The Consequences of Economic Inequality

Income-InequalityThe second in SPI’s series on Inequality.


By: Nicholas Birdsong


“Economic inequality” generally refers to the disparity of wealth or income between different groups or within a society. Often characterized by the aphorism “the rich get richer while the poor get poorer,” the phrase often refers more specifically to the gap in income or assets between the poorest and richest segments of an individual nation.[1]

Even though the basic concept has entered the public consciousness, the effects of highly concentrated wealth are hotly debated and poorly understood by observers. Research attributes advantages and disadvantages to pronounced levels of economic inequality. Some on the right claim income inequality is socially beneficial in the main despite possible negative effects.

Global trends have led to an increasing concentration of wealth in an increasingly small number of hands. Although some methods of calculating global economic inequality show little change in wealth distribution,[2] different methods of calculating income or wealth tend to come up with different results.[3] The majority of analysts conclude inequality is increasing.[4] In 2013, nearly half of all global wealth was owned by one percent of the global population.[5] On current trends Oxfam says, in its latest research, it expects the wealthiest 1 percent to own more than 50 percent of the world’s wealth by 2016. Intra-national inequality has captured the attention of political, business and academic leadership in wealthy nations such as the United States,[6] Japan,[7] and Europe.[8]

The purported consequences of the rich-poor divide are exceedingly diverse. Some economists conclude inequality is beneficial overall for stimulating growth, improves the quality of life for all members of a society, or is merely a necessary part of social progress. Other economists claim wealth concentrations create perpetually oppressed minorities, exploit disadvantaged populations, hinder economic growth, and lead to numerous social problems.

The Benefits of Economic Inequality

Inequality Drives Growth

Rising levels of economic inequality often correlate with economic growth. In 1979, the Chinese government introduced several new programs designed to stimulate the economy.[9] Soon afterward, the Chinese GDP annual growth rate rapidly increased from 5.3% in 1979 to over 15% in 1984.[10] The growth rate rose and fell in the years that followed, but China has generally maintained one of the highest rates of growth globally since the 1980’s.[11] During the same period of time that rapid Chinese economic growth took place, economic inequality in China also increased noticeably. Currently, China has one of the highest wealth disparities on the planet.[12]

Another example that demonstrates the apparent correlation between economic growth and wealth disparity is the economic expansion the United States experienced in the years prior to 2008. This period coincided with increasing rates of income inequality.[13] Inequality fell between 2007-2008, during the economic recession.[14] Then, as the U.S. economy recovered from the recession, so did rates of income inequality.[15]

Some observers claim the correlation provides evidence economic inequality drives growth in a variety of ways. First, incentives are greater for innovation and entrepreneurship when inequality is pronounced.[16] Large salaried executive positions, for example, create an incentive for lower paid workers to win coveted labor positions.[17] The less-wealthy members of a society work harder, create new businesses, or invent new products to become a member of the highest income group. On the other hand, when the gap between income levels is small, those in lower income groups have less of an incentive to move up in income.

Some economists argue therefore, that wealth disparities are an inevitable part of a successful economy. Kaldor maintains that long-term market patterns show pulls toward the concentration of wealth.[18] He shows how, in the short term, where inequality is at a minimum, relatively low levels of investment result in lower profit margins, lower consumption levels, lower employment, and lower total income.[19] Subsequently the market demands higher levels of investment and innovation. These increased levels of demand for investment and the trend of technological progress require deep pools of capital to develop innovations and inventions.[20] The process of development and the demand for investment lead to increasing concentration of capital.[21] The concentration of wealth thus results in increasing division between the poor or middle-classes and the wealthy investment class.

Inequality Increases Fairness

Some argue a society with pronounced economic inequality is fairer than a society with a generally equal wealth distribution. Unconstrained markets tend to naturally develop pronounced economic inequalities, as discussed above. Economic equality then generally requires the utilization of redistributive state policies such as progressive taxes. In basic terms, economic equality requires taking from the “have’s” and giving to the “have not’s.”

The idea that property rights should be relatively inviolate forms, in part, the basis for neoliberal economic theory.[22] The state is viewed as a sort of necessary evil for facilitating a free and rationally operating market. Political interference with natural economic processes, such as economic inequality, should be kept to a minimum because substantial government involvement disrupts the moral rights of independence and individual freedom.[23]

Redistribution does not appear fair to some, especially from the perspective of the wealthy. Taxes and other redistributive policies that aim to reduce income inequality involuntarily take assets from individuals without equivalent exchange. Although redistributive policies generally benefit all members of a society, the majority of the costs for those social benefits are borne by the wealthy segments of society.

