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.
Measuring 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.
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.
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.