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Summary Article: Inequality, Economic
From International Encyclopedia of Political Science

Inequality is a complex multidimensional phenomenon, depending on many factors and lending itself to a great variety of explanations and evaluations. The existence, shape, and origins of inequalities are significant both from a positive perspective, owing to the fact that the economic, political, and psychological attitudes and behavior of individuals or groups are affected by the relative position they occupy in the distribution of meaningful resources, and from a normative one, as a consequence of the fact that in general a situation characterized by inequalities compares unfavorably with one of equality or with lesser inequalities. In this entry, a brief overall survey is provided that can be summarized in the following questions: Inequality of what? How large are the inequalities? Inequality among whom? Inequalities due to which causes?

Inequality of What and How Large?

The qualification of inequalities as economic lends itself to various interpretations: In a narrow sense, it regards the differences in the levels of personal income or wealth; in a broader sense, it includes all the values that directly or indirectly derive from economic activities, which can be used in obtaining them or can be exchanged with them. In the first case, its interpretation is straightforward, in the second, it requires the integration of different systems of inequality that include, besides income and wealth, elements such as health, knowledge, power, or availability of public services, and so on, whose distribution among individuals does not coincide with that of income. In the case of income and wealth, the size of the inequalities can be determined in terms of monetary units and in ways that are sufficiently precise, although not stable and exposed to a certain margin of error. For other aspects that can be broadly termed economic, this is not possible, and the differences between the positions can be described only in ordinal terms of larger and smaller (possibly with qualifications such as much larger or much smaller); in still other cases, even this is impossible, and one is limited to an incomplete or partial ordering. The measuring of inequalities raises problems even in the case of items that are directly expressed in monetary terms: In international comparisons, the per capita incomes of different countries are usually translated into a single currency through purchasing power exchange rates, whose value is affected by the choice of national baskets of representative consumption goods. Even more serious are the problems arising from the presence of externalities and of goods whose production counts as income when they are sold in the market but not when they are consumed by the producer or within his or her family, an occurrence that is usually more frequent in poorer countries or among lower income groups. To face these problems, a number of alternative and broader notions of economic welfare have been suggested, among them that of net economic welfare, proposed by Joseph Stiglitz, which adjusts gross domestic product (GDP) by subtracting from it negative factors (“bads”) such as pollution and by adding the contribution of beneficial nonmarket activities such as leisure, household production, child care, or looking after sick people.

There are good reasons both for treating the inequalities existing in the various spheres separately and for pooling them in a single comprehensive notion of economic inequality. The reason for treating them separately is that the pattern of inequalities of one sphere does not coincide with those of others; that their economic and political consequences as well as the moral criteria for evaluating them are different, according to Michael Walzer, and that the instruments available for redressing them are usually specific to each sphere (redistributing income has no immediate impact on inequalities in health, education, or power). The reasons for pooling them is that the shortcomings in one sphere can, at least partly, be compensated for by advantages in another and that the overall condition of people depends on the positions they have in each of the relevant ones.

There have been many attempts at finding criteria for combining the individual positions in a number of separate spheres to form an overall indicator of their standing both in absolute terms and relative to each other. One of the most relevant of these is the one proposed by Amartya Sen (1993) with the term capabilities, defined as “combinations of functionings a person can achieve, and from which he or she can choose one collection” (p. 31), which represents an all-encompassing notion of what has value for an individual and covers the whole range of possible valuable life experiences that are within reach of a person (including alternatives that are mutually exclusive). The solution Sen put forward can be applied both to individuals and to groups or whole populations; in this second form it has inspired the adoption by the United Nations of the Human Development Index (HDI), as a benchmark for the evaluation of social policies and policies for development, an index that is calculated for each country on the basis of data concerning income per head, the expectation of life at birth, and the level of education. For each of these variables, each country is given a score corresponding to the point in which it is placed in the interval that separates the position of the country that ranks first from that of the country that ranks last, the general index being formed by the simple average of the indexes concerning the individual variables.

Inequality Among Whom?

A system of inequalities is defined

  1. by the choice of the particular sphere, or groups of spheres, to be considered;

  2. by the identification of the population about which the comparisons are made and of the units within it whose positions are compared; and

  3. by the specification of the moment or span of time that is taken into consideration.

For the sake of simplicity, we shall limit ourselves to consider a single sphere of value (that of income) and to a static approach, considering a single moment in time. The definition of the population for which inequalities are assessed requires on the one hand that its members have a sufficient number of elements in common to make it relevant, and on the other that they present sufficient differences to make it interesting; both conditions depend on the nature of the problems examined.

