ECONOMIC INEQUALITY

Dipankar Madaan
The Law School, Jammu University
B.A. LLB 5 Years
dipankarmadaan_10@yahoo.com

9055545837
Abstract
Economic inequality is the difference found in various measures of economic well-being among
individuals in a group, among groups in a population, or among countries. Economic inequality
is sometimes called income inequality, wealth inequality, or the wealth gap. Economists
generally focus on economic disparity in three metrics: wealth, income, and consumption.[1] The
issue of economic inequality is relevant to notions of equity, equality of outcome, and equality of
opportunity. Economic inequality varies between societies, historical periods, economic
structures and systems. The term can refer to cross-sectional distribution of income or wealth at
any particular period, or to changes of income and wealth over longer periods of time. There are
various numerical indices for measuring economic inequality. A widely used index is the Gini
coefficient, but there are also many other methods.
Some studies say economic inequality is a social problem. E.g., too much inequality can be
destructive,[5][6] because it might hinder long term growth.[7][8][9] Too much
income equality is also destructive since it decreases the incentive for productivity and the desire
to take-on risks and create wealth.[11][12]
Empirical Measurements of inequality
The first set of income distribution statistics for the United States covering the period from
(19131948) was published in 1952 by Simon Kuznets, Shares of Upper Income Groups in
Income and Savings. It relied on US federal income tax returns and Kuznetss own estimates of
US national income, National Income: A Summary of Findings (1946). Others who contributed
to development of accurate income distribution statistics during the early 20th century were John
Whitefield Kendrick in the United States, Arthur Bowley and Colin Clark in the UK, and L.
Dug de Bernonville in France.
Economists generally consider three metrics of economic dispersion: wealth, income,
and consumption. A skilled professional may have low wealth and low income as student, low
wealth and high earnings in the beginning of the career, and high wealth and low earnings after
the career. People's preferences determine whether they consume earnings immediately or defer
consumption to the future. The distinction is also important at the level of economy:

There are economies with high income inequality and relatively low wealth inequality (such as
Japan and Italy).
There are economies with relatively low income inequality and high wealth inequality (such as
Switzerland and Denmark).
There are many different ways to measure income inequality and wealth inequality. Different
choices lead to different results. The Organization (OECD) provides data on the following eight
types of income inequality:[16]
Dispersion of hourly wages among full-time (or full-time equivalent) workers
Wage dispersion among workers E.g. annual wages, including wages from part-time work or
work during only part of the year.
Individual earnings inequality among all workers Includes the self-employed.
Individual earnings inequality among the entire working-age population Includes those who are
inactive, e.g. students, unemployed, early pensioners, etc.
Household earnings inequality Includes the earnings of all household members.
Household market income inequality Includes incomes from capital, savings and private
transfers.
Household disposable income inequality Includes public cash transfers received and direct
taxes paid.
Household adjusted disposable income inequality Includes publicly provided services.
There are many challenges in comparing data between economies, or in a single economy in
different years. Examples of challenges include:
Data can be based on joint taxation of couples (e.g. France, Germany, Ireland, Netherlands,
Portugal and Switzerland) or individual taxation (e.g. Australia, Canada, Italy, Japan, New
Zealand, Spain, the UK).[16]
The tax authorities generally only collect information on income that is potentially taxable.[16]

The precise definition of gross income varies from country to country. There are differences
when it comes to inclusion of pension entitlements and other savings, and benefits such as
employer provided health insurance.[16]
Differences when it comes under-declaration of income and/or wealth in tax filings.[16]
A special event like an exit from business may lead to a very high income in one year, but much
lower income in other years of the person's lifetime.[16]
Much income and wealth in non-western countries is obtained or held extra-legally through
black market and underground activities such as unregistered businesses, informal property
ownership arrangements, etc.
Measurements
A 2011 study "Divided we Stand: Why Inequality Keeps Rising by the Organisation for
Economic Co-operation and Development (OECD) investigated economic inequality in OECD
countries, including the following factors:[18]
Changes in the structure of households can play an important role. Single-headed households in
OECD countries have risen from an average of 15% in the late 1980s to 20% in the mid-2000s,
resulting in higher inequality.
Assortative mating refers to the phenomenon of people marrying people with similar
background, for example doctors marrying doctors rather than nurses. OECD found out that 40%
of couples where both partners work belonged to the same or neighboring earnings deciles
compared with 33% some 20 years before.
In the bottom percentiles number of hours worked has decreased.
The main reason for increasing inequality seems to be the difference between the demand for and
supply of skills.
Income inequality in OECD countries is at its highest level for the past half century. The ratio
between the bottom 10% and the top 10% has increased from 1:7, to 1:9 in 25 years.
There are tentative signs of a possible convergence of inequality levels towards a common and
higher average level across OECD countries.

