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International Encyclopedia of the

Social Sciences, 2nd edition

International Encyclopedia of the

Social Sciences, 2nd edition

VOLUME 4

INEQUALITY, INCOME–MARXISM, BLACK

William A. Darity Jr.

EDITOR IN CHIEF

INEQUALITY, INCOME

Income inequality is an important aspect of the economic

and social well-being of a nation. The axiom “the rich are

getting richer and the poor are getting poorer” is synony-

mous with rising income and wealth inequality. Both

affluent and poor countries experience some degree of

income inequality.

Income inequality rose in the United States between

the mid-1970s and early-2000s based on several measures.

The United States generally exhibited the highest degree

of income inequality of the industrialized OECD

(Organization for Economic Cooperation and Develop-

ment) countries, although research by Peter Gottschalk

and Timothy Smeeding (2000) did not discern any uni-

versal trend. According to opinion polls by Demos, a U.S.

public policy organization, American public opinion

toward income inequality tends to shift in response to

media reports on excessive executive compensation, cor-

porate downsizing, and the state of the U.S. economy.

Opinions are divided on whether society should be

concerned about income inequality. Economists Martin

Feldstein and Anne Krueger argue that policymakers

should focus on reducing poverty, not inequality. This is

because an increase in inequality will occur even though

all income-receiving units (IRUs) are better off in absolute

terms if the incomes of richer IRUs rise by higher propor-

tions than those of their poorer counterparts. An alterna-

tive view, articulated by Simon Kuznets (1901–1985) and

Kenneth Arrow, winners of the 1971 and 1972 Nobel

Prize in Economics, respectively, is that income inequality

is an important determinant of aggregate savings and

growth, and the perception of unfairness it entails may

cause political instability and social conflict.

MEASURING INCOME INEQUALITY

One way of analyzing income inequality trends is to

examine the income shares accruing to some segment of

the population (e.g., the poorest and richest 10 percent).

A falling (rising) income share of the poorest (richest)

group indicates rising inequality.

A summary inequality measure is a single number

computed from the incomes of several IRUs (individuals,

households). This number summarizes the degree of

income inequality, with higher values indicating greater

inequality.

The Gini index or Gini coefficient —named after

Corrado Gini (1884–1965), the Italian statistician who

developed it in 1912—is a popular summary measure. It

ranges from zero for perfect equality (all IRUs receive iden-

tical incomes) to one for perfect inequality (one IRU receives

all the income). For example, the World Bank (2005)

reports the 2000 Gini index for the United States and

Canada as 0.38 and 0.33, respectively, indicating that the

United States had greater inequality. Such international

comparisons are strictly valid if they are based on common

definitions of IRUs and income (gross income, net income)

and similar geographical coverage (national, urban).

Frank Cowell (1995) provides details (including for-

mulas) of the Gini index and other summary measures.

Cowell describes the generalized entropy (GE) family,

which includes the mean logarithmic deviation (GE(0)),

Theil’s index (GE(1)), and half the squared coefficient of

variation (GE(2)) as special cases, and Atkinson’s measure.

INTERNATIONAL ENCYCLOPEDIA OF THE SOCIAL SCIENCES, 2ND EDITION

Inequality, Income

Atkinson’s measure ranges from zero to one and GE from

zero to infinity.

There is no single best summary inequality measure.

The choice among summary measures is influenced by:

(1) computational convenience; (2) satisfaction of desir-

able properties, including scale independence (multiplying

all incomes by a constant should not affect inequality), the

Pigou-Dalton transfer principle (an income transfer from a

richer to poorer IRU that does not reverse their ranking

should reduce inequality), anonymity/symmetry (identities

of IRUs are irrelevant), population independence (doubling

population size by replicating every IRU should not affect

inequality), and decomposability (total inequality should

be conveniently broken down by population subgroups or

income components); and (3) the portion of the income

distribution to emphasize.

The availability of software for computing inequality

measures has rendered computational considerations less

important. The Gini index, GE, and Atkinson’s measure

satisfy scale independence, the transfer principle,

anonymity/symmetry, and population independence. The

Gini index cannot be conveniently decomposed and is

more sensitive to income changes in the middle of the dis-

tribution. The sensitivity problem is circumvented by

computing a generalized/extended Gini , whose formula,

like that of Atkinson’s measure and GE, incorporates an

inequality aversion parameter that can be changed to stress

different portions of the income distribution. The GE is

renowned for its additive decomposability (total inequality

in a population that is partitioned according to race, gen-

der, or other characteristics is the sum of within-group

inequality and between-group inequality).

