What Is Economic Inequality? Gini Coefficients, Causes, and Policy Responses

Measuring Inequality: The Gini Coefficient and Beyond

The most widely used measure of inequality is the Gini coefficient, developed by Italian statistician Corrado Gini in 1912. The Gini coefficient ranges from 0 (perfect equality — everyone has the same income) to 1 (perfect inequality — one person has all the income). In practice, national Gini coefficients for income typically range from around 0.25 (highly equal countries like Denmark or Sweden) to above 0.60 (highly unequal countries like South Africa or Brazil). The United States, at approximately 0.39–0.41, is among the most unequal of wealthy nations.

The Gini coefficient is calculated from the Lorenz curve, which plots the cumulative share of income received by the bottom x% of the population. Perfect equality would produce a 45-degree diagonal line (the "line of perfect equality"). The Gini coefficient is twice the area between the Lorenz curve and the line of perfect equality. The further the Lorenz curve bows below the diagonal, the higher the Gini.

While widely used, the Gini coefficient has limitations: it is more sensitive to changes in the middle of the distribution than at the extremes, it cannot distinguish distributions that have the same Gini but different shapes, and it does not capture geographic or racial dimensions of inequality. Researchers therefore use complementary measures: income shares (what fraction of income the top 1%, 10%, or bottom 50% receive), the Palma ratio (ratio of the top 10%'s share to the bottom 40%'s share), and wealth Gini coefficients, which typically show far greater inequality than income measures.

Income vs. Wealth Inequality

Income inequality refers to the unequal distribution of annual earnings and other income flows (wages, salaries, capital gains, dividends, transfers). Wealth inequality refers to the unequal distribution of accumulated assets minus liabilities — the stock of net worth rather than the annual flow. Wealth inequality is dramatically more severe than income inequality in virtually all countries.

In the United States, the top 1% of households receive approximately 20% of pre-tax income but own approximately 38% of wealth. The bottom 50% of households receive about 10% of income but own less than 3% of wealth. The wealth distribution is heavily skewed because high earners can save and invest a much larger share of their income, compounding wealth over time. Capital income (dividends, interest, capital gains, rental income) flows overwhelmingly to the wealthy, reinforcing the concentration of wealth.

Thomas Piketty's landmark 2013 work Capital in the Twenty-First Century analyzed wealth concentration over two centuries in France, Britain, and the United States. Piketty documented a U-shaped pattern: very high wealth concentration in the late nineteenth and early twentieth century, a "Great Compression" during mid-century (driven by wars, depression, and progressive taxation), and a return to rising concentration since the 1970s. He argued that when the rate of return on capital (r) systematically exceeds economic growth (g), wealth inevitably becomes more concentrated — a structural tendency he summarized as r > g.

Causes of Rising Inequality

The causes of rising inequality — particularly in the United States and other wealthy countries since the 1970s — are contested but several factors command broad scholarly support:

• Skill-biased technological change: Technological progress, particularly computerization and automation, has increased demand for high-skilled workers who can work alongside technology while reducing demand for routine middle-skill tasks that can be automated. This drives up wages for the highly educated and depresses wages for workers in routine occupations, a pattern economists call labor market polarization.
• Globalization: The expansion of international trade and the integration of billions of workers in China, India, and elsewhere into the global economy has intensified competition for low-skilled manufacturing jobs in wealthy countries. While globalization has raised wages globally and reduced global inequality between nations, it has contributed to rising inequality within wealthy nations by depressing manufacturing wages.
• Declining unionization: Union membership in the United States fell from about 35% of workers in the 1950s to under 10% today. Unions historically compressed wages by negotiating collective agreements that raised the floor for all workers. Their decline has contributed to wage stagnation for non-college workers and weakened the institutional counterweight to employer power.
• Changes in tax and transfer policy: Tax cuts on high incomes and capital gains, reduced estate taxes, and in some countries weakened social transfers have increased post-tax inequality. The top marginal income tax rate in the United States was over 90% in the 1950s; it is 37% today.
• Superstar economics: In sectors where technology allows the best performers to reach global markets (entertainment, software, finance), a small number of "superstars" capture enormous economic returns, pulling apart the top of the distribution from the rest.

Consequences of High Inequality

Economists and social scientists have identified several consequences of high inequality:

Economic effects: High inequality may reduce economic growth by limiting the consumption capacity of lower-income households (who spend higher shares of their income), reducing investment in human capital among those who lack access to education and healthcare, and creating political economy dynamics that favor rent-seeking by the wealthy over productive investment. IMF research has found that high inequality is associated with shorter growth spells and greater macroeconomic instability.

Social effects: Robert Putnam's research documents that areas with higher inequality show lower social trust, weaker civic participation, and worse social mobility. Richard Wilkinson and Kate Pickett's The Spirit Level argues that societies with greater inequality perform worse on a wide range of social outcomes — health, education, crime, social mobility — regardless of average income level.

Political effects: High inequality can undermine democracy by giving the wealthy disproportionate political influence through campaign contributions, lobbying, and revolving-door relationships with government. Research by Martin Gilens and Benjamin Page found that in the United States, policy outcomes correlate strongly with the preferences of economic elites and poorly with the preferences of average citizens.

Policy Responses

Governments have a variety of tools to address economic inequality:

• Progressive taxation: Higher marginal tax rates on high incomes, capital gains taxes, estate taxes, and wealth taxes directly reduce post-tax inequality. Nordic countries combine high pre-tax inequality (similar to the United States) with high tax revenues and generous transfers to achieve much lower post-transfer inequality.
• Social insurance: Unemployment insurance, public health insurance, public pensions, and disability insurance reduce the income penalty of misfortune and provide floors that limit poverty.
• Education and training: Investments in early childhood education, public universities, and worker retraining programs aim to equalize opportunity and increase the earnings capacity of lower-income workers.
• Labor market policies: Minimum wage increases, support for union organizing, and policies to reduce monopsony power in labor markets can compress the wage distribution.
• Wealth taxes: A recurring proposal — most prominently from Piketty — is a global progressive wealth tax that would directly reduce wealth concentration. Implementation faces severe challenges of valuation, evasion, and international coordination.