Public Square

An Economic Perspective of Income Inequality

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Editor’s Note: Many Christians wrestle with the topic of income inequality, an issue which has been hotly debated in the current economy. Today, the Institute for Faith, Work & Economics released a new research report entitled, “Why Does Income Inequality Exist? An Economic and Biblical Explanation” by Dr. Anne Bradley, Ph.D.  This week our blog will highlight the key findings from this report, which we pray will be helpful and insightful to you.

Income inequality is a measurement of the distribution of wealth across households. It is a relative comparison of the gap in household incomes across a given region, country or the world.   Income inequality is measured using the “Gini coefficient” and calculates the extent to which the income distribution in a country deviates from perfect equity.

A Gini coefficient of zero indicates perfect equality (everyone earns the same income) and a coefficient of one indicates perfect inequality (one person holds all the income and everyone else has zero). So if we  measure income inequality in your neighborhood, you would get a much different coefficient than if you measured it across your entire state, or country.

Formally measuring income inequality is often used as a benchmark for the welfare of a society or country—the relative poverty or prosperity of a society—and used as a justification of policy attempts at income redistribution.

Below is a graph that distinguishes countries based on income inequality.  Finland has more income “equality” than the United States.  But just based on that, is it obvious that you should pack your bags and move to Finland tomorrow?  Not really.  But, why?  Because it doesn’t tell us much about opportunity, quality of life and the ability to prosper.

Income inequality measurements are simply a way of measuring how income is held, not necessarily representative of overall prosperity or flourishing.

Are there fundamental aspects to our economic and human condition—a world of choice under scarcity—that lead to an unequal distribution of income?  Yes, there are and understanding them is important for knowing what public policy is able or unable to accomplish, and more importantly, what the Bible has to say about it.

Overall, there are six primary aspects of income inequality:

  • Family Structure—the latter half of the 20th century saw massive changes in the labor force. The family norm went from two-parent, one-earner families to either low-income single-parent families or higher-income two-parent, two-earner families.  When the family structure changes, so do income holdings across these newly defined households.
  • Technology—Rapid advancements in technology through the latter half of the twentieth century, continuing still today and into the foreseeable future, have shifted labor demand from low-skilled labor toward high-skilled labor.
  • Growing Markets—Globalized markets break down the boundaries of smaller, local markets and provide new platforms and new audiences for trade.  This can and has changed how income is held across the globe.
  • Immigration—Immigration into a country changes the supply of labor, usually low-skilled labor in that country.
  • Property Rights—We are all born with different gifts and created individually, we will all have different earthly income levels, which means income inequality will always exist on some level.  Our most fundamental property right is over ourselves and that means how we choose to use those gifts.
  • Income Mobility—Income mobility reflects how an individual’s income changes over time.  Because we are all born with different skills, talents and gifts, we have certain endowments that allow us to serve others through the market, and over time as we fine tune our gifts and become better at serving others, we move into higher income brackets.

Our next post will focus in on the concept of income mobility and how we can’t understand the full picture of flourishing without understanding mobility.

Question: Have you heard income inequality discussed in policy debates? What have you thought it means? Leave a comment here.

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