Income Inequality

Income inequality refers to the unequal distribution of income among individuals or households within a population. It is often measured using various metrics, such as the Gini coefficient or the ratio of income shares between different percentiles of the population. High levels of income inequality can have significant economic, social, and political implications. Read here to learn more.

Income inequality has declined in India with a higher tax base and a shift in taxpayers from lower income to higher income tax bracket, the Economic Research Department of the State Bank of India said in a report.

About 36.3 percent of taxpayers have moved from lower income to higher income tax bracket resulting in 21.3 percent additional income, the report said adding that the top 2.5 percent of taxpayers’ contribution in income declined from 2.81 percent in FY14 to 2.28 percent in FY21.

What Is Income Inequality?

Income inequality refers to how unevenly income is distributed throughout a population. The less equal the distribution, the greater the income inequality. Income inequality is often accompanied by wealth inequality, which is the uneven distribution of wealth.

• Populations can be divided up in different ways to show different levels and forms of income inequality, such as income inequality by gender or race.
• Different measures, such as the Gini Index, can be used to analyze the level of income inequality in a population.

Factors Contributing to Income Inequality

• Wage Disparities: Differences in wages and salaries across occupations and industries contribute to income inequality. Certain professions or sectors may offer higher remuneration, leading to disparities.
• Educational Disparities: Educational attainment is often correlated with income. Individuals with higher levels of education tend to have access to better-paying jobs, creating income gaps based on educational disparities.
• Technological Changes: Technological advancements can impact the demand for certain skills. Individuals with technical or specialized skills may see higher income gains, while those with less relevant skills may face wage stagnation.
• Globalization: Global economic integration can affect income distribution. Some argue that globalization has led to the outsourcing of jobs and wage pressure on low-skilled workers in developed countries.
• Labor Market Trends: Changes in the labor market, such as the rise of gig economy jobs, part-time work, and non-standard employment arrangements, can influence income distribution.
• Inheritance and Wealth: Intergenerational transfers of wealth and inheritance can contribute to the perpetuation of income inequality, as individuals born into affluent families may have advantages in terms of education and opportunities.
• Tax Policies: Tax structures and policies can either exacerbate or mitigate income inequality. Progressive tax systems that tax higher incomes at higher rates can help reduce inequality, while regressive tax policies may widen the gap.

Consequences

• Economic Growth: Excessive wealth inequality can hinder economic growth by limiting the purchasing power of a significant portion of the population, which can, in turn, impact demand for goods and services.
• Social Mobility: High-income inequality may impede social mobility, making it difficult for individuals from lower-income backgrounds to move up the economic ladder.
• Health Disparities: Studies suggest a correlation between income inequality and health outcomes. Higher levels of income inequality are associated with poorer health outcomes for the overall population.
• Education Disparities: Income inequality can affect access to quality education. Wealthier individuals may have better educational opportunities, exacerbating disparities in skills and qualifications.
• Social Cohesion: Excessive income inequality can strain social cohesion and lead to social unrest. It may contribute to feelings of injustice and undermine the trust individuals have in social institutions.
• Political Influence: Disparities in income can translate into disparities in political influence, potentially skewing policy decisions in favor of the affluent.

How to measure income inequality?

Income inequality can be measured using various statistical tools and indicators. Here are some commonly used methods to measure income inequality:

1. Gini Coefficient:

• The Gini coefficient is a widely used measure of income inequality. It calculates the extent to which the distribution of income among individuals or households within a country deviates from perfect equality. The Gini coefficient ranges from 0 (perfect equality) to 1 (perfect inequality).
• A Gini coefficient of 0 indicates that everyone has the same income, while a coefficient of 1 implies that one person or household has all the income, and others have none.

2. Theil Index:

• The Theil index is another measure of income inequality that considers both within-group and between-group inequalities. It breaks down total inequality into two components: inequality within groups and inequality between groups.
• The Theil index is particularly useful when examining inequality among different subgroups within a population.

3. Palma Ratio:

• The Palma ratio is the ratio of the income share of the richest 10% of the population to the income share of the poorest 40%. It focuses on the relative income shares of the top and bottom segments of the income distribution.
• The Palma ratio is especially relevant in assessing the concentration of income among the wealthiest and the distribution among the lower-income groups.

4. Percentile Ratios:

• Comparing income shares at different percentiles of the income distribution provides insights into how income is distributed across various segments of the population. Commonly used percentiles include the 10th, 20th, 50th (median), 80th, and 90th percentiles.
• Examining the ratio of income between the highest and lowest percentiles can offer a snapshot of the overall income distribution.

5. Lorenz Curve:

• The Lorenz curve is a graphical representation of income distribution. It plots the cumulative share of total income received by the bottom x% of the population against the cumulative share of the population from the poorest to the richest.
• The greater the distance between the Lorenz curve and the line of perfect equality, the higher the level of income inequality.

6. Decomposition Analysis:

• Decomposition analysis involves breaking down overall income inequality into its components, such as inequality within regions, industries, or demographic groups. This helps identify the sources of inequality.
• Decomposition techniques include the Oaxaca-Blinder decomposition for gender wage gaps and other similar methods.

7. Atkinson Index:

• The Atkinson index measures inequality by assigning different weights to income differences at various parts of the income distribution. It reflects societal preferences regarding inequality aversion.
• The Atkinson index is sensitive to changes in the distribution of income among the poor and the rich.

8. Coefficient of Variation:

• The coefficient of variation is a simple measure of relative income inequality. It is calculated as the ratio of the standard deviation of income to the mean income.
• A higher coefficient of variation indicates greater income inequality.

9. Income Shares by Quintiles:

• Dividing the population into quintiles (20% groups) based on income and examining the share of total income held by each quintile provides a straightforward measure of income distribution.

10. Relative Mean Deviation:

• The relative mean deviation measures the average percentage deviation of individual incomes from the mean income. It provides information about the dispersion of income around the mean.

Considerations for Measurement

• Population Coverage: Ensure that the measurement includes the entire population or specific demographic groups.
• Currency of Data: Use up-to-date income data to reflect current economic conditions.
• Adjusting for Cost of Living: Consider regional variations in the cost of living when assessing income inequality.

Choosing the appropriate measure depends on the research question, data availability, and the specific characteristics of the population being studied. Combining multiple measures can provide a more comprehensive understanding of income inequality within a society.

Addressing Income Inequality

• Education and Skills Development: Investing in education and skills development programs to ensure that individuals have the tools to access higher-paying jobs.
• Progressive Taxation: Implementing progressive tax policies that tax higher incomes at higher rates.
• Social Safety Nets: Establishing robust social safety nets to provide support for those facing economic challenges.
• Labor Market Policies: Implementing policies that promote fair wages, workers’ rights, and job security.
• Promoting Inclusive Economic Growth: Designing economic policies that focus on inclusive growth, ensuring that the benefits of economic development are shared more equitably.
• Addressing Discrimination: Taking measures to address discrimination in the workplace, including gender and racial disparities in pay.
• Wealth Redistribution: Exploring mechanisms for wealth redistribution, such as inheritance taxes or targeted social programs.

Conclusion

Reducing income inequality requires a multi-faceted approach that addresses the various factors contributing to disparities. Policymakers, businesses, and civil society play crucial roles in creating more equitable economic systems.

Related articles:

• Gender Pay Parity
• Inclusive growth
• Economic and Social Development
• Human Development in India
• Corporate driven Inequality

-Article by Swathi Satish