FINAL PAPER

Income and Wealth Inequality

Darren LaMothe

University of Arizona Global Campus

Professor Criswell

ECO204 – Microeconomics

Submitted March 28, 2022

 Introduction

In our continuous academic endeavors into the subject of microeconomics, the class has

indulged in and gained logical as well as critical understanding of the very many facets of

economics relative to microeconomics to be specific. From understanding the core of this social

science to the more technical and diverse nuances, it has unraveled the working of our world and

its people, with their decisions that range from a minor decision of choosing the right thing to

buy and consume to elaborate and macro-level policymaking. The building of the economical

theories and concepts stands on the notion of scarcity inclusive of the allocation required to live

off of that scarcity and the choices made in relevance to that.

Among all these various aspects etched into the cortex of economics and

microeconomics, one of the most arguably important and decisive factors are income and wealth.

As the aforementioned paragraphs explain the core principles of economics, it is quite fair and

logically sound to put income and wealth into that bracket, as it is the income i.e., the purchasing

capacity, that allows it to purchase, decided and continue moving the economic cycle and it is the

wealth that is the indicator of the accumulation of resources and assets that can be utilized

anytime to fulfil or support any economic decision of that individual (Barr, 2004).

However, as it is with almost all of the human constructed phenomenon and concepts,

everything comes with shortcomings and technical nuances that portray the negative side of the

affairs, same is the case with income and wealth, when they become unequal amongst the

individuals of the society, as a result of several factors which we hall elaborate and discuss. Such

is the goal of the paper, from analysis to evaluation and solutions of the shortcoming of these

concepts and their real-life examples.

 Description and Measurement of Income Inequality

As explained in the introductory discussion about this rather crucial factor of the

microeconomic jargon, income in its essence is the ‘consumable or saving opportunity’ an

individual has at their disposal. Now to further elaborate, it is usually given in exchange for the

service, job, labor or effort the individual puts in or offers. The simplest terms could be, you

work or provide a service, you earn income as the reward or exchange for that work. Just like

everything there is usually reasonable, logically sound and agreed rate set for all the various

fields that offer income opportunities (Barr, 2004).

Now comes the interesting part, every single job or work available in this world is unique

or different, there maybe a group or part of community that does that specific job but even then,

in those jobs, there are divisions based on experience, excellence and expertise, inclusive of skill

and where does that lead us? Difference in income earned, coupled with various geographical,

gender-oriented and different facets, according to the work done as well as various different

factors that then lead us to the income inequality.

A dictionary definition might state that income inequality is basically an ‘uneven

distribution of income or income opportunity inclusive of its distribution in the population’,

however since its measurement is fairly difficult, it is rather difficult to gauge the income

inequality. Several factors are taken into account i.e., distributions based on gender, geographics,

ethnic population, as well as jobs and occupation. A simple use-case for income inequality and

its analysis could be explanation of disparity between distribution of economics and income

amongst populations. Segmentation strategies are deployed to first segregate or segment various

populations i.e., demographic segmentation to be exact (Kopp, 2021).

 Now as far as the measurement or indicator of it is concerned, the most widely and

commonly used system or measurement too is the infamous Gini coefficient or Gini index. Gini

index or Gini ratio utilizes the concept of statistical dispersion which is intended to illustrate the

income disparity, i.e., the income inequality. It was developed by sociologist Corrado Gini and

the intention was aligned with its purpose. The basic workings of Gini are as follows; it measures

the frequency of distribution’s inequality to further measure the contributing factors such as

incomes levels. As per the aforementioned criteria, a Gini coefficient or index of 0 would signify

a ‘perfectly distributed income, illustrating perfect equality, however a value of 1 states

maximum inequality i.e., the worst possible scenario for income distribution. Almost all the

countries inclusive of major sites such as Wikipedia and even the UN, utilizes Gini to measure

the disparity of incomes and then get a score to illustrate their country’s overall performance or

position in income inequality indexes etc. (Gini, 1921).

