1 - The Economics of Income Inequality

Summary

Since 1980, income inequality has increased throughout the developed world. This pattern is reported in Table 1.1 where gini coefficients for twelve developed countries including the United States are displayed for both 1980 and 2000. Between those years, income inequality grew in ten of those nations.

This table also reveals that the growth in income inequality that occurred in the United States during these years exceeded that of any of the other eleven countries, with the exception of the United Kingdom. As a result, this country, already experiencing in 1980 the dubious distinction of possessing the most unequal distribution of income, saw its status in this regard worsen over this period. Our gini coefficient of 0.368 in 2000 was one-third higher than the mean for the other eleven nations. What this means is that the poor in the United States received one-third less of the national income and the rich one-third more than was the case elsewhere.

A country's distribution of income results from two distinct and separable processes: the functioning of its markets and the functioning of its political system. The market-determined distribution of income itself emerges from what happens in labor markets and what happens in financial markets. In labor markets, inequality exists among households because the wages that people receive in exchange for their labor differ according to the demand for and the supply of the varying skills they possess.