It’s nearly impossible to read the news these days without running across mentions of economic inequality.
In recent months, politicians have debated the merits of raising marginal tax rates on the wealthy, a move proponents say could reduce economic inequalities. Likewise, economic inequality takes center stage when columnists discuss the extreme riches of some of today’s business owners, like Jeff Bezos, who could purchase every home in Austin, Texas, according to real estate brokerage Redfin. The concept of economic inequality was even discussed during the recent college admissions scandal in which celebrities and other wealthy parents allegedly paid bribes to secure college acceptance letters for their children.
So what is economic inequality, and how does it impact you? Here’s what to do know about this important social and financial concept.
What Is Economic Inequality?
Economic inequality is a broad term that encapsulates the gap between the income and wealth amassed by different groups in a society. Americans reference it when questioning why CEOs earn so much more than their employees or how historical and current policies have barred families of color from accumulating wealth. “Economic inequality is the more generic name and within that you could talk about income inequality and wealth inequality,” says Jim Freeland, professor of business administration at Darden School of Business at the University of Virginia.
Understanding economic inequality can be complex, Freeland says. “It’s not, by itself, bad,” he says. “A lot of people would say, when you see (economic inequality), it’s a measure that capitalism is working.” But, he adds, “It’s a question of: How unequal should it be? A lot of people are concerned we’ve gone beyond where it should be.”
Indeed, wealth and income inequality have increased over the previous half-century. According to the Urban Institute, in 1963, a family in the 90th wealth percentile had about six times the wealth owned by the typical American family. This gap was relatively stable until about 1983, when it quickly widened. By 2016, a family at the 90th percentile had almost $1.2 million in wealth, more than 12 times the amount owned by the typical family.
Similarly, income inequality has risen over the past 50 years, according to the Urban Institute. The income for families near the top of the income spectrum increased by about 90 percent from 1963 to 2016. Meanwhile, the income of families at the bottom increased less than 10 percent.
While income inequality is worth considering, wealth inequality is a more revealing and comprehensive metric to understand, says Signe-Mary McKernan, co-director of the Opportunity and Ownership initiative and an economist at the Urban Institute. Income can have a powerful impact on a person’s financial health and status, but the passing down of wealth through generations is a more powerful measure of opportunity and prosperity. “Wealth is important because it’s where economic opportunity lies,” McKernan says.