In tandem to that, multiple research institutes or parts of the institutes are dedicated to the

purpose of and researching on this rather major issues. Such institutes include the Pew Research

Centre, or the Stone Centre on Socio-Economic Inequality. These institutes intend to regularly

deploy resources and measurement tools such as Gini index, to monitor income inequality

around the world, not just in this world. From academically well-versed professors to young and

researching individuals, all are tirelessly indulged in this process to measure the indicators of

income inequality, focus on its impacts to the people, in-turn monitoring its negative impacts on

the people and economy of a country as well as globally, and look for in-depth and concrete

solutions to these contributing factors of income and wealth inequality as well as solving the

problem as a whole both in the aspects of macro and microeconomics.

 Evaluation of the trends in income inequality measurement in the US (1940-2020)

Income inequality in the U.S. is a tale of contradictions and different viewpoints where

some indicators may indicate growth, but not all of them point into that direction. The difference

between various indicators is prevalent, most notably, on the positive side, the job-creation,

employment and recovery from the 2009 recession with negatives being the sluggish

improvement in household incomes and increasing disparity between the segmented classes in

the society with the middle class losing its shares continuously. An important factor to note is

that it is visibly and logically sound to understand that the household incomes have always been

on an uptrend since the 1970s however, the issue comes when the rate is taken into

consideration. A major and validated example of this sluggish and problematic growth is the rate

of growth for median household incomes themselves, that factor was cruising at rate of 1.3%

average with a 41% overall increase from 1970-2000, compare that to the next 18 years, the

growth factor has dropped to a miniscule 0.3%, this should quiet conveniently illustrate the

condition (Horowitz, Igielnik, & Kochhar, 2020).

AS illustrated by the aforementioned scenarios currently in the U.S. the research and the

experts that explain the income inequality segment the population into 3 distinct classes i.e.,

upper-income or upper class, middle-income or middle class and similarly lower-income or

lower-class individuals and families. When segmented like this according to the annual income,

size-adjusted income and multiple aggregates to distinguish every single family or home as one

of the income tier, there comes a very different take of the story.
 Among these segmented classes, the upper-class has seen the most growth and have

gained the share of income of the country in other words its GDP. This has consequently resulted

in a continuously shrinking middle-class, once holding the majority of Americans. To make

matters worse, further research has indicated that only the top 5% of the families have had the

majority of income increase and considerably more than the remaining 95%. That symbolically

indicative of an ongoing inequality crisis. Furthermore, an important factor to note is that overall,

the actual wealth of American households currently stands at the same level as 20 years ago, this

clearly indicates that the country is still recovering from the horrible and excruciating days of the

Great Recession (Horowitz, Igielnik, & Kochhar, 2020).

The case of income inequality has reached such a level that not only is it on a rise in the

U.S. but it actually overtakes almost all of the advanced economies. The Gini coefficient for the

U.S. stands at 0.434 according to the Pew Research Center, boasting a higher index then the U.K,

Germany and almost all major economic powers. The trend from the given time period is thus

been an increasing one, especially in the recent decades, it is now officially stated that the ‘rich

are getting richer’ and not just that, it is happening faster than ever. (Horowitz, Igielnik, &

Kochhar, 2020)

Wealth Inequality vs. Income Inequality

Income and wealth inequality are the facets of the same societal issue, inequality.

Inequality is any unjust scenario that an individual faces. As far as the interconnection and

differentiation between the two is concerned, income inequality is defined by the uneven

distribution of income earned amongst the population while wealth inequality is defined by the

same criteria but with respect to wealth distribution.

 Both income inequality and wealth inequality can be considered generally

interconnected as it is the income that then generates or accumulates as wealth. If one earns

enough, there are saving and investment opportunities that open up to generate more wealth, if

an individual isn’t earning enough and is in a ‘hand-to-mouth’ situation, then that income or

wealth level is a stagnation level for that family since no new wealth is being generated as a

result of barely enough income (Kopp, 2021). To put it in its simplest terms for the most

convenient understanding, if one wants to look for the disparity of income between different

countries and then group or classes of people, various sections of the society, income inequality

is the guide, however, if the goal is to elaborate on the difference of ‘how much’ various

differentiating group of people have amongst themselves, the distribution of wealth amongst

them, utilize wealth inequality.

