Economic inequality facts for kids

Economic inequality is about how money, wealth, and spending are shared among people. It looks at differences in:

• Income inequality: How much money people earn from jobs, investments, or other sources.
• Wealth inequality: How much stuff people own, like houses, cars, savings, and investments.
• Consumption inequality: How much money people spend on goods and services.

These differences can be seen between countries, within a single country, or even within smaller groups of people, like different age groups or genders.

One common way to measure income inequality is using the Gini coefficient. This number helps us understand how evenly income is spread out. Another measure is the Inequality-adjusted Human Development Index, which also considers how fair things are.

Historically, economic inequality has generally increased over time. However, it decreased during the two World Wars and when modern welfare states (countries with strong social support systems) were created after World War II. While globalization has reduced inequality between nations (some poorer countries are catching up), it has often increased inequality within most nations. For example, in many advanced countries, inequality has risen a lot in the last 30 years.

Studies often link high economic inequality to problems like political and social instability, and even civil conflict. It can also slow down economic growth. Governments can influence income distribution through taxes and spending. For instance, in rich countries, taxes and social programs like pensions and family benefits can reduce income inequality by about one-third. While no one believes in perfect economic equality (where everyone has the exact same income), there's a general agreement that too much inequality can cause serious problems.

Measuring Economic Differences

In 1820, the richest 20% of the world's population earned three times more than the poorest 20%. By 1991, this gap had grown to eighty-six times!

A 2011 study by the Organisation for Economic Co-operation and Development (OECD) looked at why inequality was rising in many countries. They found several reasons:

• Changes in households: More single-parent homes can lead to higher inequality.
• Assortative mating: People often marry others with similar incomes or backgrounds. This means high-earning couples keep more wealth, increasing the gap.
• Fewer work hours: Some people in lower income groups work fewer hours.
• Skill differences: The demand for highly skilled workers has grown faster than the supply, leading to higher wages for them, while wages for less skilled workers haven't kept up.

The OECD study also found that income inequality in its member countries was the highest in 50 years. The gap between the top 10% and bottom 10% of earners grew from 1 to 7 to 1 to 9 in 25 years.

Another OECD study in 2011 looked at countries like Argentina, Brazil, China, India, Indonesia, Russia, and South Africa. It found that key reasons for inequality there included a large informal sector (jobs not officially recognized), big differences between cities and rural areas, and unequal access to education and job opportunities for women.

A study by the United Nations University found that the richest 1% of adults owned 40% of global assets in 2000. Also, the three richest people in the world had more money than the poorest 48 nations combined!

Oxfam's 2021 report showed that the COVID-19 pandemic made economic inequality much worse. The wealthiest people became even richer, while hundreds of millions more people fell into poverty. Oxfam's 2024 report warned that the world could see its first trillionaire within a decade, while ending global poverty might take 229 years.

In the United States, the top 400 richest Americans have more wealth than half of all Americans put together. In fact, the richest 1% in the U.S. now own more wealth than the bottom 90%. This means that having inherited wealth can give people a big head start. A 2017 report said that just three individuals (Jeff Bezos, Bill Gates, and Warren Buffett) owned as much wealth as the bottom half of the U.S. population (160 million people).

While inequality between countries has decreased since the 1960s, inequality within countries has generally increased. The United Nations Development Programme said in 2014 that investing more in social security, jobs, and protecting vulnerable people is important to stop inequality from growing.

People often don't realize how unequal wealth distribution truly is. A 2011 study found that people thought the richest 20% owned about 58% of the wealth, but in reality, they owned around 84%.

However, some studies suggest that global earnings inequality has decreased since 1970, with the world's poorest half doubling their share of earnings. But even with this, the International Monetary Fund (IMF) warned in 2017 that rising inequality within nations threatens economic growth and can lead to more political division. They suggested that fair taxes and social programs are key to sharing wealth more evenly.

The 2022 World Inequality Report stated that global income and wealth inequality are as high as they were in the early 20th century. The report found that the poorest half of the world owns only 2% of global wealth, while the richest 10% own 76%. The top 1% alone owns 38%.

Wealth Distribution in Countries

Wealth is calculated based on many things like debts, property values, and natural resources.

Income Distribution in Countries

Income inequality is measured by the Gini coefficient (expressed as a percentage from 0 to 100%).

• 0% means perfect equality (everyone has the same income).
• 100% means perfect inequality (one person has all the income, and everyone else has none).

