8 Examples of Income Inequality

John Spacey, October 28, 2021

Income inequality is a large gap in the distribution of income and wealth whereby a relatively small group of people control most resources. One of the basic functions of an economic system is to distribute value. In this context, income inequality is inefficient whereby value is locked up and not used where it is desperately needed. The following are illustrative examples of income inequality.

Laissez-faire Capitalism

Laissez-faire capitalism is a system where governments don't intervene in the economy in any way. Theoretically, this is a system of pure competition whereby people who create value get to keep it. This is pure fiction. In reality, a large monopoly would be likely to emerge in laissez-faire capitalism that would eventually control most or all resources. As such, laissez-faire capitalism ironically resembles communism -- with a single entity that controls all capital.

Social Market Economy

Laissez-faire capitalism doesn't exist at any scale. Every developed nation is currently some variation of a social market economy whereby capitalism is used to create value and the government plays a role in preventing monopolies, regulating markets and redistributing income. A social market economy is based on a profit motive and open competition such that some degree of income inequality is an inherent feature of these systems. However, these systems generate immense wealth such that taxation can be used to fund public services and entitlements that provide a minimum quality of life.

Tax Burden

Social market economies tend to place heavy tax-burdens on the middle class as the upper class have access to aggressive tax strategies. This greatly undermines the sense that the system is fair and the amount of income available to fund public services.

Monopolies

Monopolies are firms that grow very large such that they dominate a valuable industry or product-category. These end up creating vast inefficiencies as monopolies are unresponsive to customers, partners and regulators. Monopolies also concentrate wealth at significant scale. For example, a 2017 Oxfam study found that 8 people owned as much combined wealth as half the human race.^* Governments often fail to regulate monopolies and may even fund them or become intertwined with them. This is essentially a breakdown of capitalism that prevents the open competition and opportunity that this system represents.

Structural Inequality

Societies are often structured to support the privilege of an upper class. For example, a system of escalator schools that allows the upper class to essentially guarantee their children entry into high status universities from a young age. These universities then represent gate keepers that provide the social status and cultural capital required to enter dominant institutions, firms and social circles.

Globalization

Generally speaking, the process of globalization has greatly decreased income inequality between "rich" and "poor" countries in recent decades but has increased inequality within the "rich" countries themselves^{**, ***, ****}.

Race to the Bottom

Globalization may encourage a race to the bottom whereby nations are under pressure to reduce quality of life to be more cost competitive with other nations. For example, a developed nation with a ridiculously low minimum wage that is under pressure from firms to maintain this policy with the implicit threat being that they can move operations overseas.

Communism

Communism is a system of forced sameness whereby the government takes over all capital in the name of "the people" or "the workers." This resembles a large monopoly that is likely to be incredibly inefficient. Communism can create equality of outcome whereby everyone gets the same income regardless of contribution. This is problematic as this requires the state to centrally orchestrate the economy with a large bureaucracy. With no opportunity to improve your income, there is no incentive to work, improve or innovate. Historically, communism has produced remarkably low quality of life even where it was employed in technologically advanced societies.

Statistics

The top 10% of US households hold 70% of the country's wealth while the bottom 50% hold 2%.^†

The top 0.6% of richest people globally hold 39.3% of world wealth. The bottom 95% hold 28.4% of world wealth.^‡

Economic Systems

This is the complete list of articles we have written about economic systems.

Economic Institutions

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References

* World's 8 Richest Have as Much Wealth as Bottom Half of Global Population. The New York Times. Mullany, Gerry. January 16, 2017.

** Parametric estimations of the world distribution of income, Xavier Sala-i-Martin, Maxim Pinkovskiy, 22 January 2010.

*** Kang-Kook, L. E. E. "Globalization, income inequality and poverty: Theory and empirics." Social System Studies 28 (2014): 109-134.

**** Jaumotte, Florence, Subir Lall, and Chris Papageorgiou. "Rising income inequality: technology, or trade and financial globalization?." IMF Economic Review 61.2 (2013): 271-309.

† Distributional National Accounts. Federal Reserve. February 16, 2020.

‡ OECD Income and Wealth Distribution Databases, 2012.