Evaluation of the trends in wealth inequality measurement in the US

Just as is the case with income inequality measurement, it has been accompanied with

wealth inequality, maybe even as a resulting factor. As the main highlight of relevant research

suggests, the gaps between the families of various classes and segments of the U.S. public

continue to widen as the U.S. aggregate family share according to tiers feature an ever-so-

widening graph for upper income increasing and middle income decreasing their share

respectively (Horowitz, Igielnik, & Kochhar, 2020).

 Causes of wealth inequality in the US

There are several documented causes for the current, past and future projected wealth

inequality that persists in the U.S. but the major ones include the technological leaps that the US

has made, globalization of almost everything and citizens themselves, minimum wage

depreciating in value and weakened unions to be the highlights.

Globalization is the fact that America has become the epitome of success opportunity for

almost every person in the world hailing from Asia etc. and consequently, America’s own

workers have been falling short, especially those with various skill-based works, have faced

fierce competition from the global citizen (Krugman, 2002).

Same is the case with technology and constantly improving skillset to support the future

employment for a country. As the technological leaps continue more and more firms, employers

and markets demand higher skilled workers etc. (Krugman, 2002).

Role of healthcare in the domain of income and wealth inequality

Healthcare or healthcare inequality is an indispensable part of this discussion as well.

Both income inequality and healthcare inequality go hand in hand because income and then

wealth is what supports a better healthcare which, especially if we’re talking about the U.S. gets

exponentially expensive as procedures and difficulties or technicalities of procedures go up.

After several researches and in-depth analysis, i9t has now been documented and validly proven

that a poorer individual needs to spend a much high portion of their income on healthcare

services comparatively than richer people. It is also fair to assume that the government

compensating for that also has to take away from other ventures such as education etc. (Chokshi,

2018).
 Wealth Gap between individuals with and without private insurance

The healthcare crisis highlighted by the private insurance companies have been frowned

upon by experts and researchers worldwide for its increasingly unjust and profit-maximization

strategy to the where money now equates to a good healthcare and a longer life. Looking at a

philosophical point of view, money should never have been the determinant of someone’s life as

well as an individual’s life expectancy, but that is increasingly becoming the case for the U.S.

(Powell, 2016).

A wealth gap in itself basically denotes the difference of accumulated or cumulative

assets in relevance with race and ethnicities as well, taking all such nuances into consideration

and then illustrating that disparity. On further research, it was found there was severe and

widespread disparity between those that can afford and those with such critical situation dure to

their income and other factors that they choose to entirely avoid the medical bearings of the

private insurance. It was found that overall, an average of 16.9% of Americans reported financial

barriers to decide on getting private insurance, amongst them were the poor, near-poor and

impaired population. Middle-income families and groups have also been seen to avoid this

medical bill due to their low incomes and high expenditure they’ll have to endure. The research

concluded that this disparity between those who can afford private insurance and those who

cannot inclusive of those who may and applied but are facing financial barriers to continue might

be or must be on the agenda for an improved healthcare system that does not equate itself to

income or ‘money’ in general. Another important factor is that if the cost of private insurance is

not enough, the people hitting those financial barriers also have to deal with continuously rising

prescription charges, that have been increasing with no sluggishness in mind (Weinick, Byron, &

Bierman, 2005).
 Evaluation of increased access to public healthcare impacts on income and wealth

inequality

As the aforementioned discussions and researched have indicated, it is a must to urgently

tend to the need of the American people in the face of a better, more accessible and convenient

model of a healthcare system that’ll detach itself from being accompanied by income and wealth

inequality. As it was stated before, in a more philosophical sense of the world, the model

currently followed maintains that your wealth and income shall determine if you’ll survive a

medical condition or scare, especially chronic conditions that required recurring visits and

continuous monitoring and care, not just that, research has indicated life expectancy being

related to that, and that model is unfair in every sense of the word.

