15.4 Income Inequality: Measurement and Causes

Income inequality is a hot topic in economics. It's about how money is spread among people in a society. Factors like education, skills, and family structure play a big role in who gets what slice of the economic pie.

We use tools like quintiles and the Lorenz curve to measure inequality. The Gini coefficient gives us a single number to compare inequality across different places. Understanding these measures helps us see how income gaps are changing over time.

Measuring Income Inequality

Distribution of Income and Key Factors

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• Income distribution shows how income is divided among individuals or households in an economy influenced by factors such as education, skills, experience, and wealth
• Key factors driving income inequality:
  • Differences in educational attainment and skills with higher levels often leading to higher-paying jobs
  • Technological advancements and globalization increasing demand for high-skilled workers while reducing demand for low-skilled jobs
  • Changes in family structure and household composition such as the rise in single-parent households and assortative mating
  • Institutional factors including the decline in unionization and changes in tax policies favoring high-income earners

Data Visualizations

• Quintiles divide the population into five equal groups based on income with the lowest quintile representing the poorest 20% and the highest quintile representing the richest 20% to assess the extent of inequality by comparing income shares
• Lorenz curve is a graphical representation of income distribution plotting cumulative share of income earned by cumulative share of population with perfect equality represented by a 45-degree line and greater deviation indicating higher income inequality
• Gini coefficient derived from the Lorenz curve ranges from 0 (perfect equality) to 1 (perfect inequality) calculated as the area between the Lorenz curve and the 45-degree line of perfect equality

Factors Contributing to Rising Inequality

Household Composition and Wage Disparities

• Changes in household composition:
  • Increase in single-parent households which often have lower incomes compared to two-parent households
  • Assortative mating tendency for people with similar education and income levels to marry each other leading to higher-income households at the top and lower-income households at the bottom
• Wage disparities:
  • Skill-biased technological change increasing demand for high-skilled workers leading to higher wages and reducing demand for low-skilled workers leading to stagnant or lower wages
  • Globalization and trade outsourcing low-skilled jobs to countries with lower labor costs and increasing competition for low-skilled workers putting downward pressure on wages
  • Decline in unionization weakening collective bargaining power especially for low-skilled workers and reducing ability to negotiate for higher wages and better working conditions