Economic Inequality

March 23, 2009

Definition of economic inequality

Economic inequality entails all discrepancies in the distribution of income and all economic assets in a society. It may refer to disparities among groups or/and individuals in a particular society or may also refer to disparities among countries.


It generally refers to the equality of outcome, and it is in a way connected to the idea of parity of opportunity. That said, it is a debatable issue on both moral and practical grounds as to whether economic inequality is good or not for a society.

Causes of Economic Inequality

Each society has its own causes of economic inequality; some are very complex, others inter-related while other reasons are non-linear. The following are just few of the acknowledged factors that cause economic inequality.

Wealth Condensation

This is a hypothetical process whereby, under certain conditions, wealthy individuals generate more wealth since they have the means to invest in new channels of wealth generation, or are able to influence wealth accumulation, hence ending up the beneficiaries of new wealth. Recurring wealth condensation contributes to inequality within societies.

The employment market

Another major reason for economic inequality in modern market economies is how the market determines wages; this is to say that the disparities are caused by the differences in the supply and demand of varied types of works. High supply of workers competing for jobs with low demand will drive the wages down whereas low supply of workers in a high demand job market results in high wages.


Innate ability

Economists believe that there is a connection between differences in inborn abilities, such as strength, charisma and intelligence to a person’s wealth. These abilities when related to the labor market, means that when they are in high demand relative to their supply will increase the wages of the individuals possessing them.

Diversity of preferences

When two equally able individuals, with an equal earning potential are faced with a preference of working to earn more money or relishing more leisure time, often they select different strategies, thus leading to economic inequality. .

Education

The differences in individual’s access to education can also create inequality, typically, when individuals get education on areas with high worker’s demand, they get high wages, therefore individuals who are unable to get education due to factors such as financial constraints get much lower wages.

Other causes of economic inequality include globalization, gender, race, culture and inflation.

Effects of economic inequality

Economic inequality is believed to be directly linked to social cohesion. Research shows that in economically equal societies, individuals are more probable to trust each other, thus enhancing greater community involvement and reducing the rates of social injustices like homicides and theft.

Economic inequality is also linked to the health of the populations in a society. Research shows that there is a repeated gradient in the social-economic ladder that relates the status of health. Basically, the poor individuals in a society tend to fall sick more often that the rich in the same society.


By the same token, it is a perceived thought that economic inequality reduces the distributive efficacy in a society. This means that the sum total of personal utility is substantially reduced because of the declining marginal utility wealth, thus, making the marginal utility of wealth lower among the rich and unaffordable among the poor.

Reducing economic inequality

It is believed that public education will contribute to reducing economic inequality caused by education disparities by increasing the supply of skilled laborers. Equally progressive taxation can contribute to reducing economic inequality. This means that the rich should be taxed more than the poor, therefore closing the income inequality gap.

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Written by Uncle Sam · Filed Under Economics 

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