What is economic inequality?
Economic inequality is the unequal distribution of income and opportunity between different groups in society. It is a concern in almost all countries around the world and often people are trapped in poverty with little chance to climb up the social ladder. But, being born into poverty does not automatically mean you stay poor. Education, at all levels, enhancing skills, and training policies can be used alongside social assistance programs to help people out of poverty and to reduce inequality. Several countries are also now exploring whether a universal basic income could be the answer.
The global coronavirus pandemic is likely to further inequalities as travel restrictions, nationwide lockdowns, and the virus itself affect people within and across nations in widely varying ways.
For commentary on the effects of the virus see Covid-19: Pandemics and the labor market.
See National responses to Covid-19 for content looking at the effects of the pandemic on individual countries or cities.
Standard poverty measures may drastically understate the problem; the collective household model can helpA 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.MoreLess
Promoting intergenerational mobility makes societies more egalitarianLorenzo Cappellari, May 2021Income 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.MoreLess
A bidirectional relationship between informality and inequality exists; in transition and emerging countries, higher informality decreases inequalityRoberto Dell'Anno, April 2021Higher 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.MoreLess
The variation of racial wage gaps across and within groups requires differing policy solutionsSimonetta Longhi, October 2020In 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.MoreLess
Market adjustments to tax evasion alter factor and product prices, which determine the true impacts and beneficiaries of tax evasionHow does tax evasion affect the distribution of income? In the standard analysis of tax evasion, all the benefits are assumed to accrue to tax evaders. However, tax evasion has other impacts that determine its true effects. As factors of production move from tax-compliant to tax-evading (informal) sectors, these market adjustments generate changes in relative prices of products and factors, thereby affecting what consumers pay and what workers earn. As a result, at least some of the gains from evasion are shifted to consumers of goods produced by tax evaders, and at least some of the returns to tax evaders are competed away via lower wages.MoreLess
Better educated parents invest more time and money in their children, who are more successful in the labor marketPaul J. Devereux, November 2019Governments invest a lot of money in education, so it is important to understand the benefits of this spending. One essential aspect is that education can potentially make people better parents and thus improve the educational and employment outcomes of their children. Interventions that encourage the educational attainment of children from poorer families will reduce inequality in current and future generations. In addition to purely formal education, much less expensive interventions to improve parenting skills, such as parental involvement programs in schools, may also improve child development.MoreLess