The degree of income inequality can also be deduced

graphically from a Lorenz curve . When comparing non-

crossing Lorenz curves, the one with greater curvature

away from the perfect equality line indicates greater

inequality. The Gini index is twice the area between the

Lorenz curve and the perfect equality line, which may be

inaccurate if the Lorenz curve is constructed from data

that are grouped into income brackets, as statistical agen-

cies often do.

a narrow definition of income (market income) or a

broader definition that takes into account taxes, social

transfers (e.g., child benefits), and noncash benefits (e.g.,

food stamps) is considered. Rising social transfers may off-

set an increase in earnings inequality. Second, since sum-

mary measures are based on household surveys,

researchers should test whether observed inequality

changes are statistically significant by computing an

appropriate standard error . Until the mid-1990s, many

practitioners eschewed this issue because of the complexi-

ties of most standard error formulas. Advances in comput-

ing have facilitated significance tests for inequality

changes using the bootstrap standard error , as Martin

Biewen (2002) has demonstrated.

Economic historian Peter Lindert (2000) has summa-

rized the vast literature explaining the rise in U.S. income

inequality. The rise is ascribed to a complex mix of eco-

nomic and social/demographic factors. Since earnings

constitute the largest component of income for most

IRUs, explanations of rising inequality in the United

States have focused mainly on earnings inequality. They

include the weakening of unions, technological changes

requiring highly skilled workers, outsourcing of jobs, and

immigration. Other explanations include import compe-

tition from low-cost countries, government tax and

income transfer policies, and the rise in single-parent fam-

ilies. Similar factors have been used to explain inequality

trends in other industrialized OECD countries, with vari-

ations in the relative importance of the factors.

ECONOMIC GROWTH AND

INCOME INEQUALITY

Does economic growth lead to rising inequality? In 1955

Kuznets postulated the existence of an inverted U-curve

relationship between economic growth and income

inequality by tracking the historical experiences of

England, Germany, and the United States. This U-curve

hypothesis contends that the intersectoral shifts associated

with the early stages of economic growth exacerbate

inequality (the rising portion of the inverted U-curve). At

some threshold level, inequality peaks and then falls (the

falling portion of the inverted U-curve).

The vast literature on the U-curve hypothesis,

reviewed by economist Ravi Kanbur (2000), reveals mixed

empirical results. Furthermore, government policy is

important in influencing the direction of inequality.

Regarding the reverse causation from income inequality to

economic growth, empirical evidence by Klaus Deininger

and Lyn Squire (1998) reveals that inequality in land dis-

tribution is a more important determinant of future

growth than income inequality.

INCOME INEQUALITY WITHIN

AMERICAN SOCIETY AND OTHER

OECD COUNTRIES

The Gini index for U.S. household income inequality,

reported by the U.S. Census Bureau, increased from

0.397 in 1975 to 0.466 in 2001. Both the GE and

Atkinson’s measure also increased during this period, indi-

cating rising inequality.

Two factors complicate the analysis of the observed

inequality trends. First, the trend may depend on whether

INTERNATIONAL ENCYCLOPEDIA OF THE SOCIAL SCIENCES, 2ND EDITION

Inequality, Political

INCOME INEQUALITY, RACE,

ETHNICITY, WEALTH INEQUALITY,

AND INTERGENERATIONAL

MOBILITY

It is now widely recognized (e.g., World Bank 2005) that

the root cause of persistent earnings and income inequal-

ity is unequal opportunities. For example, sustained dis-

crimination in employment or education against a

particular racial or ethnic minority group could result in

persistently low earnings for the group’s members, result-

ing in an inequality trap .

The link between ethnicity and income inequality is

convoluted. Economists William Darity and Ashwini

Deshpande (2000) articulate how overall inequality could

drive interethnic inequality and vice versa. Shelly

Lundberg and Richard Startz (1998) explain how com-

munity influence and loyalty could shape interethnic

inequality even without discrimination. Some have

argued that ethnically homogeneous societies should have

less inequality since assimilation by ethnic groups is easier

and support for income redistribution is more likely.