With very few exceptions (France, Japan, and Spain), the wages of the 10% best-paid workers
have risen relative to those of the 10% lowest paid.
A 2011 OECD study investigated economic inequality
in Argentina, Brazil, China, India, Indonesia, Russia and South Africa. It concluded that key
sources of inequality in these countries include "a large, persistent informal sector, widespread
regional divides (e.g. urban-rural), gaps in access to education, and barriers to employment and
career progression for women."
A study by the World Institute for Development Economics Research at United Nations
University reports that the richest 1% of adults alone owned 40% of global assets in the year
2000. The three richest people in the world possess more financial assets than the lowest 48
nations combined.[19] The combined wealth of the "10 million dollar millionaires" grew to
nearly $41 trillion in 2008.[20] A January 2014 report by Oxfam claims that the 85 wealthiest
individuals in the world have a combined wealth equal to that of the bottom 50% of the world's
population, or about 3.5 billion people.[21][22][23][24][25] According to a Los Angeles
Times analysis of the report, the wealthiest 1% owns 46% of the world's wealth; the 85 richest
people, a small part of the wealthiest 1%, own about 0.7% of the human population's wealth,
which is the same as the bottom half of the population.[26]More recently, in January 2015,
Oxfam reported that the wealthiest 1 percent will own more than half of the global wealth by
2016.[27][28] An October 2014 study by Credit Suissealso claims that the top 1% now own
nearly half of the world's wealth and that the accelerating disparity could trigger a recession.[29]

Causes
There are many reasons for economic inequality within societies. Recent growth in overall
income inequality, at least within the OECD countries, has been driven mostly by increasing
inequality in wages and salaries.
Economist Thomas Piketty, who specializes in the study of economic inequality, argues that
widening economic disparity is an inevitable phenomenon of free market capitalism when the
rate of return of capital (r) is greater than the rate of growth of the economy (g).[51]

Common factors thought to impact economic inequality include:

labor market outcomes

globalization, by:

suppressing wages in low-skill jobs due to a surplus of low-skill labor in

developing countries

increasing the market size and the rewards for people and firms succeeding in a
particular niche

providing more investment opportunities for already-wealthy people

increasing international influence

decreasing domestic influence

policy reforms

extra-legal ownership of property (real estate and business)

more regressive taxation

plutocracy

computerization, automation and increased technology, which means more skills are
required to obtain a moderate or high wage

ethnic discrimination[55]

gender discrimination[56]

nepotism[57]

variation in natural ability[58]

neoliberalism[59][60]

Growing acceptance of very high CEO salaries, e.g. in the United States since the
1960s[61]

Land speculation- Followers of Henry George believe that landlords and land speculators
derive excess wealth and income from the tendency of land to increase exponentially with
development and at a much higher rate than population growth. Their solution is to tax land
value, though not necessarily structures or other improvements. This concept is known
as Georgism.

Theoretical Frameworks
Neoclassical economics
Neoclassical economics views inequalities in the distribution of income as arising from
differences in value added by labor, capital and land. Within labor income distribution is due to
differences in value added by different classifications of workers. In this perspective, wages and
profits are determined by the marginal value added of each economic actor (worker,
capitalist/business owner, landlord).[62] Thus, in a market economy, inequality is a reflection of
the productivity gap between highly-paid professions and lower-paid professions.
Marxian economics
Marxian economics attributes rising inequality to job automation and capital deepening within
capitalism. The process of job automation conflicts with the capitalist property form and its
attendant system of wage labor.
In Marxian analysis, capitalist firms increasingly substitute capital equipment for labor inputs
(workers) under competitive pressure to reduce costs and maximize profits. Over the long-term,
this trend increases the organic composition of capital, meaning that less workers are required in
proportion to capital inputs, increasing unemployment (the "reserve army of labour"). This
process exerts a downward pressure on wages. The substitution of capital equipment for labor

(mechanization and automation) raises the productivity of each worker, resulting in a situation of
relatively stagnant wages for the working class amidst rising levels of property income for the
capitalist class.[64]

