Billionaires are increasing their fortunes by $2.7 billion every day. Meanwhile, at least 1.7 billion workers live in areas where inflation is higher than wages. Income inequality is a global problem. It has several consequences, including financial crises, fragile economies, high inflation, poorer health outcomes, and violence. In this article, we’ll explore what causes income inequality, what it looks like, the most important facts everyone should know, and how to address it.
Income inequality is a global issue with several causes, including historical racism, unequal land distribution, high inflation, and stagnant wages. As gaps increase thanks to crises like COVID-19, the world needs to take action in education, labor market policies, tax reforms, and higher wages.
What is income inequality?
When some people in society earn significantly more than others, it creates inequality. Inequality is more than just about the paychecks we take home, however. There’s also wealth inequality, which refers to uneven distributions of wealth. This includes the value of assets and possessions like stocks, property, boats, and so on. Someone may earn a lower income than a neighbor, but because they own stocks and land, they’re wealthier.
Income inequality is measured with factors like gender, ethnicity, location, historical income, and occupation. When identifying a country’s income inequality, there are measurements like the Gini index, which is also called the Gini coefficient. A score of 0 on the index means there’s no deviation; everyone is perfectly equal. A score of 100 means total inequality; a single person has all the country’s wealth. The index isn’t perfect. As Amanda Shendruck points out, Greece, Israel, Thailand, and the UK got the same score in 2015. However, poverty in these countries looks very different. The World Inequality Database avoids the index altogether. On its own, the Gini index may not be especially useful, but it can provide a quick snapshot that encourages more investigation.
The causes of income inequality: two case studies
There are global and country-specific factors that drive income inequality. To get a clearer idea of the causes, let’s look at two countries as examples: South Africa and the United States.
South Africa: The long shadow of apartheid and land ownership
Based on the Gini index, South Africa has the world’s highest income inequality at 63.0. Apartheid is a big reason why. For almost 50 years, this formalized racial segregation restricted the activities and movements of Black South Africans, who made up most of the population. Black Africans couldn’t marry white people, travel without passbooks, or start businesses in white areas. Society was structured to uplift white people while trampling Black South Africans. When apartheid ended in the 1990s, inequality remained baked into the country’s foundation. South Africa has struggled to make progress on ending inequality. According to a 2022 World Bank report, the top 10% of South Africa’s population holds 71% of all income. Living in or near cities increases job opportunities, but South Africa’s growth has stalled and failed to create enough jobs. High unemployment is a significant driver of inequality, especially for young people.
Gender, race, and land ownership are three other main causes. In South Africa, women earn 38% less than men even when they have similar education levels. When race gets added to inequality analyses, it contributes 41% to income inequality. The World Bank report also studied land ownership, which is vital for addressing inequality among poor people in rural areas. Because of apartheid, there’s a long history of unequal land distribution which hasn’t been remedied yet. COVID-19 made all these factors worse.
The United States: The legacy of slavery and stagnant wages
The United States isn’t among the top most unequal countries in the world, but it has a much higher Gini coefficient when compared to similar economies. According to Statista, the top 10% of earners in the United States (in the third quarter of 2022) held 68% of the country’s total wealth. The lowest 50% held just 3.3.%. Like South Africa, the United States’ history of racial segregation plays a big role. Slavery made it impossible for Black people to build wealth, but even after emancipation, Jim Crow laws severely restricted economic opportunities. The effects resonate to this day. A 2018 analysis of incomes and wealth found that over the past 70 years, there’s been no progress in reducing income and wealth inequalities between Black and white households.
Inequality is also driven by the fact that wages haven’t kept pace with inflation. In June 2022, consumer prices hit 9.1% higher than the year before. This made it the largest annual increase since 1981. Wages have been going up, but they’ve been consistently at 4.5%. The federal minimum wage hasn’t increased since 2009: it’s just $7.25. A study found that in 91% of U.S. counties, a full-time minimum wage worker doesn’t make enough to afford a one-bedroom apartment rental.
What are the five main facts everyone should know about income equality?
There’s a lot to sift through when it comes to income and wealth inequality, but here are five of the most important facts to know:
#1. Inequalities within countries are getting worse
While global inequalities between countries are lowering, the gaps within countries are increasing. According to the World Inequality Database’s 2022 report, the gap between the average incomes of the bottom 50% and the top 10% of individuals has nearly doubled in the past two decades. The World Inequality Database frames it this way: “global inequalities seem to be about as great today as they were at the peak of Western imperialism in the early 20th century.”
#2. COVID-19 is erasing progress
According to groups like the IMF, COVID-19 is worsening inequalities within countries (the poor were hit harder than the rich), but also between countries. Wealthier countries had more resources to deal with the pandemic and could recover faster. According to the World Bank, progress was set back by about a decade.
#3. Inequality hits already-disenfranchised people the hardest
Income inequality is an intersectional issue. It affects disenfranchised groups like women, young people, informal industry workers, the elderly, and disabled people the most. As income inequality worsened in the UK, the disposable income for the poorest ⅕ of the population dropped by 3.8%. The average income for retired households also went down from £26,300 to £25,900.
#4. Over the last decade, the world’s richest 1% have gotten 54% of new wealth – and they’re getting richer
According to an Oxfam report, the world’s richest 1% captured $42 trillion of the new wealth created between December 2019-December 2021. $16 trillion got distributed to the bottom 99%. While the pandemic hit the poor the hardest, the world’s richest actually gained wealth. There was a slight dip in 2022, but in 2023, their wealth is increasing yet again.
#5. Income inequality is linked to climate change
Every year, humans emit around 6.6 tonnes of carbon dioxide equivalent per capita. However, the top 10% of emitters are releasing around 50% of all emissions. The bottom 50% are producing just 12%. Why does this matter to income inequality? The world’s biggest emitters are rich. While many of the world’s poorest countries emit significantly less CO2, they’re enduring the worst climate change effects. Even within rich countries, the poorest half of the population have already met (or are close to meeting) the 2030 climate targets set by their nations. It’s the rich who need to change.
How to take action on income inequality
Income inequality is a deeply-entrenched, global problem that will take lots of work. Here are three ways countries can take action:
#1. Pay a living wage
Many countries are raising wages, but they’re not raising them enough to close income gaps. That’s why minimum wages need to be higher. In an article on the World Economic Forum about fair wages, the global director of human rights at Unilver emphasized the need for living wages. These are calculated based on what it takes to afford a decent standard of living. Currently, minimum wages in many countries don’t reflect reality. The United States is an example as its minimum wage won’t cover rent on a one-bedroom apartment.
#2. Invest in good public education
Study after study shows the positive impact of good public education. According to a report from Oxfam, a good education can reduce poverty, increase opportunities, and encourage a more democratic society. Education also improves gender equality, which is key to closing income inequality gaps. To successfully address income inequality, education must be universal, free, and public. If it isn’t, education can make inequalities worse as it divides students by traits like race, gender, and wealth.
#3. Make tax systems more redistributive
According to the IMF, addressing inequality more redistributive tax systems. What is a redistributive tax system? It’s a system where high-income people pay higher taxes (positive taxes) and lower-income people receive more subsidies. In places like the United States, where legislation has designed tax codes to benefit corporations and the wealthiest individuals, wider inequality has followed. The rich are also allowed to get away with more. In 2014-2016, the IRS – which is famously underfunded – didn’t pursue over 300,000 high-income individuals who failed to file tax returns. If countries want to tackle inequality, their tax systems should be designed to help rather than make things worse. That includes spending more on social sectors like education, health, and social protection.
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