Definition of Income Inequality
The unequal distribution of household or individual income across the various participants in an economy. Income inequality is often presented as the percentage of income to a percentage of the population. For example, a statistic may indicate that 70% of a country's income is controlled by 20% of that country's residents.
It is often associated with the idea of income "fairness". It is generally considered "unfair" if the rich have a disproportionally larger portion of a country's income compared to their population.
The causes of income inequality can vary significantly by region, gender, education, and social status. Economists are divided as to whether income equality is ultimately positive or negative and what are the implications of such disparity.
The policy measures to reduce income inequality are:
1. Increase the minimum wage.
Research shows that higher wages for the lowest-paid workers have the potential to help nearly 4.6 million people out of poverty and add approximately $2 billion to the nation's overall real income. Additionally, increasing the minimum wage does not hurt employment nor does it retard economic growth.
2. Expand the Earned Income Tax.
In recent years, the EITC has been shown to have a positive impact on families, lifting roughly 4.7 million children above the poverty line on an annual basis. Increases in the EITC can pull more children out of poverty while providing more economic support for the working poor, especially single parents entering the workforce.
3. Build assets for working families.
Policies that encourage higher savings rates and lower the cost of building assets for working and middle-class households can provide better economic security for struggling families. New programs that automatically enroll workers in retirement plans and provide a savings credit or a federal match for retirement savings accounts could help lower-income households build wealth. Access to fair, low-cost financial services and homeownership are also important pathways to wealth.
4. Invest in education.
Differences in early education and school quality are the most important components contributing to persistent inequality across generations. Investments in education, beginning in early childhood with programs like Head Start and Universal Pre-K, can increase economic mobility, contribute to increased productivity and decrease inequality.
5. Make the tax code more progressive.
It is a great irony that tax rates for those at the top have been declining even as their share of income and wealth has increased dramatically. The data show we have created bad tax policy by giving capital gains -- profits from the sale of property or investments -- special privileges in our country's tax code; privileges that give investment income more value than actual work. Capital gains tax rates must be adjusted so that they are in line with income tax rates. Savings incentives structured as refundable tax credits, which treat every dollar saved equally, can provide equal benefits for lower-income families.
6. End residential segregation.
Higher levels of racial residential segregation within a metropolitan region are strongly correlated with significantly reduced levels of intergenerational upward mobility for all residents of that area. Segregation by income, particularly the isolation of low-income households, also correlates with significantly reduced levels of upward mobility. Eliminating residential segregation by income and race can boost economic mobility for all.