Labour market
A major cause of economic inequality within modern market economies is the determination of
wages by the market. Where competition is imperfect; information unevenly distributed;
opportunities to acquire education and skills unequal market failure results. Since many such
imperfect conditions exist in virtually every market, there is in fact little presumption that
markets are in general efficient. This means that there is an enormous potential role for
government to correct such market failures.
In a purely capitalist mode of production (i.e. where professional and labor organizations cannot
limit the number of workers) the workers wages will not be controlled by these organizations, or
by the employer, but rather by the market. Wages work in the same way as prices for any other
good. Thus, wages can be considered as a function of market price of skill. And therefore,
inequality is driven by this price. Under the law of supply and demand, the price of skill is
determined by a race between the demand for the skilled worker and the supply of the skilled
worker. "On the other hand, markets can also concentrate wealth, pass environmental costs on to
society, and abuse workers and consumers." "Markets, by themselves, even when they are stable,
often lead to high levels of inequality, outcomes that are widely viewed as unfair."[66] Employers
who offer a below market wage will find that their business is chronically understaffed. Their
competitors will take advantage of the situation by offering a higher wage the best of their labor.
For a businessman who has the profit motive as the prime interest, it is a losing proposition to
offer below or above market wages to workers.[67]

A job where there are many workers willing to work a large amount of time (high supply)
competing for a job that few require (low demand) will result in a low wage for that job. This is
because competition between workers drives down the wage. An example of this would be jobs
such as dish-washing or customer service. Competition amongst workers tends to drive down
wages due to the expendable nature of the worker in relation to his or her particular job. A job
where there are few able or willing workers (low supply), but a large need for the positions (high
demand), will result in high wages for that job. This is because competition between
employers for employees will drive up the wage. Examples of this would include jobs that
require highly developed skills, rare abilities, or a high level of risk. Competition amongst
employers tends to drive up wages due to the nature of the job, since there is a relative shortage
of workers for the particular position. Professional and labor organizations may limit the supply
of workers which results in higher demand and greater incomes for members. Members may also
receive higher wages through collective bargaining, political influence, or corruption.[68]
These supply and demand interactions result in a gradation of wage levels within society that
significantly influence economic inequality. Polarization of wages does not explain the
accumulation of wealth and very high incomes among the 1%. Joseph Stiglitz believes that "It is
plain that markets must be tamed and tempered to make sure they work to the benefit of most
citizens."[69]
On the other hand, higher economic inequality tends to increase entrepreneurship rates at the
individual level (self-employment). However, most of it is often based on necessity rather than
opportunity. Necessity-based entrepreneurship is motivated by survival needs such as income for
food and shelter ("push" motivations), whereas opportunity-based entrepreneurship is driven by
achievement-oriented motivations ("pull") such as vocation and more likely to involve the pursue
of new products, services, or underserved market needs. The economic impact of the former type
of entrepreneurialism tends to be redistributive while the latter is expected to foster technological
progress and thus have a more positive impact on economic growth.
Taxes

Another cause is the rate at which income is taxed coupled with the progressivity of the tax
system. A progressive tax is a tax by which the tax rate increases as the taxable base amount
increases.[71][72][73][74] In a progressive tax system, the level of the top tax rate will often have a
direct impact on the level of inequality within a society, either increasing it or decreasing it,
provided that income does not change as a result of the change in tax regime. Additionally,
steeper tax progressivity applied to social spending can result in a more equal distribution of
income across the board.[76] The difference between the Gini index for an income distribution
before taxation and the Gini index after taxation is an indicator for the effects of such taxation.
There is debate between politicians and economists over the role of tax policy in mitigating or
exacerbating wealth inequality. Economists such as Paul Krugman, Peter Orszag, and Emmanuel
Saez have argued that tax policy in the post World War II era has indeed increased income
inequality by enabling the wealthiest Americans far greater access to capital than lower-income
ones

