IZA World of Labor explains inequality

This video explains what economic inequality is, why it matters and what causes it. It also offers suggestions on how inequality can be reduced. Inequality affects what we do and how we perceive the rest of the world, in every aspect of our daily lives. So find out more: https://wol.iza.org/key-topics/economic-inequality

What is inequality?
Economic inequality means some people, some households, are earning more than others or have incomes above others. It can be fairly equal—some people making more and others having much less—or much less equal—with a few people making huge amounts, others making some and large numbers making very little. Inequality has varied over time—right now, it’s at the highest level for 80 years in the US and that also seems to be true in much of Western Europe.

Why does inequality matter?
The more unequal a society is, the greater the chances it’s less socially cohesive—more feelings that there are others who are different from us. This leads to instability and more visible conflict. We see this today with the rise of populism in Western Europe and the US.

What causes inequality?
Inequality of economic outcomes is caused by a variety of things including lack of opportunities for jobs, longer term unemployment, and perhaps, most of all, lack of opportunities for education. The biggest single thing that causes people to do better economically is the amount of education they have. So, if education isn’t readily available for many people, we’ll find more inequality. Some economies offer much higher pay at the top than others. In the US in particular, there are huge rewards for being near the top of the pay distribution. In the last 15–20 years we’ve seen widening inequality due to the people at the very top doing much much better than they had previously and compared to those who are less well paid. And changes in these things are the main causes of changing inequality in Western societies.

How can we reduce inequality?
There are numerous ways to reduce inequality and governments already do this with various policies. Transfer payments—from governments to individuals depending on their income status. These may equalize income across households. Also, governments tax households. In most countries including even the US, on net, taxes are proportionately greater on higher-income households thus redistributing income toward lower income households. The extent to which countries do this will help reduce the amount of inequality after taxes in those societies and therefore also spending inequality.

So, in summary
Inequality of incomes matters—it affects what we do, how we perceive the rest of the world, in every aspect of our daily lives.