Income and Wealth Inequality: Crash Course Economics #17

Introduction

Jacob and Adriene introduce the topic of economic inequality and its various forms.

Economic Inequality Types

• There are two main types of economic inequality: wealth inequality and income inequality.

• Wealth refers to accumulated assets, while income refers to new earnings being added to that wealth.

• Wealth inequality focuses on how assets are distributed, while income inequality looks at how new income is distributed.

Global Wealth Distribution

The distribution of global wealth is highly unequal, with certain regions having a disproportionate share compared to their population.

Global Wealth Distribution

• North America and Europe, with less than 20% of the world's population, possess 67% of the world's wealth.

• China, despite having more people than North America and Europe combined, only holds about 8% of global wealth.

• India and Africa together make up almost 30% of the world's population but have only about 2% of its wealth.

Income Inequality Representation

Ten individuals representing different income levels are used to illustrate income inequality globally.

Income Distribution Illustration

• Ten individuals represent the entire global population lined up according to their income levels.

• The richest individuals are on one end, while the poorest are on the other.

• If $100 were distributed based on current trends, the poorest 20% would receive only $1, while the richest group would receive $83.

Historical Perspective on Inequality

The Industrial Revolution led to a significant increase in global income inequality over time.

"Economic Big Bang"

• With the Industrial Revolution came an "economic big bang" that caused income differences between countries to explode.

• In 1820, the richest countries were only three times wealthier than the poorest. Today, the gap is around 100:1.

Globalization and Inequality

Globalization and international trade have accelerated global inequality, benefiting the rich more than the poor.

Impact of Globalization

• Globalization has improved living standards for billions but has concentrated wealth among a few.

• Low-skilled workers are left behind as technology-based jobs require new skills.

• The gap between the poor and rich, as well as the working class, continues to widen.

Reasons for Growing Income Gap

Various factors contribute to the widening income gap, including skill-biased technological change and job shifts.

Skill-Biased Technological Change

• Modernized economies favor technology-based jobs that require specific skills.

• Skilled workers thrive while unskilled workers struggle to find employment.

• This leads to an increasing income gap between different skill levels.

Other Factors Contributing to Income Inequality

Additional reasons for growing income inequality include reduced union influence, biased tax policies, and other forms of inequality.

Additional Factors

• Reduced union influence impacts income equality.

• Biased tax policies favoring the wealthy exacerbate inequality.

• CEO salaries significantly surpass those of their employees.

• Other forms of inequality such as race and gender can worsen income equality.

Income Inequality in the United States

Max Lorenz's graph is used to illustrate income inequality in the United States.

Lorenz Curve Illustration

• Max Lorenz created a graph to depict income inequality in the United States.

• The graph shows the percent of households on the x-axis and the percent share of income on the y-axis.

• Perfect income equality is represented by a straight line, but some level of inequality is necessary for job differentiation and incentives.

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Income Inequality and Its Impact

This section discusses income inequality in the United States, the GINI Index as a measure of income equality, and the debate surrounding whether income inequality is a problem that needs to be addressed.

Income Inequality Trends

• The top earners in the US earned 43.3% of the total income in 1970, and by 1990, income inequality had worsened.

• Over the past 40 years, each bottom group or 80% households earned smaller shares of the total income.

The GINI Index

• The GINI Index is a commonly used measure of income equality.

• It represents the gap between equal distribution of income (0) and actual distribution (100).

• The US has the highest income inequality among Western industrialized nations.

Debate on Income Inequality

• There is agreement that income inequality exists but disagreement on whether it is a problem.

• Some argue that all groups are making more money but the rich's share is growing faster.

• Others argue that while people in the lowest income bracket have earned more money over 40 years, average incomes have been falling in the last 20 years. Meanwhile, the rich continue to get richer.

Impact of Income Inequality

• Greater income inequality is associated with problems such as violence, drug abuse, incarcerations, and diluted political equality.

• The rich have a disproportionate say in policy-making due to their wealth.

Addressing Income Inequality

• There are different proposed solutions:

• Education: Some argue that improving education can reduce the gap by providing better skills for higher-income jobs.

• Minimum wage increase: Increasing minimum wage could help bridge the gap.

• Affordable childcare: Access to affordable, high-quality childcare can have a positive impact.

• Social safety net: Governments should provide more support and adjust the tax code to redistribute income.

• Taxation: Some economists suggest increasing income taxes and capital gains taxes on the rich, while others argue for reducing regulation and bureaucratic red tape.

Conclusion

• Income inequality needs to be addressed due to its potential negative impacts on society.

• The motivation to address it can come from a desire to help people or the fear of social upheaval.