Economic liberalism, deregulation and decline of unions

John Schmitt and Ben Zipperer (2006) of the CEPR point to economic liberalism and the
reduction of business regulation along with the decline of union membership as one of the causes
of economic inequality. In an analysis of the effects of intensive Anglo-American liberal policies
in comparison to continental European liberalism, where unions have remained strong, they
concluded "The U.S. economic and social model is associated with substantial levels of social
exclusion, including high levels of income inequality, high relative and absolute poverty rates,
poor and unequal educational outcomes, poor health outcomes, and high rates of crime and
incarceration. At the same time, the available evidence provides little support for the view that
U.S.-style labor-market flexibility dramatically improves labor-market outcomes. Despite
popular prejudices to the contrary, the U.S. economy consistently affords a lower level of
economic mobility than all the continental European countries for which data is available.
Sociologist Jake Rosenfield of the University of Washington asserts that the decline of organized
labor in the United States has played a more significant role in expanding the income gap than

technological changes and globalization, which were also experienced by other industrialized
nations that didn't experience steep surges in inequality. He points out that nations with high rates
of unionization, particularly in Scandinavia, have very low levels of inequality, and concludes
"the historical pattern is clear; the cross-national pattern is clear: high inequality goes hand-inhand with weak labor movements and vice-versa.
A 2015 study by the International Monetary Fund found that the decline of unionization in many
advanced economies starting in the 1980s has fueled rising income inequality.[85][86]
In 2016, researchers at the IMF concluded that neoliberal policies imposed by economic elites
have exacerbated inequality to such an extent that it is slowing economic growth and
"jeopardizing durable expansion." Their report highlights "three disquieting conclusions":

The benefits in terms of increased growth seem fairly difficult to establish when looking
at a broad group of countries.

The costs in terms of increased inequality are prominent. Such costs epitomize the tradeoff between the growth and equity effects of some aspects of the neoliberal agenda.

Increased inequality in turn hurts the level and sustainability of growth. Even if growth is
the sole or main purpose of the neoliberal agenda, advocates of that agenda still need to pay
attention to the distributional effects.[87]

Globalization

Change in real income between 1988 and 2008 at various income percentiles of global income
distribution.
Trade liberalization may shift economic inequality from a global to a domestic scale. When rich
countries trade with poor countries, the low-skilled workers in the rich countries may see
reduced wages as a result of the competition, while low-skilled workers in the poor countries

may see increased wages. Trade economist Paul Krugman estimates that trade liberalization has
had a measurable effect on the rising inequality in the United States. He attributes this trend to
increased trade with poor countries and the fragmentation of the means of production, resulting
in low skilled jobs becoming more tradeable. However, he concedes that the effect of trade on
inequality in America is minor when compared to other causes, such as technological innovation,
a view shared by other experts. Empirical economists Max Roser and Jesus Crespo-Cuaresma
find support in the data that international trade is increasing income inequality. They empirically
confirm the predictions of the StolperSamuelson theorem regarding the effects of international
trade on the distribution of incomes.[90] Lawrence Katz estimates that trade has only accounted
for 5-15% of rising income inequality. Robert Lawrence argues that technological innovation and
automation has meant that low-skilled jobs have been replaced by machine labor in wealthier
nations, and that wealthier countries no longer have significant numbers of low-skilled
manufacturing workers that could be affected by competition from poor countries.
Economist Branko Milinkovic analyzed global income inequality, comparing 1988 and 2008. His
analysis indicated that the global top 1% and the middle classes of the emerging economies (e.g.,
China, India, Indonesia, Brazil and Egypt) were the main winners of globalization during that
time. The real (inflation adjusted) income of the global top 1% increased approximately 60%,
while the middle classes of the emerging economies (those around the 50th percentile of the
global income distribution in 1988) rose 70-80%. On the other hand, those in the middle class of
the developed world (those in the 75th to 90th percentile in 1988, such as the American middle
class) experienced little real income gains. The richest 1% contains 60 million persons globally,
including 30 million Americans (i.e., the top 12% of Americans by income were in the global top
1% in 2008).[91][92]

Individual preferences
Related to cultural issues, diversity of preferences within a society may contribute to economic
inequality. When faced with the choice between working harder to earn more money or enjoying
more leisure time, equally capable individuals with identical earning potential may choose

different strategies. The trade-off between work and leisure is particularly important in the
supply side of the labor market in labor economics.
Likewise, individuals in a society often have different levels of risk aversion. When equally-able
individuals undertake risky activities with the potential of large payoffs, such as starting new
businesses, some ventures succeed and some fail. The presence of both successful and
unsuccessful ventures in a society results in economic inequality even when all individuals are
identical.
Rent seeking
Economist Joseph Stiglitz argues that rather than explaining concentrations of wealth and
income, market forces should serve as a brake on such concentration, which may better be
explained by the non-market force known as "rent-seeking". While the market will bid up
compensation for rare and desired skills to reward wealth creation, greater productivity, etc., it
will also prevent successful entrepreneurs from earning excess profits by fostering competition to
cut prices, profits and large compensation.[100] A better explainer of growing inequality,
according to Stiglitz, is the use of political power generated by wealth by certain groups to shape
government policies financially beneficial to them. This process, known to economists as rentseeking, brings income not from creation of wealth but from "grabbing a larger share of the
wealth that would otherwise have been produced without their effort"[101]
Rent seeking is often thought to be the province of societies with weak institutions and weak rule
of law, but Stiglitz believes there is no shortage of it in developed societies such as the United
States. Examples of rent seeking leading to inequality include

