rise in inequality was initially driven by privatization, liberalization, and deregulation reforms, and, more recently, has been amplified by technological change and globalization coupled with relatively ungenerous income and wealth redistribution policies.

A key element of anti-poverty policy is the accurate identification of poor individuals. However, measuring poverty at the individual level is difficult since consumption data are typically collected at the household level. Per capita measures based on household-level data ignore both inequality within the household and economies of scale in consumption. The collective household model offers an alternative and promising framework to estimate poverty at the individual level while accounting for both inequality within the household and economies of scale in consumption.

Income inequality has been on the rise in many countries. Is this bad? One way to decide is to look at the degree of change in incomes across generations (intergenerational mobility) and, more generally, at the extent to which income differences among individuals are traceable to their social origins. Inequalities that reflect factors largely out of an individual’s control—such as parents’ education, local schools, and communities—require attention in order to reduce income inequality. Evidence shows a negative association between income inequality and intergenerational mobility, and a positive relationship between mobility and economic performance.

Higher inequality reduces capital accumulation and increases the informal economy, which creates additional employment opportunities for low-skilled and deprived people. As a result, informal employment leads to beneficial effects on income distribution by providing sources of income for unemployed and marginalized workers. Despite this positive feedback, informality raises problems for public finances and biases official statistics, reducing the effectiveness of redistributive policies. Policymakers should consider the links between inequality and informality because badly designed informality-reducing policies may increase inequality.

In many developed countries, racial and ethnic minorities are paid, on average, less than the native white majority. While racial wage differentials are partly the result of immigration, they also persist for racial minorities of second and further generations. Eliminating racial wage differentials and promoting equal opportunities among citizens with different racial backgrounds is an important social policy goal. Inequalities resulting from differences in opportunities lead to a waste of talent for those who cannot reach their potential and to a waste of resources if some people cannot contribute fully to society.