Fractionalization indexes, which measure the probabilities

that two randomly selected individuals from a population

belong to different ethnic, linguistic, or religious groups,

have been used in empirical investigations of the ethnic-

diversity income inequality nexus, with mixed results.

The causality between wealth inequality and income

inequality may potentially run two ways. On the one

hand, those with greater wealth accumulation are more

likely to invest and generate higher incomes. On the other

hand, those with higher incomes have higher potential to

accumulate more wealth.

Are the children of poor parents destined to remain

poor? This is the issue of intergenerational mobility , the

relationship between a person’s socioeconomic status and

that of his or her parents. The rich are capable of provid-

ing their offspring with a better education, increasing

their chances of earning higher incomes. Also, the off-

spring of the rich are likely to inherit greater wealth,

which aids the wealth accumulation process for the next

generation. Thomas Piketty (2000) has surveyed theoreti-

cal and empirical literature on intergenerational mobility.

Economists and sociologists measure the degree of inter-

generational mobility by computing an intergenerational

elasticity in income and wealth. Unfortunately, intergener-

ational elasticity estimates are sensitive to the methodol-

ogy employed. Irrespective of the exact magnitude, there

is no doubt that the level of opportunities allowed by soci-

ety determines intergenerational mobility.

SEE ALSO Gini Coefficient; Income; Income Distribution;

Inequality, Gender; Inequality, Political; Inequality,

Racial; Inequality, Wealth; Interest Rates; Poverty,

Indices of; Profits; Rent; Wages

BIBLIOGRAPHY

Biewen, Martin. 2002. Bootstrap Inference for Inequality,

Mobility, and Poverty Measurement. Journal of Econometrics

108 (2): 317–342.

Cowell, Frank A. 1995. Measuring Inequality . 2nd ed.

Wheatsheaf, U.K.: Prentice Hall.

Darity, William, Jr., and Deshpande Ashwini. 2000. Tracing the

Divide: Intergroup Disparity Across Countries. Eastern

Economic Journal 26 (1): 75–85.

Deininger, Klaus, and Lyn Squire. 1998. New Ways of Looking

at Old Issues: Inequality and Growth. Journal of Development

Economics 57 (2): 257–285.

Gottschalk, Peter, and Timothy M. Smeeding. 2000. Empirical

Evidence on Income Inequality in Industrialized Countries.

In Handbook of Income Distribution , eds. Anthony Atkinson

and François Bourguignon, 261–307. Amsterdam: Elsevier.

Kanbur, Ravi. 2000. Income Distribution and Development. In

Handbook of Income Distribution , eds. Anthony Atkinson and

François Bourguignon, 791–841. Amsterdam: Elsevier.

Lindert, Peter H. 2000. Three Centuries of Inequality in Britain

and America. In Handbook of Income Distribution , eds.

Anthony Atkinson and Francois Bourguignon, 167–216.

Amsterdam: Elsevier.

Lundberg, Shelly, and Richard Startz. 1998. On the Persistence

of Racial Inequality. Journal of Labor Economics 16 (2):

292–323.

Piketty, Thomas. 2000. Theories of Persistent Inequality and

Intergenerational Mobility. In Handbook of Income

Distribution , eds. Anthony Atkinson and François

Bourguignon, 429–476. Amsterdam: Elsevier.

World Bank. 2005. World Development Report 2006: Equity and

Development . New York: Oxford University Press.

http://econ.worldbank.org/.

Tomson Ogwang

INEQUALITY,

POLITICAL

Of the disparities among ordinary people in whatever is

scarce and valued in a society—economic wherewithal,

social respect, public influence, health, freedom—political

equality is relevant most especially in democracies. In con-

trast to authoritarian systems, democracies are based on

the expectation that the people are sovereign and that

public officials are to be equally accessible and account-

able to all. In spite of the egalitarian commitment embod-

ied in the principle of one person, one vote, political

equality among ordinary people is not the same thing as

equal political power, even in democracies. Those who, by

dint of election or appointment, are entrusted with the

responsibility for governing—from the prime minister to

the city council member—inevitably wield greater politi-

cal power than others. Instead of equal power, therefore,

INTERNATIONAL ENCYCLOPEDIA OF THE SOCIAL SCIENCES, 2ND EDITION

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