the obtaining of public resources by "rent-collectors" at below market prices (such

as granting public land to railroads,[102] or selling mineral resources for a nominal
price[103][104] in the US),

selling services and products to the public at above market prices[105] (Medicare in the
US that prohibits government from negotiating prices of drugs with the drug companies,
costing the US government an estimated $50 billion or more per year),

securing government tolerance of monopoly power (The richest person in the world in
2011, Carlos Slim, controlled Mexico's newly privatized telecommunication industry[106]).

Since rent seeking aims to "pluck the goose to obtain the largest amount of feathers with the least
possible amount of hissing" it is by nature obscure, avoiding public spotlight in legal fine print,
or camouflaged its extraction with widely accepted rationalizations (markets are naturally
competitive and so need no government regulation against monopolies[107]).

Effects
Effects of inequality researchers have found include higher rates of health and social problems,
and lower rates of social goods, a lower level of economic utility in society from resources
devoted on high-end consumption, and even a lower level of economic growth when human
capital is neglected for high-end consumption. For the top 21 industrialised countries, counting
each person equally, life expectancy is lower in more unequal countries (r = -.907).[113] A similar
relationship exists among US states (r = -.620).[114]
2013 Economics Nobel prize winner Robert J. Shiller said that rising inequality in the United
States and elsewhere is the most important problem. Increasing inequality harms economic
growth.[116] High and persistent unemployment, in which inequality increases, has a negative
effect on subsequent long-run economic growth. Unemployment can harm growth not only
because it is a waste of resources, but also because it generates redistributive pressures and
subsequent distortions, drives people to poverty, constrains liquidity limiting labor mobility, and
erodes self-esteem promoting social dislocation, unrest and conflict. Policies aiming at
controlling unemployment and in particular at reducing its inequality-associated effects support
economic growth.
The economic stratification of society into "elites" and "masses" played a central role in the
collapse of other advanced civilizations such as the Roman, Han and Gupta empires.
Health

British researchers Richard G. Wilkinson and Kate Pickett have found higher rates of health and
social problems (obesity, mental illness, homicides, teenage births, incarceration, child conflict,
drug use), and lower rates of social goods (life expectancy by country, educational
performance, trust among strangers, women's status, social mobility, even numbers
of patents issued) in countries and states with higher inequality. Using statistics from 23
developed countries and the 50 states of the US, they found social/health problems lower in
countries like Japan and Finland and states like Utah and New Hampshire with high levels of
equality, than in countries (US and UK) and states (Mississippi andNew York) with large
differences in household income.[118]
For most of human history higher material living standards full stomachs, access to clean water
and warmth from fuel led to better health and longer lives. This pattern of higher incomeslonger lives still holds among poorer countries, where life expectancy increases rapidly as per
capita income increases, but in recent decades it has slowed down among middle income
countries and plateaued among the richest thirty or so countries in the world. Americans live no
longer on average (about 77 years in 2004) than Greeks (78 years) or New Zealanders (78),
though the USA has a higher GDP per capita. Life expectancy in Sweden (80 years) and Japan
(82) where income was more equally distributed was longer.
In recent years the characteristic that has strongly correlated with health in developed countries is
income inequality. Creating an index of "Health and Social Problems" from nine factors, authors
Richard Wilkinson and Kate Pickett found health and social problems "more common in
countries with bigger income inequalities", and more common among states in the US with
larger income inequalities. Other studies have confirmed this relationship. The UNICEF index of
"child well-being in rich countries", studying 40 indicators in 22 countries, correlates with
greater equality but not per capita income.[
Pickett and Wilkinson argue that inequality and social stratification lead to higher levels of
psychosocial stress and status anxiety which can lead to depression, chemical dependency, less
community life, parenting problems and stress-related diseases.