A Gini index above 50% is considered high (e.g., Brazil, South Africa). A value of 30% or above is medium (e.g., United States, Mexico). A value below 30% is low (e.g., Germany, Norway). In 2012, the Gini index for the entire European Union was 30.6%.

It's important to remember that income distribution can be different from wealth distribution. For example, countries like Denmark and Norway have low income inequality but very high wealth inequality (Gini index from 70% to 90%). This means that while incomes are similar, wealth is still very concentrated among a few.

Consumption Distribution in Countries

Consumption inequality looks at how much people spend, rather than how much they earn or own. This is important because people directly experience inequality through what they can afford to buy and use.

What Causes Economic Inequality?

Many things can cause economic inequality. These include how global markets work (like trade and regulations) and social factors (like gender, race, and education). In many developed countries, the recent rise in inequality is mostly due to differences in wages and salaries.

Economist Thomas Piketty suggests that inequality naturally grows in free market economies when the return on capital (money made from investments) is higher than the overall economic growth. The IMF also warned in 2016 that certain policies like privatization and cuts to public spending have increased inequality globally.

Jobs and the Economy

In modern economies, if competition isn't perfect, or if people don't have equal chances to get education and skills, it can lead to unfairness. Economist Joseph Stiglitz says that governments have a big role to play in fixing these problems.

In the U.S., wages for many jobs haven't grown much in 40 years. However, owning stocks and investments, which is more common among higher earners, has led to big differences in overall income.

Taxes

The way income taxes are set up also affects inequality. A progressive tax means that people with higher incomes pay a larger percentage of their income in taxes. This can help reduce inequality. Also, tax credits (money back from taxes) can help lower-income families.

Education

Access to education is a huge factor in inequality. Good education, especially in high-demand fields, leads to higher wages. People who can't afford or don't pursue higher education often earn much less. This lack of education can lead to lower incomes and less saving. On the other hand, quality education helps people earn more and boosts economic growth.

Historically, land ownership also affected education. In the 19th century, landowners didn't always want to educate their workers as much as factory owners did, because educated workers might move to cities for better jobs.

Less Regulation and Weaker Unions

Some experts believe that less government regulation of businesses and fewer people joining unions have contributed to economic inequality. When unions are weaker, workers have less power to negotiate for higher wages and better conditions.

The IMF has also found that the decline of unions and the rise of neoliberal economic policies (which favor free markets and less government involvement) have increased income inequality.

Technology

The rise of information technology has been linked to increasing income inequality. Some argue that technology replaces lower-skilled jobs with machines that need highly skilled operators, increasing demand and wages for skilled workers, and decreasing them for unskilled workers.

Online platforms for services (like TaskRabbit) can also increase inequality. Many people working on these platforms already have full-time jobs and use them to earn extra money, leaving less work for those who truly need it. Also, many highly educated people are now doing manual tasks through these platforms, which used to be done by less educated workers.

Globalization

Free trade can shift inequality. When rich countries trade with poor countries, low-skilled workers in rich countries might see their wages drop due to competition. However, low-skilled workers in poor countries might see their wages increase.

Gender

In many countries, there's a gender pay gap, meaning men often earn more than women for similar work. While factors like job choices play a role, discrimination also contributes. Studies in some countries show that being female can significantly lower income, partly because employers might avoid hiring women due to possible maternity leave, or because women are often in lower-paid jobs like social services.

Race

There are also big differences in wealth and income based on race in many parts of the world. People from certain racial groups often earn less, have fewer chances for education and career growth, and face intergenerational wealth gaps. This means disadvantages can be passed down through families. For example, in the U.S., policies like "redlining" in the past intentionally prevented Black Americans from building wealth, and these effects are still seen today in health and economic disparities.

Globally, groups that have been historically colonized often continue to face lower financial stability.

Western Countries

Even in countries like the U.S., UK, and France, racial income and wealth differences still exist. For example, African Americans in the U.S. are more likely to drop out of school, work fewer hours for lower wages, and have less inherited wealth. The wealth gap between Black and white Americans has remained large over time.

Latin America

In Latin American countries, many indigenous and Afro-descendant groups still deal with the effects of European colonization. They often have incomes roughly half that of white populations and face unequal access to education and jobs.

Africa

African countries also continue to deal with the effects of the Atlantic slave trade. For example, South Africa, still recovering from Apartheid, has some of the highest racial inequality in Africa. Progress in reducing these gaps for non-white populations has been slow or even reversed in some areas.

