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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.

  • Income inequality and social origins Updated

    Promoting intergenerational mobility makes societies more egalitarian

    Lorenzo Cappellari, May 2021
    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.
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  • Inequality and informality in transition and emerging countries Updated

    A bidirectional relationship between informality and inequality exists; in transition and emerging countries, higher informality decreases inequality

    Roberto Dell'Anno, April 2021
    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.
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  • Racial wage differentials in developed countries Updated

    The variation of racial wage gaps across and within groups requires differing policy solutions

    Simonetta Longhi, October 2020
    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.
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  • Tax evasion, market adjustments, and income distribution Updated

    Market adjustments to tax evasion alter factor and product prices, which determine the true impacts and beneficiaries of tax evasion

    James AlmMatthias Kasper, February 2020
    How 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.
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  • Intergenerational return to human capital Updated

    Better educated parents invest more time and money in their children, who are more successful in the labor market

    Paul J. Devereux, November 2019
    Governments 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.
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  • Measuring income inequality

    Summary measures of inequality differ from one another and give different pictures of the evolution of economic inequality over time

    Ija Trapeznikova, July 2019
    Economists use various metrics for measuring income inequality. Here, the most commonly used measures—the Lorenz curve, the Gini coefficient, decile ratios, the Palma ratio, and the Theil index—are discussed in relation to their benefits and limitations. Equally important is the choice of what to measure: pre-tax and after-tax income, consumption, and wealth are useful indicators; and different sources of income such as wages, capital gains, taxes, and benefits can be examined. Understanding the dimensions of economic inequality is a key first step toward choosing the right policies to address it.
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