The most frequent cases are those in which the population is defined on a national level, but Branko Milanovic notes that an increasing number of studies make reference to the broadest possible definition of the population, which of course corresponds to the whole of humanity. At the other extreme are populations that are formed by specific groups (such as the workforce of a single factory or the members of a single union), local communities, or even single families. As a general (but by no means universal) rule, we can say that the size of the inequalities increases with the size of the population but that its significance can move in the opposite direction, because individuals or groups living close together or having much in common tend to have a sharper perception of what makes them different.

We have a disaggregated representation of inequalities when the population is seen as formed by single individuals and an aggregate one when it is seen as formed by groups of individuals having in common certain characteristics such as gender, age, living in the same area, working in the same sector, having a similar professional qualification, belonging to the same ethnic group, or even belonging to the same bracket or fraction (decile, quintile, etc.) in the distribution of income. The case of families is in some ways ambiguous in that they can be considered both as elementary units and as groups. Aggregation is of course a matter of degree insofar as any group can be split into a number of subgroups or lumped together with others to form a wider group. When the aggregate approach is adopted, the systems of inequalities present both an external and an internal side: In the first case, the position of a group is considered in terms of a representative figure or parameter (typically the average or the median value) and compared with that of other groups; in the second, comparison is made of the position of each single individual or subgroup with those of other individuals or subgroups that make up the larger one.

The aggregate and disaggregate approaches are more often complementary than alternative, given that the position of single individuals in the larger populations is usually the joint result of factors affecting the position of the group to which they belong compared with that of other groups and of factors affecting their personal position in the former. The choice of an aggregate or disaggregate approach is far from neutral and can have relevant ethical and political implications: Presenting world income inequalities in aggregate terms through a comparison of the per capita incomes of different countries leads naturally to development policies that work through transfers of resources to governments; more disaggregate approaches lead to policies that are directly targeted to individuals or local communities. Similarly, policies of affirmative action addressed to disadvantaged groups (like women or ethnic minorities) often take the forms of reserving to members of those groups coveted positions or privileged conditions for obtaining them, measures that do in fact improve the average position of the targeted group but tend to increase the inequalities within it and often do little to improve the conditions of its most disadvantaged members.

Another meaningful distinction, according to Larry Temkin, is that between analytical and synthetic representations of inequalities. In the first case, we have a set of separate data regarding the differences between the position of every single element (individual or group) into which the population has been divided and that of each of the others; for a population of N elements, this representation takes the form of an N × N symmetrical matrix. The synthetic versions take the form of a single numerical indicator, whose value reflects the dispersion of the positions of the various elements, or more exactly the extent to which the distribution of values within the population diverges from equality. The most well-known and frequently used measure is the Gini index, which is especially sensitive to the variations of the extreme positions and takes on a zero value in the case of full equality and a value of 1 in the case of maximum inequality, when all resources belong to just one individual or group.

Synthetic representations may be thought of as the expression of inequalities in the singular, describing properties of entire populations or collective entities: analytical representations, on the other hand, as expressions of inequality in the plural, describing the relative positions of different individuals or groups. Analytical representations are closer to what might be called the direct perception of inequalities, that is, the actual conditions of individuals and the way they compare themselves with other individuals: Richard Wilkinson and Kate Pickett, for example, have shown that individuals are often more concerned with how much more or less than others they earn than with the absolute level of their income and that less wealth can be as painful (or even more painful) than actual poverty. The empirical descriptions of systems of inequalities combine in general synthetic and analytical aspects, as well as aggregate and disaggregate ones.

The systems of inequalities characterizing a given population can show at the same time stability and variability: stability, as the pattern of relative positions remains basically the same, and variability, as the individuals occupying the different positions keep changing all the time. A high degree of variability or mobility tends to dampen significantly the economic, social, political, and psychological impact of any given system of inequalities.

The Causes of Inequalities

The factors that give shape to a raw system of economic inequalities among individuals, by which is meant those that precede any corrective intervention by the state or other authorities, normally operate within a general competitive framework and can be grouped into three broad categories:

  1. macrofactors, which determine the relative levels of average incomes of whole communities (typically countries);

  2. personal factors, which determine the relative positions that individuals living in the same country can attain through their choices and actions; and

  3. microfactors, which correspond to gaps in the general framework and provide privileged conditions for particular organizations or individuals within them.

The individual positions in a given system of inequalities are to a varying degree affected by each of the aforementioned factors.

The general framework is that of a competitive capitalist market economy in which the income people earn broadly corresponds to the contribution they have given to marketable production through their work and the resources they have made available. The rule applies fully and directly only to units (persons or firms) that sell their products in the market and are motivated by the maximization of income (or profit, in the case of firms). When production is organized by public bodies, or by nonprofit organizations, the rules are different, but still subject to the indirect influence of those of the capitalist sector, owing to the fact that individuals and resources can move or be transferred from one to the other. Before reaching individuals, the flows of income (mainly capital income but to a certain extent even incomes from labor) deriving from the sale of production can be partially modified by intermediate actors (corporations, financial institutions, insurance companies, families, etc.), which pool different flows and redistribute them among their members or associates.

