Inequality is the state of not being equal, especially status, rights and opportunities. However, it is easy to be confused in open debates because it often ways different things to different people. Whether from inequality of income, wealth inequality or inequality of opportunity, inequality in all countries is grave and presents an ever-increasing trend. Inequality is also a huge challenge for many countries around the world. Income distribution can not be explained by standard economic theory. The price of inequality is huge and diverse. Rising inequality is a major cause of the current economic hardship in rich countries. One of the issues raised by inequality is described in the UNCTAD TDR (2012): Increased inequality – triggers or creates economic conflicts – leads to social tensions – a general slowdown in income growth or Closing growth may lead to political violence.
There are many different methods for measuring inequality in income. According to the nature of the measure of inequality in income distribution, various measurement methods can be broadly divided into three categories: share proportionality measure, universal discrete coefficient measure and income concentration measure Law (Liu Yang, Ji Hong, 2007). However, most scholars at home and abroad use the third method to measure income inequality. Revenue concentration measurement generally includes Lorentz curve, Gini coefficient, generalized entropy index. But here we will discuss the Lorentz curve and Gini coefficient.
The Lorentz Curve is a graphical distribution of wealth developed in 1906 by Max Lorenz and it shows the percentage of income earned by any given percentage of the population. The 45° angle line shows exactly equal income distribution, while the other line shows that the further away from the diagonal, the more unequal the size of income distribution. In Figure 1, the Lorenz curve, which represents the actual distribution of income in a country, shows the poorest 20% of the population. Only earn 5% of the national income of this population. In the case of full equality, the poorest 20% of the population will earn 20% of their income. The better Lorenz curves bow, the higher the inequality in income in this country.
The Gini Coefficient (Figure 2) is derived from the Lorenz curve and is used as an indicator of a country’s economic development. The Gini coefficient can vary from 0 meaning perfect equality to 1 (or 100%) mean total inequality. A Gini coefficient of zero means that everyone has the same income, and a coefficient of 1 means that one person accepts all the income.
Economic Growth and it’s Measure Method
Economic Growth is a narrower concept than economic development. The definition of “economic growth” refers to the increase in the monetary value of goods and services generated by the economic sector per capita at a given time. This is a quantitative indicator. Economic growth can be expressed in terms of Gross Domestic Product (GDP) and Gross National Product (GNP), which helps to measure the size of the economy. It allows us to compare the absolute value and the percentage change.
GDP is the best way to measure economic growth. This is because it takes into account the economy of the entire country. It includes all goods and services manufactured and sold in the country. It does not matter whether it is sold domestically or overseas. GDP measures the final output. It does not include the parts that make the product. It includes exports because they are produced domestically. Import is subtracted from economic growth. Most countries measure economic growth quarterly. They use the real gross domestic product to compensate for the effects of inflation. There is more information on GDP growth and how to calculate it.
Article Reviews on Relationship Between Income Inequality and Economic Growth
In the article “Inequality and Economic Growth: The Perspective of the New Growth Theories” (1999) points out that the author analyzes the relationship between the inequality and economic growth from two perspectives. First, the impact of inequality on economic growth shows that when the capital market is imperfect, it is not necessarily the trade-off between equity and efficiency. The negative effects of inequality and the positive effect of redistribution on economic growth. Second, it analyzes several mechanisms by which economic growth may increase wage inequality, both across and with education cohorts. Here we will discuss the relation between inequality and economic growth in both way, there are the impact of econmic growth on income inequality and the impact of income inequality on economic growth.
The Impact of Income Inequality on Economic Growth
The impact of inequality within a country on economic growth has given different answers by different scholars. Economists seem to find from the different sides of the issue some conflicting forces that together determine the impact of income inequality on economic growth. Persson & Tabellini (1994) argues that such redistribution of income generally has some degree of economic distortions that will reduce people’s enthusiasm for production and thus slow economic growth.
Aslanidis (2004) thinks that there is a threshold in the relationship between income inequality and economic growth. When income inequality exceeds this threshold, the relationship between inequality and economic growth will shift from one mechanism to another. Perhaps it is precisely because of the complexity of the mechanism of the impact of inequality on economic growth that there is still no definitive conclusion to date and many empirical studies often have different results.
One of the economists emphasized the impact of income inequality on human capital investment, which in turn affected economic growth. In his opinion, the initial distribution of household wealth may play a very important role in the economic development driven by human capital, due to the lack of an insurance market targeting the risk of investment in human capital. When not considering credit constraints, greater inequality tends to increase total human capital stock and per capita income, a conclusion that is supported by empirical data from developed countries; greater when not considering credit constraints Equality hinders investment in human capital in poor countries. This conclusion shows that there is a non-linear relationship between inequality and economic development.
