In economics, income distribution covers how a country's total GDP is distributed amongst its population. Economic theory and economic policy have long seen income and its distribution as a central concern. Unequal distribution of income causes economic inequality which is a concern in almost all countries around the world.
About Classical economists such as Adam Smith (1723–1790), Thomas Malthus (1766–1834), and David Ricardo (1772–1823) concentrated their attention on factor income-distribution, that is, the distribution of income between the primary factors of production (land, labour and capital). Modern economists have also addressed issues of income distribution, but have focused more on the distribution of income across individuals and households. Important theoretical and policy concerns include the balance between income inequality and economic growth, and their often inverse relationship.
The Lorenz curve can represent the distribution of income within a society. The Lorenz curve is closely associated with measures of income inequality, such as the Gini coefficient. World Bank lists 118 countries based on consumption inequality compared to 68 countries based on income inequality.
Measurement
The concept of inequality is distinct from that of povertyFor poverty see FGT metrics. and fairness. Income inequality metrics (or income distribution metrics) are used by social scientists to measure the distribution of income, and economic inequality among the participants in a particular economy, such as that of a specific country or of the world in general. While different theories may try to explain how income inequality comes about, income inequality metrics simply provide a system of measurement used to determine the dispersion of incomes.
Gini Coefficient: A measure that represents the income or wealth distribution among a nation's residents, with 0 expressing perfect equality and 1 indicating perfect inequality. Lorenz Curve: A graphical representation of income distribution, where a perfectly straight line (45-degree line) reflects absolute equality. Quintile and Decile Ratios: These divide the population into equal parts (quintiles - fifths, deciles - tenths) to compare the income shares received by each group.
Economic Theories and Government Policies Various economic theories address income distribution, from classical economics, which tends to focus on market mechanisms, to Keynesian economics, which emphasizes the role of government intervention. Policies to influence income distribution include:
Progressive Taxation: Taxing higher incomes at higher rates to redistribute income more evenly. Public Spending: Directing government expenditure towards education, healthcare, and social security to support lower-income groups. Wage Policies: Implementing minimum wage laws and encouraging collective bargaining to improve wages for low- and middle-income workers. International Perspectives on Income Distribution Income distribution varies greatly around the world. Comparing countries through tools like the World Income Inequality Database (WIID) or the Standardized World Income Inequality Database (SWIID) can provide insights into global patterns and the effectiveness of different policies.
Trends and Current Data Recent trends in income distribution show increasing income inequality in many parts of the world. This trend has been exacerbated by globalization and changes in the global economy. Current data from sources like the OECD can be used to update the article with the latest figures and trends.
Neoclassical theory of distribution According to this theory, the distribution of national income is determined by factor prices, the payment to each factor of production (wage for labor, rent for land, interest for capital, profit for entrepreneurship) which themselves are derived from the equilibrium of supply and demand in that factor's market, and finally, are equal to the marginal productivity of the factors of production. A change in the quantity of any one of the factors will affect the marginal production, supply and demand of factors and eventually alter the income distribution from firms to households within the economy.
Income inequality and its causes
Income inequality is one aspect of economic inequality. Incomes levels can be studied through taxation records and other historical documents. Capital in the Twenty-First Century (2013) by French economist Thomas Piketty is noted for its systematic collection and review of available data, especially concerning income levels; not all aspects of historical wealth distribution are similarly attested in the available records.
Causes of income inequality and of levels of economic equality/inequality include: labor economics, tax policies, other economic policies, labor union policies, Federal Reserve monetary policies & fiscal policies, the market for labor, abilities of individual workers, technology and automation, education, globalization, gender bias, racism, and culture.
Addressing income inequality requires comprehensive policy interventions that consider these diverse causes, including improving access to education, reforming tax systems, ensuring fair labor practices, and implementing social policies that promote equity and economic mobility.