The Disadvantages of Economic Inequality

Inequality Stifles Growth

A degree of inequality can act as a positive influence on economic growth in the short term.[24] However, some economists find empirical evidence of a negative correlation of about 0.5-0.8 percentage points between long-term growth rates and sustained economic inequality.[25]

A variety of explanations have been proposed to explain how inequality can work to stifle growth. A high level of economic inequality means a higher level of poverty. Poverty is associated with increased crime and poor public health, which places burdens on the economy. In the face of increasing food prices and lower incomes, support for pro-growth government policies declines.[26] Wealthy citizens maintain disproportionate political power compared to poorer citizens,[27] which encourages the development of inefficient tax structures skewed in favor of the wealthy. Unequal income distribution increases political instability, which threatens property rights, increases the risk of state repudiated contracts, and discourages capital accumulation.[28] A widening rich-poor gap tends to increase the rate of rent-seeking and predatory market behaviors that hinder economic growth.[29]

According to one theory, growth is suppressed in economically unequal societies, after a phase of increased growth, by the decreasing availability of investments for human capital. Physical capital becomes increasingly scarce, as fewer individuals have funds to invest in training and education.[30] As a result, demands for human capital are difficult or impossible to meet, and economic growth stalls.[31] As an additional consequence, market demands increase for risky unsecured loans, which increase lenders’ risk exposure to the borrower’s default. More risks in the markets increase market volatility and the possibility of cascading defaults such as the 2008 subprime mortgage crisis.[32]

Inequality Increases Crime

Studies establish a positive relationship between income inequality and crime. According to a survey of research conducted between 1968 and 2000, most researchers point to evidence economically unequal societies have higher crime rates.[33] That survey concludes that inequality is “the single factor most closely and consistently related to crime.”[34]

Researchers propose several possible explanations for the inequality-crime correlation. First, disadvantaged members of a society may be more likely to suffer from resentment and hostility as a result of their economic position or competition over scarce jobs or resources, resulting in a higher propensity for criminal behavior.[35]

Second, inequality increases the incentive to commit crimes. Fewer methods of lawfully obtaining resources are available for the increasing number of poor who live in an unequal society. Even when risks of punishments are taken into account, illegal methods of gaining assets may provide better returns than legal means of obtaining resources.[36]

Third, a wide gap between rich and poor tends to increase crime by reducing law enforcement spending in low-income areas. Wealthy members of a society tend to concentrate in secluded communities, especially as the disparity between the rich and poor increase.[37] Rich neighborhoods or countries have more funds for the police than their poorer counterparts, resulting in a less effective police force or a higher number of officers susceptible to bribes in an increasing number of poor areas. Increasingly concentrated wealth leads to higher crime rates in poor areas which are prevalent in economically unbalanced societies. In societies with a sufficiently high degree of economic inequality, state investments in reducing economic inequality is vastly more effective at reducing crime than increasing spending law enforcement.[38]

Inequality Decreases Health

The impoverished members of society are subject to disproportionate occurrence rates of certain kinds of illnesses. Access to quality health care and healthy food is sometimes limited or unavailable for poor individuals. The result of a substantial poor population, a defining feature of economic inequality, is a less effective lower-income work force, higher disease and mortality rates, higher health care costs, and progressively deepening poverty for afflicted groups.

Food deserts are a unique characteristic of economically unequal societies, characterized by the lack of readily accessible healthy and affordable food. Food deserts occur in several heavily industrialized Western nations, including the United Kingdom, Canada, Australia and New Zealand.[39] The term “food desert” originated in Scotland during the early 1990s in the context of a public sector housing report.[40] Although the term originated in Scotland, its prevalence steadily increased since the 1990s in the United Kingdom, eventually becoming a common topic of research affecting public policy internationally.[41] In 2009, 2.2 percent of all households in the United States were located in food deserts.[42] In the United States and other industrialized Western nations, the lack of access to fresh foods is associated with disproportionate obesity and diet-related disease rates among low-income households.

There is an growing interest in food deserts as obesity rates and other diet-related illnesses increase. Obesity rates in the United States began to increase at alarming rates during the late 1970s and early 1980s. Currently, more than 1 in 3 American adults are obese and 2 out of 3 are overweight or obese.[43] Increases in the number of new diabetes diagnoses accompany the trend of increasing weight. The number of individuals suffering from high cholesterol has decreased, although the trend may be attributed to increasing consumption of cholesterol-lowering medications.[44] Health care costs in the United States were $75 billion in 1970, $2.6 trillion in 2010, and are expected to reach $4.8 trillion in 2021.[45] While not attributed solely to diet, unhealthy lifestyles account for a substantial portion of the rising expenditures on health care.[46] Obesity increases health care costs by $147 billion every year in the United States, or $1,429 more per person than a normally weighted person.[47] Obesity and diet-related diseases contribute to about 10 percent of all health care costs in the United States.[48] Poor diets are a cause of conditions such as diabetes, heart disease, osteoarthritis, some cancers, and other diseases.[49]