The macrofactors are those that affect the position of a country in the world economy; they include the nature of the goods it produces, their prices, the efficiency of its firms compared with those of other countries, and its currency's exchange rate; they play a crucial role in determining the relative level of its per capita income and, owing to their frequent fluctuations, its variation through time. Each of them has a direct positive effect on relative per capita income that is sometimes accompanied by indirect negative ones; an appreciation of the exchange rate, for instance, reduces the competitiveness of national firms, making the goods they produce more expensive in terms of foreign currencies.

The personal factors are those that determine the precise position of individuals and the roles they perform in the economic system of the country they live in; these include their natural gifts (in terms of intelligence, health, and physical dexterity), the social milieu in which they were born and grew up, the choices they made regarding their development and during their working life, how much they worked and the effort and commitment they put in, how much they saved, the risks they took, and the luck they had. Mainstream explanations of income inequalities among persons living in the same country see them as arising from competitive market interactions of individuals having different personal characteristics.

The microfactors are mainly sociological and usually “local,” in the sense of having a direct influence on specific sectors or locations; they reflect the structure of organizations (firms, unions, etc.) or networks within which and between which elements of power, monopoly, and discrimination play a significant role: They typically offer to insiders privileged channels of access to valuable resources from which outsiders are excluded or that they face obstacles in accessing. The inequalities they produce are sheltered from the competitive forces that are characteristic of the basic framework and have a “durable” nature insofar as they affect individuals' conditions throughout their lives and are often transmitted vertically through generations and horizontally among persons who share some easily recognizable and permanent traits (such as gender, ethnic origin, or faith). These microfactors can be grouped into the three broad categories of hierarchization, exclusion, and exploitation, which perform different but often complementary roles, according to Charles Tilly.

Hierarchization has been defined by Göran Therborn (2006) as “institutionalized ranking of social actors”: The subjects occupying the higher ranking positions, usually limited in number, have at their disposal a variety of resources (finances, prestige, power, etc.), the access to which is subject to their control and approval, or from which those of lower rank are excluded; inequalities of this kind are generally codified by rules that are both formal and stable in time, and sometimes transmitted to designated heirs.

Exclusion occurs when access to positions associated with wealth and prestige is barred to subjects who would otherwise qualify, on the basis of characteristics such as gender, race, or religion, which are easily ascertained by the insiders and cannot easily be modified by the excluded.

Exploitation has been examined from various points of view: the Marxist one, for which every relationship based on the separation between workers and the means of production involves exploitation, is both too broad and insufficiently comprehensive; more limited versions refer to the presence of elements of monopoly and/or of coercion, which alter the distribution of the fruits of labor to the advantage of those who control them. According to Tilly's version, similar to Marx's but more sociological and not limited to relationships between capital and labor, exploitation “operates when powerful, connected people command resources from which they draw significantly increased returns by coordinating the effort of outsiders whom they exclude from the full value added by that effort” (Durable Inequality, p. 10). Common to all these versions is the idea of a systematic and long-lasting distortion of relationships in favor of the exploiter, which (a) could be removed without significant loss of efficiency and (b) is accompanied by forms of “categorical inequality,” that is, by the attribution to the exploited and exploiter of distinctive characteristics (in terms of race, gender, culture, or class) that tend to both consolidate and justify the exploitation. Alongside exploitation, and sharing some of its traits, Tilly proposes the category of “opportunity hoarding,” which arises when groups of people sharing some recognizable characteristic establish preferential relationships that ensure them the control of resources, which they take advantage of to the exclusion of outsiders but without exploiting the latter.

See also

Class, Social, Inequality, Political, Social Stratification

Further Readings
  • Milanovic, B.2005 Worlds apart: Measuring international and global inequality. Princeton, NJ: Princeton University Press.
  • Sen, A.1993 Capability and well-being. In Nussbaum, M. & Sen, A. (Eds.), The quality of life (pp. 30-53). Oxford, UK: Clarendon Press.
  • Temkin, L. S.1993 Inequality. Oxford, UK: Oxford University Press.
  • Therborn, G. (Ed.). 2006 Inequalities of the world. London: Verso.
  • Tilly, C.1999 Durable inequality. Berkeley: University of California Press.
  • Walzer, M.1983 Spheres of justice. New York: Basic Books.
  • Wilkinson, R., & Pickett, K.2009 The spirit level: Why more equal societies almost always do better. London: Penguin.
  • Somaini, Eugenio
    Università degli Studi di Parma Parma, Italy Università degli Studi di Parma Parma, Italy
    SAGE Publications, Inc.

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