Social cohesion
Research has shown an inverse link between income inequality and social cohesion. In more
equal societies, people are much more likely to trust each other, measures of social capital (the
benefits of goodwill, fellowship, mutual sympathy and social connectedness among groups who
make up a social units) suggest greater community involvement, andhomicide rates are
consistently lower.
Comparing results from the question "would others take advantage of you if they got the
chance?" in U.S General Social Survey and statistics on income inequality, Eric Uslaner and
Mitchell Brown found there is a high correlation between the amount of trust in society and the
amount of income equality.[127] A 2008 article by Andersen and Fetner also found a strong
relationship between economic inequality within and across countries and tolerance for 35
democracies.
In two studies Robert Putnam established links between social capital and economic inequality.
His most important studies established these links in both the United States and in Italy. His
explanation for this relationship is that
Community and equality are mutually reinforcing... Social capital and economic inequality
moved in tandem through most of the twentieth century. In terms of the distribution of wealth
and income, America in the 1950s and 1960s was more egalitarian than it had been in more than
a century... [T]hose same decades were also the high point of social connectedness and civic
engagement. Record highs in equality and social capital coincided. Conversely, the last third of
the twentieth century was a time of growing inequality and eroding social capital... The timing of

the two trends is striking: somewhere around 196570 America reversed course and started
becoming both less just economically and less well connected socially and politically.
Albrekt Larsen has advanced this explanation by a comparative study of how trust increased in
Denmark and Sweden in the latter part of the 20th century while it decreased in the US and UK.
It is argued that inequality levels influence how citizens imagine the trustworthiness of fellow
citizens. In this model social trust is not about relations to people you meet (as in Putnam's
model) but about people you imagine.
The economist Joseph Stiglitz has argued that economic inequality has led to distrust of business
and government.
Crime
Crime rate has also been shown to be correlated with inequality in society. Most studies looking
into the relationship have concentrated on homicides since homicides are almost identically
defined across all nations and jurisdictions. There have been over fifty studies showing
tendencies for violence to be more common in societies where income differences are larger.
Research has been conducted comparing developed countries with undeveloped countries, as
well as studying areas within countries. Daly et al. 2001[133]found that
among U.S States and Canadian Provinces there is a tenfold difference in homicide rates related
to inequality. They estimated that about half of all variation in homicide rates can be accounted
for by differences in the amount of inequality in each province or state. Fajnzylber et al. (2002)
found a similar relationship worldwide. Among comments in academic literature on the
relationship between homicides and inequality are:

The most consistent finding in cross-national research on homicides has been that of a
positive association between income inequality and homicides.[134]

Economic inequality is positively and significantly related to rates of homicide despite an

extensive list of conceptually relevant controls. The fact that this relationship is found with
the most recent data and using a different measure of economic inequality from previous
research, suggests that the finding is very robust.

A 2016 study, controlling for different factors than previous studies, challenges the
aforementioned findings. The study finds "little evidence of a significant empirical link between
overall inequality and crime", and that "the previously reported positive correlation between
violent crime and economic inequality is largely driven by economic segregation across
neighborhoods instead of within-neighborhood inequality".
Social, cultural, and civic participation
Higher income inequality led to less of all forms of social, cultural, and civic participation
among the less wealthy. When inequality is higher the poor do not shift to less expensive forms
of participation.[138]
Utility, economic welfare, and distributive efficiency[
Following the utilitarian principle of seeking the greatest good for the greatest number
economic inequality is problematic. A house that provides less utility to a millionaire as a
summer home than it would to a homeless family of five, is an example of reduced "distributive
efficiency" within society, that decreases marginal utility of wealth and thus the sum total of
personal utility. An additional dollar spent by a poor person will go to things providing a great
deal of utility to that person, such as basic necessities like food, water, and healthcare; while, an
additional dollar spent by a much richer person will very likely go to luxury items providing
relatively less utility to that person. Thus, the marginal utility of wealth per person ("the
additional dollar") decreases as a person becomes richer. From this standpoint, for any given
amount of wealth in society, a society with more equality will have higher aggregate utility.
Some studies have found evidence for this theory, noting that in societies where inequality is
lower, population-wide satisfaction and happiness tend to be higher.
Economist Arthur Cecil Pigou argues that
... it is evident that any transference of income from a relatively rich man to a relatively poor
man of similar temperament, since it enables more intense wants, to be satisfied at the expense of
less intense wants, must increase the aggregate sum of satisfaction. The old "law of diminishing
utility" thus leads securely to the proposition: Any cause which increases the absolute share of