The Impact of Economic Growth on Income Inequality
There are a variety of factors contributing to income inequality. Different scholars have different views. For example, sociology generally considers social stratification or stratification as a cause of inequality (Garcia, 2006). Many western economists generally substitute income inequality for income inequality not only because wage income in western developed capitalist countries accounts for a large enough share of total income, so that it can determine the income distribution pattern of residents. Moreover, Because the impact of economic growth on wages is more obvious, easy to analyze.
From the late 1970s to the mid-1990s, the wage gap between the tenth and the 90th percentile workers in most The Organisation for Economic Co-operation and Development (OECD) countries widened. In the light of the fact that wage inequality continues to grow, Helmutman (2004) attributes it to two competing explanations: trade and technological determinism are undeniable, and trade and technological change both Economic growth is closely linked, so they can be seen as an intermediate mechanism of the impact of economic growth on wage inequality.
Theories on Income Inequality on economic growth
This section discusses the theories of income inequality and its relationship to economic growth. Whether income inequality is harm to economic growth or not
Theories on Income Inequality that Harm Economic Growth
Stiglitz (2012) argues that inequality slows economic growth. He said that inequality diminishes the aggregate demand of the underlying population, so they earn more than the top population. This is intuitive; the poor often need to spend all their money just to make life necessary. In addition, Stiglitz believes policy responses to weak demand may hurt the economy. This may cause the bubble to burst, leading to a recession. Unequal outcomes are linked to inequality of opportunity, thus preventing individuals with low socio-economic backgrounds from reaching their full potential. This shows that income inequality also has a negative impact on future economic growth, making it possible for families to fall into poverty trap.
Aghion et al. (1999) argue that inequality is detrimental to growth in the absence of capital markets. Without a normal credit market, the investment will depend on the individual’s own income and assets. As a result, the poor may not be able to make enough investments to raise their human capital. The lack of investment in education in poor communities is a proof. As a result, poor community education is under-invested. Imperfect capital markets can stop the poor from educating themselves and their children, starting businesses and buying insurance. These factors prevent the potential growth that the country itself may face in achieving more equitable distribution.
The Organisation for Economic Co-operation and Development (OECD, 2014) found that there was a significant negative correlation between OECD countries’ inequality and economic growth over a 30-year period. The gap between low-income families and the rest of the population is paramount, and there is no evidence that the rich extract from other populations undermines economic growth. Their research shows that, in an unequal society, the poor have less education and skills investment and have almost no effect on the investment in human resources at the upper and middle levels. This means that inequality will lead to an increase in education and income disparity. The study divides the population into three groups based on their parents’ educational background (high, medium and low) and analyzes the calculated results of the three groups based on the OECD Adult Skills Survey. In an unequal society, people with a low socio-economic background score worse than in an equal society. This can be economically inefficient, as more workforce can make a bigger contribution to the economy.
Theories on Income Inequality: Does Not Harm Growth
In neoclassical economics, there is a balance between equality and efficiency. One enomists discussed this issue and giving one example: the transfer from the rich to the poor is like a “funnel,” with some money lost in the funnel. Equality is expected to affect incentives, and politicians must choose whether to give priority to fairness or economic efficiency. The corollary is that the rich tend to have more marginal saving than the poor. If GDP growth is directly related to the saving rate, this means that the unequal economies will experience faster growth. In addition, this means that income distribution such as progressive taxation will reduce the saving rate of the entire economy.
Galor & Tsiddon (1997) claim that inequalities have risen in major technological inventions at different times. By increasing the liquidity and the concentration of highly skilled workers in high-tech industries, technological progress and growth will follow.
Benhabib (2003) argues that the relationship between inequality and economic growth is actually non-linear and raises a “mild hump-shaped” relationship. He believes that excessive inequality will undermine economic growth, because it will lead to rent-seeking, and inequality will intensify. When inequality rises from a low level, it will have a positive effect on economic growth.
The relationship between income inequality and economic growth has always focused by the economists, and the related research literature has increased in large scale in recent years. In terms of income inequality, there are two levels. First is the inequality of per capita income among countries, second is the inequality of personal income within a country. The former is especially embodied in the theory of economic growth. Impact of inequality on economic growth, for the current study, there is no clear and consistent conclusion. When considering the stage of economic development (based on the per capita income index), it is generally considered that there is a non-linear relationship between inequality and economic growth. In the same time, the impact of economic growth on inequality according to the existing literature, the result is uncertain. Except for the many factors that affect income inequality, the single economic growth does not form a consensus framework for the effects of inequality, but it is generally considered faster when only short-term effects are taken into account Economic growth rates generally give rise to temporary income inequality.