Advantages & Disadvantages to Income Inequality

The question of income inequality is a major issue in economic and policy debates. Not surprisingly, economists and politicians often disagree about the advantages and disadvantages of income inequality. Understanding this debate is important because it provides insight into the rationale behind policy decisions and helps inform the conversation of macroeconomic theory. In addition, the causes and effects of income inequality are an area of academic interest.

  1. Basics of Income Inequality

    • Income inequality is essentially a difference between the amount of monetarily described earnings of one person or group of people, and others. Often, the debate is framed in terms of "haves" and "have-nots," or the wealthy as compared to the impoverished. Inequality is measured along various metrics, including the Lorenz curve and the Gini coefficient. The Lorenz curve is calculated on a graph where "cumulative family income is plotted against the number of families arranged from the poorest to the richest," according to the Central Intelligence Agency. The Gini coefficient is represented by the difference between the nation's Lorenz curve and the perfect equality line -- the Lorenz curve if all families earned the same income.

    Advantages of Income Inequality

    • Some scientists and politicians consider income inequality to be a natural and beneficial feature of a nation's economy. According to the American Enterprise Institute, a political think-tank, the "growing inequality gap is associated with growing oppor­tunity---in this case, the opportunity to advance through education." In this view, inequality comes necessarily as a result of growing prosperity and accompanies the improved standard of living of all people in the economy. Inequality is seen as a means to reward some actors in the economy for increased investment in the future; the suppression of inequality has the effect of discouraging output.

    Disadvantages of Income Inequality

    • Other politicians, philosophers and economists believe that income inequality is detrimental to economic growth, social justice and human well-being. For example, the World Bank reports that "high inequality threatens a country's political stability," as those without high incomes are dissatisfied with their economic status. In this view, political gridlock, failure to build national consensus, and even violent conflicts can result. According to Anna Bernasek of the "New York Times," "some scientists believe that growing inequality leads to more health problems in the overall population," and "income inequality can breed corruption," which is thought to limit long-term growth by inefficiently allocating economic resources.

    Relative Income Inequality

    • Income inequality varies considerably by countries. Income levels of countries themselves also vary substantially. Income inequality is often measured at the national level using the Gini coefficient and at the global level comparing differences in per capita gross domestic product. In either case, the scope of the measure is highly relevant. As an example, the "New York Times" and "NPR" both report that income inequality in the United States grew between 1980 and 2004. Regardless, the country as a whole experiences a lesser degree of income inequality than less industrialized nations, such as Sierra Leone or Guatemala, and a larger degree of inequality than nations in Europe, such as Norway or Sweden.

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