real income in the hands of the poor, provided that it does not lead to a contraction in the size of
the national dividend from any point of view, will, in general, increase economic welfare.
Philosopher David Schmidtz argues that maximizing the sum of individual utilities will harm
incentives to produce.
A society that takes Joe Richs second unit [of corn] is taking that unit away from someone who .
. . has nothing better to do than plant it and giving it to someone who . . . does have something
better to do with it. That sounds good, but in the process, the society takes seed corn out of
production and diverts it to food, thereby cannibalizing itself.
However, in addition to the diminishing marginal utility of unequal distribution, Pigou and others
point out that a "keeping up with the Joneses" effect among the well-off may lead to greater
inequality and use of resources for no greater return in utility.
a larger proportion of the satisfaction yielded by the incomes of rich people comes from their
relative, rather than from their absolute, amount. This part of it will not be destroyed if the
incomes of all rich people are diminished together. The loss of economic welfare suffered by the
rich when command over resources is transferred from them to the poor will, therefore, be
substantially smaller relatively to the gain of economic welfare to the poor than a consideration
of the law of diminishing utility taken by itself suggests.
When the goal is to own the biggest yacht rather than a boat with certain features there is no
greater benefit from owning 100-meter-long boat than a 20 m one as long as it is bigger than
your rival. Economist Robert H. Frank compare the situation to that of male elks who use their
antlers to spar with other males for mating rights.
The pressure to have bigger ones than your rivals leads to an arms race that consumes resources
that could have been used more efficiently for other things, such as fighting off disease. As a
result, every male ends up with a cumbersome and expensive pair of antlers, ... and "life is more
miserable for bull elk as a group.
Aggregate demand, consumption and debt

Some economists, such as Alfred Pigou, have argued that income inequality lowers aggregate
demand, leading to increasingly large segments of formerly middle class consumers unable to
afford as many luxury and essential goods and services.[143] This pushes production and overall
employment down.
Conservative researchers have argued that income inequality is not significant because
consumption, rather than income should be the measure of inequality, and inequality of
consumption is less extreme than inequality of income in the US. Will Wilkinson of
the libertarian Cato Institute states that "the weight of the evidence shows that the run-up in
consumption inequality has been considerably less dramatic than the rise in income inequality,"
and consumption is more important than income.[ According to Johnson, Smeeding, and Tory,
consumption inequality was actually lower in 2001 than it was in 1986.[145][146] The debate is
summarized in "The Hidden Prosperity of the Poor" by journalist Thomas B. Edsall.[147] Other
studies have not found consumption inequality less dramatic than household income inequality,
[148][149] and the CBO's study found consumption data not "adequately" capturing
"consumption by high-income households" as it does their income, though it did agree that
household consumption numbers show more equal distribution than household income.[150]
Others dispute the importance of consumption over income, pointing out that if middle and lower
income are consuming more than they earn it is because they are saving less or going deeper into
debt.[151] Income inequality has been the driving factor in the growing household debt, as high
earners bid up the price of real estate and middle income earners go deeper into debt trying to
maintain what once was a middle class lifestyle.
Central Banking economist Raghuram Rajan argues that "systematic economic inequalities,
within the United States and around the world, have created deep financial 'fault lines' that have
made [financial] crises more likely to happen than in the past" the Financial crisis of 2007
08 being the most recent example. To compensate for stagnating and declining purchasing power,
political pressure has developed to extend easier credit to the lower and middle income earners
particularly to buy homes and easier credit in general to keep unemployment rates low. This
has given the American economy a tendency to go "from bubble to bubble" fueled by
unsustainable monetary stimulation.

Monopolization of labor, consolidation, and competition

Greater income inequality can lead to monopolization of the labor force, resulting in fewer
employers requiring fewer workers. Remaining employers can consolidate and take advantage of
the relative lack of competition, leading to less consumer choice, market abuses, and relatively
higher real prices.
Economic incentives
Some economists believe that one of the main reasons that inequality might induce economic
incentive is because material well-being and conspicuous consumption relate to status. In this
view, high stratification of income (high inequality) creates high amounts of social stratification,
leading to greater competition for status.

Perspectives

Socialist perspectives
Socialists attribute the vast disparities in wealth to the private ownership of the means of
production by a class of owners, creating a situation where a small portion of the population lives
off unearned property income by virtue of ownership titles in capital equipment, financial assets
and corporate stock. By contrast, the vast majority of the population is dependent on income in
the form of a wage or salary. In order to rectify this situation, socialists argue that the means of
production should be socially owned so that income differentials would be reflective
of individual contributions to the social product.

