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What’s it: Economic inequality is the unequal distribution of income and economic opportunities between various groups in society. Inequality is a universal problem. You can see, it happens in all countries.
The acute unemployment rate and low levels of education and skills leave people with less opportunity to move up the social ladder. Finally, they are trapped in a cycle of poverty and pass it on to the next generation.
However, being born into a poor family does not automatically make people poor. They can handle it, either with determination or with external help.
Government welfare programs are one solution. Improving access to education, skills, and training is among the ways to overcome this.
Economic inequality: understanding the disparity
Economic inequality refers to the unequal distribution of income and economic opportunities among a population. In simpler terms, it’s the gap between the rich and the poor, and how easily people can move between those brackets. This gap exists in all countries, but the degree to which it widens has significant consequences.
Why economic inequality matters
Economic inequality isn’t just a fairness issue; it impacts a society’s overall well-being. Here’s a glimpse of how:
- Slowed economic growth: Widening inequality can stifle economic growth. When a large portion of the population has low income, they have less purchasing power, which can hurt businesses and hinder economic activity.
- Social unrest and crime: High levels of inequality can breed resentment and social unrest. People with limited opportunities may turn to crime to survive, further destabilizing the social fabric.
- Health problems: Poverty linked to inequality is associated with poorer health outcomes. Limited access to healthcare and nutritious food can lead to a higher prevalence of health issues.
- Limited upward mobility: When economic inequality is severe, it becomes harder for people born into poverty to climb the economic ladder. This lack of social mobility can trap entire generations in disadvantaged circumstances.
Understanding economic inequality is crucial for students of economics, investors, and anyone interested in economic trends. It’s a complex issue with far-reaching consequences, and addressing it requires a multi-faceted approach.
Measure economic inequality
Economic inequality is closely related to disparities in wealth and income in the economy. Those who are wealthy are getting richer and controlling the economy. Meanwhile, the poor must struggle to fulfill their essential needs.
Often, economic access is more concerned with the rich than the poor. This, in turn, makes inequality even more acute.
Governments often use several metrics to measure economic inequality. The Gini ratio is the most widely used. Also, there is an Inequality-adjusted Human Development Index (IHDI), which measures economic development by considering its distribution among communities.
Gini coefficient
The Gini coefficient (or Gini index, Gini ratio) compares the two areas of the Lorenz Curve, which relates population to income (wealth) control among societies.
As people’s income increases, the Lorenz curve states the relative share of their wealth increases disproportionately. Therefore, the amount of wealth owned by 10% of the richest would be much greater than the bottom 10% wealth. Here’s what the Lorenz curve looks like:
Mathematically, the Gini index formula is to compare area A with the area of a triangle.
- Gini Index = Area A / (Area A + Area B)
The Gini Index ranges from 0 to 1 (100%). Gini index 0 indicates perfect equality. The higher the index, the higher the economic inequality. A value of 100% indicates perfect inequality and tells you, one person controls all income or wealth in the economy.
Inequality-adjusted Human Development Index (IHDI)
The Human Development Index (HDI) is a well-known metric that tracks a country’s progress in three key areas: health, education, and living standards. However, the HDI presents an average picture, which can mask significant inequalities within a population. This is where the Inequality-adjusted Human Development Index (IHDI) steps in.
The IHDI goes beyond the average by factoring in how equally these benefits are distributed across the population. Imagine a country with a high average HDI, but wealth and opportunities are concentrated in the hands of a few. The IHDI would account for this by penalizing the overall score, reflecting the reality that many people are left behind.
Why is the IHDI important?
For investors and those interested in economic trends, the IHDI provides valuable insights:
- Identifying risks: A high HDI might seem positive, but a low IHDI suggests unequal distribution of wealth, which can lead to social unrest and political instability – potential risks for investments.
- Prioritizing markets: Businesses and investors can use the IHDI to identify countries with high human development achieved through equality. These markets might offer a more stable and sustainable environment.
Understanding the IHDI score
The IHDI score falls between 0 and 1, just like the HDI. However, a higher IHDI indicates greater equality in achieving human development. A significant gap between a country’s HDI and IHDI highlights a need for policies promoting equal access to opportunities.
The IHDI is a powerful tool for students of economics and anyone seeking a more nuanced understanding of a nation’s development. It sheds light on how effectively a country is ensuring all its citizens can thrive, not just a privileged few.
Causes of economic inequality
The factors causing economic inequality vary between countries. Here are a few reasons:
High unemployment rate. It shows you a lot of people are not getting jobs and income. An increase in the unemployment rate weakens the demand for goods and services. That results in sluggish production activities. Businesses reduce workers. That leads to more unemployment and less income for households.
Poor working conditions. Wages below international or national standards still occur. It keeps people from earning a decent income. Thus, it is difficult for them to meet their daily needs or access essential services such as education and health.
Low education and skills. It restricts people from getting more decent jobs and incomes. Poor people find it difficult to access education or training because they don’t have money. So, providing more access to such facilities is one solution to getting out of poverty.
Economic discrimination. Being a minority or immigrant often exposes people to unfair treatment when they pursue economic opportunities or access essential services.
Poor infrastructure. People in remote areas find it challenging to access necessities from other areas. Also, poor infrastructure increases logistics costs and goods’ prices, causing the poor’s purchasing power to fall even further. It is also not easy for people to move to other regions to pursue better economic opportunities.
Family size. The more family members there are, the more needs to be met. If they only rely on the family’s head to earn a living, income often cannot meet their needs.
Concentration of wealth. The rich have better resources than the poor. They control a large part of the economy.
If people have to compete, as the free market suggests, the poor are at a disadvantage. They find it challenging to deal with rich people. As a result, the rich are getting richer, and the poor are getting poorer.
Potential solutions to economic inequality
Economic inequality is a complex challenge, but there are several approaches that can help narrow the gap:
Government intervention & welfare programs: Targeted government programs can provide a safety net for the most vulnerable. Social security benefits, unemployment insurance, and minimum wage laws can help ensure basic needs are met and offer a buffer during difficult times.
Additionally, investments in affordable housing and childcare can free up resources for low-income families, allowing them to pursue education and better opportunities.
Educational opportunities & skills training: Education is a powerful equalizer. Investing in quality education at all levels, from early childhood development to vocational training and higher education, equips individuals with the skills they need to compete in the job market. Scholarship programs and affordable loan options can further ensure everyone has access to educational opportunities, regardless of background.
Infrastructure development & investment: Strong infrastructure connects people to jobs, education, and healthcare. Investing in transportation networks, reliable internet access, and modern utilities in underserved areas can create opportunities for economic growth and development. Improved infrastructure can empower people in remote areas to participate more fully in the economy.
Promoting fair competition & addressing discrimination: A level playing field is essential for economic mobility. Antitrust regulations can prevent monopolies from stifling competition and driving down wages. Additionally, policies that address discrimination based on race, gender, or other factors can help ensure equal access to opportunities and dismantle barriers that prevent some groups from reaching their full potential.