If the healthcare system is improved drastically and made more accessible to the public

that have in the past avoided their own health and life care for the sake of survival and not

indulging in lifelong crushing debts, would feel completely relieved of this massive burden on

their income that has complicated and further hurt the already problematic income and wealth

inequality struck public. Although income inequality or wealth inequality both can drastically be

improved only by governmental policies to ensure even distribution of wealth and income

opportunities but removing a burden on that unequal income can work wonders for the affected

middle-class and the most affected lower-class public.

 Recommendation as a federal policy maker for reduction of wealth and income inequality

The basic and most to-go policy for such an improvement is very logically and easily the

raise in minimum wage for labor and jobs alike. As our thorough research indicated, the most

affected ones in this tussle of income and wealth inequality are the ones relating to the middle-

class and lower-class, hence it can be assumed that because they’re barely surviving on their

unequal income, those are the ones doing the minimum wagers hence those will be the most

benefitting from this step. Relevant research has indicated that an increase of minimum wage by

as low as a few dollars, those with the lowest paying jobs would instantly pull up to 4.6 million

Americans out of poverty. Not just that, but an additional $2 billion would be added to the

country’s real income without almost minimal or non-existent impacts to employment or

retardation of employment (Powell J. A., 2014).

Furthermore, investment in education and educational opportunity, making it more and

more accessible can be a key factor in eliminating the ‘generational’ inequality of income and

poverty. Economic mobility, the driving force of an economically prosperous country, has been

linked to more educational and literate populations, especially those with early childhood

education higher mean tests scores as well as low dropout rates, clearly showing the interesting

link between a better education and a better economy (Powell J. A., 2014).

Conclusion

Conclusively stating, it has been evident more than ever now after the thoroughly

documented, logically sound and valid research and in-depth discussions that these problems

exist and are not only present but haunting the public however, the government intervention and

right policies can make a difference and this is problem that can be combated for the people.
 References

Barr, N. (2004). Problems and definition of measurement. In N. Barr, Economics of the welfare

state (pp. 121–124). New York: Oxford University Press.

Chokshi, D. A. (2018, April 3). Income, Poverty, and Health Inequality. The JAMA Forum, pp.

1312-1313. doi:10.1001/jama.2018.2521

Gini, C. (1921). Mwasurement of inqualiity of incomes. The Economic Journal, 31(121), 124-

126.

Horowitz, J. M., Igielnik, R., & Kochhar, R. (2020). Trends in income and wealth inequality.

Pew Research Center. Retrieved from

https://www.pewresearch.org/social-trends/2020/01/09/trends-in-income-and-wealth-

inequality/

Kopp, C. M. (2021, November 02). Income Inequality. (KELLY, & R. C., Eds.) Retrieved March

28, 2022, from Investopedia: https://www.investopedia.com/terms/i/income-

inequality.asp#:~:text=Income%20inequality%20is%20how%20unevenly,the%20uneven

%20distribution%20of%20wealth.

Krugman, P. (2002, October 02). For Richer. The New Yourl Times. Retrieved from

https://www.nytimes.com/2002/10/20/magazine/20INEQUALITY.html?pagewanted=all

Powell, A. (2016, February 22). The costs of inequality: Money = quality health care = longer

life. The Harvard Gazette. Retrieved from

https://news.harvard.edu/gazette/story/2016/02/money-quality-health-care-longer-life/
Powell, J. A. (2014). Responding to Rising Inequality, Policy Interventions to Ensure

Opportunity for All. Berkeley, CA: Haas Institute for a Fair and Inclusive Society at the

University of California, Berkeley. Retrieved from

https://belonging.berkeley.edu/sites/default/files/haasinstitute_inequalitypolicybrief.pdf?

file=1&force=1

Weinick, R., Byron, S., & Bierman, A. (2005). Who Can't Pay for Health Care? J Gen. Intern

Med., 504-509. doi:https://dx.doi.org/10.1111%2Fj.1525-1497.2005.0087.x