Marxist socialists ultimately predict the emergence of a communist society based on the common
ownership of the means of production, where each individual citizen would have free access to
the articles of consumption (From each according to his ability, to each according to his need).
According to Marxist philosophy, equality in the sense of free access is essential for freeing
individuals from dependent relationships, thereby allowing them to transcend alienation.[
Meritocracy
Meritocracy favors an eventual society where an individual's success is a direct function of his
merit, or contribution. Economic inequality would be a natural consequence of the wide range in
individual skill, talent and effort in human population. David Landes stated that the progression
of Western economic development that led to the Industrial Revolution was facilitated by men
advancing through their own merit rather than because of family or political connections.
Liberal perspectives
Most modern social liberals, including centrist or left-of-center political groups, believe that the
capitalist economic system should be fundamentally preserved, but the status quo regarding the
income gap must be reformed. Social liberals favor a capitalist system with
active Keynesian macroeconomic policies and progressive taxation (to even out differences in
income inequality).
However, contemporary classical liberals and libertarians generally do not take a stance on
wealth inequality, but believe in equality under the law regardless of whether it leads to unequal
wealth distribution. In 1966 Ludwig von Mises, a prominent figure in the Austrian School of
economic thought, explains:
The liberal champions of equality under the law were fully aware of the fact that men are born
unequal and that it is precisely their inequality that generates social cooperation and civilization.
Equality under the law was in their opinion not designed to correct the inexorable facts of the
universe and to make natural inequality disappear. It was, on the contrary, the device to secure
for the whole of mankind the maximum of benefits it can derive from it. Henceforth no man-

made institutions should prevent a man from attaining that station in which he can best serve his
fellow citizens.
Robert Nozick argued that government redistributes wealth by force (usually in the form of
taxation), and that the ideal moral society would be one where all individuals are free from force.
However, Nozick recognized that some modern economic inequalities were the result of forceful
taking of property, and a certain amount of redistribution would be justified to compensate for
this force but not because of the inequalities themselves. John Rawls argued in A Theory of
Justice that inequalities in the distribution of wealth are only justified when they improve society
as a whole, including the poorest members. Rawls does not discuss the full implications of his
theory of justice. Some see Rawls's argument as a justification for capitalism since even the
poorest members of society theoretically benefit from increased innovations under capitalism;
others believe only a strong welfare state can satisfy Rawls's theory of justice.
Classical liberal Milton Friedman believed that if government action is taken in pursuit of
economic equality then political freedom would suffer. In a famous quote, he said:
A society that puts equality before freedom will get neither. A society that puts freedom
before equality will get a high degree of both.
Economist Tyler Cowen has argued that though income inequality has increased within
nations, globally it has fallen over the last 20 years. He argues that though income inequality
may make individual nations worse off, overall, the world has improved as global inequality
has been reduced.
Policy Response to Intend to mitigate
A 2011 OECD study makes a number of suggestions to its member countries, including:

Well-targeted income-support policies.

Facilitate and encourage access to employment.

Better job-related training and education for the low-skilled (on-the-job training) would
help to boost their productivity potential and future earnings.

Better access to formal education.

Progressive taxation reduces absolute income inequality when the higher rates on higher-income
individuals are paid and not evaded, and transfer payments and social safety nets result in
progressive government spending. Wage ratio legislation has also been proposed as a means of
reducing income inequality. The OECD asserts that public spending is vital in reducing the ever
expanding wealth gap.
The economists Emmanuel Saez and Thomas Piketty recommend much higher top marginal tax
rates on the wealthy, up to 50 percent, or 70 percent or even 90 percent. Ralph Nader, Jeffrey
Sachs, the United Front Against Austerity, among others, call for a financial transactions
tax (also known as the Robin Hood tax) to bolster the social safety net and the public sector.
The Economist wrote in December 2013: "A minimum wage, providing it is not set too high,
could thus boost pay with no ill effects on jobs....America's federal minimum wage, at 38% of
median income, is one of the rich world's lowest. Some studies find no harm to employment
from federal of state minimum wages, others see a small one, but none finds any serious
damage."
Public policy responses addressing causes and effects of income inequality in the US
include: progressive tax incidence adjustments, strengthening social safety net provisions such
as Aid to Families with Dependent Children, welfare, the food stamp program, Social
Security, Medicare, and Medicaid, organizing community interest groups, increasing and
reforming higher education subsidies, increasing infrastructure spending, and placing limits on
and taxing rent-seeking.