Asia

While less studied, Asian regions also show effects of colonization and historical practices like the caste system in India. These can lead to social differences that result in income and wealth inequality.

Economic Development

Economist Simon Kuznets suggested that inequality changes as countries develop. In early stages, as some industries grow, inequality might increase. But as the economy develops further and more people get jobs, inequality should decrease. However, many experts now question this idea.

Wealth Concentration

Wealth concentration is when newly created wealth ends up in the hands of those who are already wealthy. This happens because rich individuals can invest more and use their existing wealth to make even more. Over time, this can make inequality much worse. Thomas Piketty argues that capital (investments) often grows faster than the economy, leading to more wealth for the already rich.

Rent-Seeking

Rent-seeking is when certain groups use their political power to shape government policies to benefit themselves financially, rather than creating new wealth. Economist Joseph Stiglitz argues that this "grabbing a larger share of the wealth" is a major reason for growing inequality, not just market forces.

Finance Industry

Some argue that countries with larger financial sectors tend to have greater inequality.

Climate Change

Studies show that global warming is increasing economic inequality between countries. It helps developed countries grow while harming developing nations. The wealthiest 10% of the global population are responsible for more than half of global carbon emissions. The richest 1% emit over double the greenhouse gases of the poorest 50% combined. This means that if inequality isn't reduced, it will worsen poverty and increase the risk of climate breakdown.

Politics

Joseph Stiglitz argues that economic inequality is partly caused by the huge political power held by the richest people. He says that politics shapes the market in ways that benefit the wealthy at the expense of everyone else.

Reducing Economic Inequality

Many factors can help reduce economic inequality. These can be divided into market-driven factors and government-sponsored initiatives.

Things that can reduce inequality without direct government intervention include:

• Spending habits: As people become wealthier, they might spend more, which can create jobs and spread wealth. However, very rich people tend to save more, which can lead to even greater wealth growth for them.

Typical government actions to reduce inequality include:

• Public education: Providing good education for everyone helps more people get skilled jobs, which can reduce income differences.
• Progressive taxation: Taxing the rich a higher percentage than the poor helps redistribute income.
• Social safety nets: Programs like welfare, food stamps, and social security help support vulnerable populations.

Research suggests that major drops in wealth inequality in Europe have historically only happened after extreme events like the Black Death or World Wars. However, some experts believe that smaller, peaceful policy changes can still make a difference.

Policies to Help

The OECD suggests several ways to reduce inequality:

• Targeted income support: Helping low-income families directly.
• Encouraging employment: Making it easier for people to find jobs.
• Better training and education: Providing job-related training for low-skilled workers to boost their earnings.
• Better access to formal education: Ensuring everyone can get a good education.

Economists like Emmanuel Saez and Thomas Piketty suggest much higher tax rates for the very wealthy (up to 50%, 70%, or even 90%). Others propose a financial transaction tax (a small tax on financial trades) to fund social programs.

A minimum wage, if set at a reasonable level, can also help boost pay for low-income workers without harming jobs.

The United Nations Sustainable Development Goal 10 aims to significantly reduce economic inequality by 2030 through international efforts.

Effects of Inequality

Economic inequality has many effects on society:

• Health: Countries with higher inequality often have worse health outcomes, like higher rates of obesity and mental illness.
• Social well-being: More equal societies tend to have higher trust among people, better educational performance, and more social mobility.
• Happiness: Rising inequality, along with high healthcare costs, can lead to less happiness around the world.
• Crime: Societies with less economic inequality generally have lower crime rates.
• Poverty: Studies suggest that reducing economic inequality could help reduce poverty.
• Debt: High income inequality can lead to more household debt, as middle-income earners try to keep up with rising costs, especially for housing.
• Economic growth: Some studies find that inequality can slow down economic growth, especially in less developed countries.
• Political instability: High economic inequality can lead to greater political instability, including a higher risk of civil conflict.

Different Views on Inequality

Fairness vs. Equality

Research suggests that people don't necessarily dislike inequality itself, but they dislike unfairness. People often prefer distributions where rewards are based on effort, talent, or contribution, even if it means some people get more than others. Very young children also seem to prefer fairness over perfect equality.

People tend to underestimate how much inequality actually exists, and they often want less inequality than there is.

Socialist Views

Socialists believe that large differences in wealth come from a small group of people owning the "means of production" (like factories and businesses). This means a few people earn money just from owning things, while most people depend on wages. Socialists argue that the means of production should be owned by society so that income differences reflect how much each person contributes.