Further Reading(s): Eisenbarth, A., Chen, Z.F. The evolution of wage inequality within local U.S. labor markets. J Labour Market Res 56, 2 (2022). https://doi.org/10.1186/s12651-022-00307-6
How to improve income equality
Taxes
The progressive income tax takes a larger percentage of high incomes and a smaller percentage of low incomes. Effectively, the poorest pay the least of their earned incomes on taxes which allows them to keep a larger percentage of wealth. Justification can be illustrated by a simple heuristic: The same dollar amount of money (e.g. $100) has a greater economic impact on only one party—the poor. That same amount has little economic impact on a wealthy individual, so the disparity is addressed by ensuring the richest individuals are taxed a greater share of their wealth. The state then uses the tax revenue to fund necessary and beneficial activities for the society at large. Every person in this system would have access to the same social benefits, but the rich pay more for it, so progressive tax significantly reduces the inequality.
Income mobility Income mobility is another factor in the study of income inequality. It describes how people change their economic well-being, i.e. move in the hierarchy of earning power over their lifetime. When someone improves his economic situation, this person is considered upwardly mobile. Mobility can vary between two extremes: 1) rich people stay rich and poor stay poor: people cannot easily change their economic status and inequality then seems as a permanent problem. 2) individuals can easily shift their income class, e.g. from middle earning class to upper class or from lower class to middle class. Inequality is "fluid" and temporary so it does not create a serious permanent problem.
Measuring income mobility Mobility is measured by the association between parents´ and adult children's socioeconomic standing, where higher association means less mobility. Socioeconomic standing is captured by four different measures:
Occupational status: – it is weighted average of the mean level of earnings and education of certain occupations. It has advantages such a collecting important information about parents, which can be reported retrospectively by adult children. It also remains relatively stable in between the occupation career so single measuring provides adequate information of long run standing. On the other hand, it has also limitations for the mobility analyzing. Whereas occupational earning of men usually tends to be higher than by women, by the occupational education it is the other way around. Class mobility: – Classes are instead categorical groupings based on specific occupational assets that determine life chances as expressed in outcomes such as income, health or wealth. Earnings mobility: – Earning mobility evaluates the relationship between two certain generations by means of linear regression (upper math) of the long transformed measure of children's and parents' earnings. Total family income mobility and the mobility of women: – Old economic analysis has been making one mistake, that they did analysis that focused mostly on the father-son pairs and their individual earnings. In the last two decades, they have expanded their research and now they focus more on the mother-daughter pairs as well. Generally earnings provides a stable measure of well-being independently of another financial assets or any kind of transfers.
Labor union It is known that labor union reduces the income inequality in both private and public sectors, and research conducted by David Card et al. showed that unionization redressed the income inequality in America and Canada, especially in their public sectors. For American male workers, the reduction of wage inequality was 1.7 percent in the private sector, while the reduction was 16.2 percent in the public sector. For American female workers, the reductions were 0.6 percent and 10.7 percent in the private and public sectors, respectively. In Canada, reduction effects were likewise more noticeable in the public sector.
Distribution measurement internationally
Using Gini coefficients, several organizations, such as the United Nations (UN) and the US Central Intelligence Agency (CIA), have measured income inequality by country. The Gini index is also widely used within the World Bank. It is an accurate and reliable index for measuring income distribution on a country by country level. The Gini index measurements go from 0 to 1 for 1 being perfect inequality and 0 being perfect equality. The world Gini index is measured at 0.52 as of 2016.
Trends
Standard economic theory stipulates that inequality tends to increase over time as a country develops, and to decrease as a certain average income is attained. This theory is commonly known as the Kuznets curve after Simon Kuznets. However, many prominent economists disagree with the need for inequality to increase as a country develops. Further, empirical data on the proclaimed subsequent decrease of inequality is conflicting.
Across the board, a number of industries are stratified across the genders. This is the result of a variety of factors. These include differences in education choices, preferred job and industry, work experience, number of hours worked, and breaks in employment (such as for bearing and raising children). Men also typically go into higher paid and higher risk jobs when compared to women. These factors result in 60% to 75% difference between men's and women's average aggregate wages or salaries, depending on the source. Various explanations for the remaining 25% to 40% have been suggested, including women's lower willingness and ability to negotiate salary and sexual discrimination. According to the European Commission direct discrimination only explains a small part of gender wage differences.