Uma Rani Amara, Senior Economist, Marianne Furrer, Research Officer
If you watch the news or read the papers, chances are you have heard about income inequality. The issue is complex and polarizing. But what does income inequality really mean?
For anyone who’s still in the dark about income inequality, it’s essentially the uneven way in which income is distributed within a population. The rich keep getting richer but everyone else’s income stays the same or decreases.
At the ILO, we’ve been studying income inequality for a long time with an eye towards answering three major questions:
- What drives income inequality?
- How does income inequality affect people?
- What can we do to reduce income inequality?
To begin answering those questions, we can look at some of our latest research, particularly the data from countries in the G20, a group of the world’s 20 largest economies. As you might expect, income inequality across the G20 varies significantly, a fact owing to differing policies on labour, taxes and welfare among other factors.
These differences allow us to identify some common denominators which can help us to better understand income inequality and its impact on our societies.
The most commonly used measure of inequality is the Gini coefficient. It ranges from 0 to 1, with 0 indicating perfect equality and 1 perfect inequality (i.e. one person has all the income while all others have none). The higher it is, the more inequality you have.
Here are a few of the things that we’ve learned over the course of our research:
- Income inequality traps people in poverty. Skewed income distribution is a sign that the economy had a chance to improve living conditions for the poor, but didn’t take it. As a result, lower-income families find themselves at an increasing disadvantage compared to wealthier households in terms of access to things like education, credit and even food—the very things they need to pull themselves out of poverty.
- Income inequality concentrates political power in the hands of the few. Political contests have long been marked by significant spending of money and resources. Elected officials often depend on private contributions to fund their campaigns. Wealthier households who are better able to make those contributions engender a system where government becomes more responsive to their needs than to those of lower-income households. As such, income inequality can diminish the ability of lower-income families to make their voices heard in government and society.
- Wealth often determines a person’s earning potential. Labour income (mostly through wages) is the biggest source of income for all G20 countries and accounts for 75 per cent of income in emerging economies. It’s normal for people to be paid differently according to their skills, experience and type of work. Unfortunately, factors like gender and ethnicity can play a role as well. But perhaps the biggest factor determining a person’s income potential is whether or not they’re already wealthy.
- High levels of income inequality go hand in hand with high rates informal or non-standard work. ILO research shows that globally, workers who have permanent, formal contracts earn a higher average annual income that workers who don’t. As such, countries with higher rates of irregular work tend also to have higher levels of income inequality.
- Income inequality makes it harder for poor families to benefit from economic growth. Globalization and new technologies have together shifted the demand for labour from low-skilled workers to high-skilled workers. As a result, workers from lower income families, with less access to training and education, are at once at greater risk of losing their current jobs and less able to get new or better ones. This makes income inequality a major hurdle to inclusive economic growth.
- Strong social protection systems can reduce income inequality. ILO research shows that countries with stronger social protection systems generally have lower levels of income inequality. The more restrictive the system, the more likely it is that vulnerable groups like non-standard and informal workers, the unemployed or the elderly—are negatively affected by income inequality.
- What other factors affect income inequality? As we said before, income inequality differs across countries. In China, it has a strong regional component while in the USA and Turkey, age is a significant factor. Ethnicity continues to be a powerful driver in South Africa.
This is the first in a two part series exploring the topic of inequality based on the data and findings of ILO Research Paper No. 15 and World Economic and Social Outlook 2016