Marxian economics suggests that as companies use more machines and automation, fewer workers are needed, which can push wages down and increase the wealth of business owners.

Meritocracy

Meritocracy is the idea that a person's success should be based on their merit (skill, talent, and effort). From this view, economic inequality is a natural result of people having different abilities and working harder.

Liberal Views

Most modern social liberals believe that the capitalist system should be kept, but with changes to reduce the income gap. They support government policies like progressive taxes to even out income differences. People with liberal beliefs often see high income inequality as morally wrong.

However, classical liberals and libertarians generally focus on equality under the law, meaning everyone should have the same rights and opportunities, regardless of whether it leads to unequal wealth. They believe that government forcing wealth redistribution (like through high taxes) can limit individual freedom.

John Rawls argued that inequality is only fair if it benefits everyone in society, especially the poorest. Some see this as supporting capitalism, while others believe it requires a strong welfare state.

Economist Milton Friedman famously said that "A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both."

Social Justice Arguments

Some argue that true social justice requires redistributing high incomes and large amounts of wealth more widely. This is to recognize everyone's contribution to building a nation's wealth.

Pope Francis has stated that "inequality is the root of social evil" and that problems of the poor won't be solved without addressing the causes of inequality.

When income inequality is low, more people can afford basic goods and services, which can boost the economy.

Effects on Social Well-being

In many democracies, reducing economic inequality is a goal of left-leaning political groups. One argument for this is that inequality can reduce social cohesion (how connected people feel to each other) and increase social unrest. Studies show that this is often true.

It's also argued that economic inequality can lead to political inequality, where the wealthy have more power in democratic processes.

Capabilities Approach

The capabilities approach sees income inequality as a form of "capability deprivation." This means that when a person's abilities or freedoms are limited (for example, by illness, gender roles, or violence), they are less able to earn income and improve their well-being. This approach focuses on widening people's choices and their ability to achieve their goals.

Societal Acceptance

Studies show that in countries where free-market ideas are very strong, people tend to be more accepting of high levels of income inequality and even prefer it over more equal outcomes.

Images for kids

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  Share of income of the top 1% for selected developed countries, 1975 to 2015

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  Differences in national income equality around the world as measured by the national Gini coefficient as of 2018. The Gini coefficient is a number between 0 and 100, where 0 means perfect equality and 100 means absolute inequality.

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  Global share of wealth by wealth group, Credit Suisse, 2021

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  Tents of the homeless on the sidewalk in Skid Row, Los Angeles

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  An affluent house in Holmby Hills, Los Angeles, roughly 12 miles from downtown

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  Countries by total wealth (2022)

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  Countries by the inequality-adjusted Human Development Index.

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  The average personal wealth of people in the top 1% is more than a thousand times that of people in bottom 50%.

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  The logarithmic scale shows how wealth has increased for all percentile groups, though moreso for wealthier people.

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  Total effective tax rates (includes all taxes: federal+state income tax, sales tax, property tax, etc) for the richest Americans declined by 2018 to a level beneath that of the bottom 50% of earners, contributing to economic inequality. Analysis by economists Emmanuel Saez and Gabriel Zucman.

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  Ivy-Plus university admissions rates vary with the income of the students' parents, with the acceptance rate of the top 0.1% income percentile being almost twice as much as other students.

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  A 1916 ad for a vocational school appealed to Americans' belief in the possibility of self-betterment, as well as threatening economic insecurity through lack of education and the consequences of downward mobility in the income inequality during the Industrial Revolution

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  "Elephant curve": Change in real income between 1988 and 2008 at various income percentiles of global income distribution.

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  The gender gap in median earnings of full-time employees according to the OECD 2015

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  Countries' income inequality according to their most recent reported Gini index values as of 2018.

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  A Kuznets curve

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  Scaling the effect of wealth to the national level: richer (developed) countries emit more CO₂ per person than poorer (developing) countries. Emissions are roughly proportional to GDP per person, though the rate of increase diminishes with average GDP/pp of about $10,000.

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  Though total CO₂ emissions (size of pie charts) differ substantially among high-emitting regions, the pattern of higher income classes emitting more than lower income classes is consistent across regions. The world's top 1% of emitters emit over 1000 times more than the bottom 1%.

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  Social connectedness to people of higher income levels is a strong predictor of upward income mobility. However, data shows substantial social segregation correlating with economic income groups.