Income Inequality
The uneven distribution of income across individuals or households in an economy, measured by indicators like the Gini coefficient.
What is Income Inequality?
Income inequality measures the degree to which income is unevenly distributed across individuals, households, or demographic groups within an economy. The most widely used measure is the Gini coefficient, which ranges from 0 (perfect equality, where all households earn identically) to 1 (maximum inequality, where one household earns everything). Other measures include the income share of the top 1% or 10%, the Palma ratio (top-10% share divided by bottom-40% share), and the 90/10 income ratio. Rising income inequality reduces the consumption share of lower-income households (who have higher marginal propensities to consume), potentially dampening aggregate demand. Key drivers include skill-biased technological change, globalization reducing demand for low-skill labor, declining unionization, and tax and transfer policy choices.
Example
The United States has one of the highest income inequality ratios among developed economies. The US Gini coefficient for pre-tax, pre-transfer household income was approximately 0.49 in 2022, according to the Census Bureau, compared to approximately 0.29 for Denmark and 0.31 for Germany after taxes and transfers. The top 1% of US earners captured approximately 19% of pre-tax national income in 2022, while the bottom 50% captured approximately 13%—a ratio that has widened significantly since the 1970s.