Impoverished Americans have been especially affected by the nation’s deteriorating average quality of health. Americans living in the poorest neighborhoods are more likely to be obese than Americans living above the poverty line.[50] Additionally, individuals living below the federal poverty level are two times more likely to die from diabetes.[51]

Considerable inconvenience and time constraints create barriers to cheap groceries for citizens living in food deserts. The incentive is increased for residents to purchase processed sugary and fatty items from gas stations, convenience stores, fast food restaurants, or other sources of unhealthy food.[52] Residents who are elderly, disabled, or have children are often less mobile, and the incentive to rely on convenient yet unhealthy foods is even greater. As a result, residents living in the food desert are more prone to obesity and other diet related diseases.

Beyond the direct health care costs of food deserts, poor health impacts the prosperity of a society. Poor health forces communities to cope with a less effective workforce, higher mortality rates, higher life insurance premiums, and a less prosperous economy.[53] A poorer economy may result in fewer taxable resources, and subsequently either higher overall tax rates or inferior public services. Food deserts also reinforce wealth disparities. Lower-income persons live in food deserts and face higher costs as a result. The poor are disproportionately burdened with higher health care costs, a disadvantaged ability to work, and a higher percentage of time spent on obtaining food.

Economic Inequality Increases Political Inequality

When wealth distribution becomes concentrated in a small number of hands, political power tends to become skewed in favor of that small wealthy group. High-income groups are able and incentivized to manipulate government in their favor through both legal processes and through corrupt practices. Impoverished or working class groups are simultaneously less able to become educated or participate in the political process as economic means become increasingly scarce.

Wealthy groups receive political advantages in several different ways. In democratic societies that lack public financing of campaigns such as the United States, political figures require private financial backing in order to run effective campaigns. Federal candidates during the 2010 elections cycle spent around six billion dollars altogether.[54] Successful candidates in Senate races spent an average of $10.3 million on their elections, while winning Congressional candidates spent an average of $1.6 million.[55] While more money spent does not always result in more votes, campaign expenditures correlate so closely with votes that researchers have been able to reliably predict that for every $5 spent, a candidate will receive approximately one vote.[56]

Political figures are required to court potential wealthy donors in order to fund successful campaigns. Half or more of the average Congressperson’s time is spent speaking with potential donors and raising money.[57] According to one report, “It is considered poor form in Congress — borderline self-indulgent — for a freshman [legislator] to sit at length in congressional hearings when the time could instead be spent raising money.”[58] Wealthy donors are given extreme access to elected officials. Politicians are likely to be reluctant to support policies that are not in the interests of their wealthy backers for fear of loosing vital financial support and subsequently the next election.

Low-income groups are less able to influence elected officials. Political interest and involvement is substantially depressed in economically unequal societies. According to one survey, individuals living in the most economically equal societies are four times more likely to be actively involved in politics and 2.7 times more likely to vote compared to the most economically unequal society.[59] Poorer groups are politically disadvantaged by the inability to dedicate time for political activities. Lower income groups tend to spend more time at work or securing basic needs. Consequently, they are less able to invest time or money to obtain political knowledge or participate in the political process. Additionally, economic inequality decreases participation by the poor because the poor are less able to influence outcomes.[60] The apparent futility of low-income groups’ efforts to influence policy discourages subsequent attempts to affect policies.

Wealth concentration further concentrates political power by the increased ability of wealthy groups to corrupt political processes. Some government officials may be especially susceptible to bribes if the officials are subject to the increased economic pressures present in an economically unequal society. Further, extremely wealthy community members are more able to afford to pay bribes in a relatively unequal economic state.

Inequality Decreases Education

Substantial empirical research reveal link education and poverty. Nations with a high degree of economic equality and a relatively small low-income population tend to have a substantially higher level of education. [61] A one-point increase in the Gini coefficient (a measurement of income inequality) translates into a 10% decrease in high school graduation rates and a 40% increase in college graduation.[62] In an economically unequal society, the society-wide average level of education decreases while the number of educational elites increases.

One proposed causal connection between education and inequality is unequal societies tend to underinvest in education. Absent private or public scholarship programs, the poor are unable to afford to pay for education or spend the time in school that could have otherwise been spent working. Sweatshops in countries like Bangladesh provide an example of poverty’s effect on education. Sweatshops in Bangladesh employ young children, which give destitute families much needed economic support.[63] However, the children who work in the sweatshops are unable to attend schools or obtain an education because of their economic needs. The children’s future earning potential decline and the likelihood increases the child and the family continue to live in poverty.[64]

In unequal societies, government support tends to decline for public education programs. As the rich become increasingly wealthy, public policies become increasingly favorable to the policy goals of the economic elites.[65] Public education programs tend to be unpopular with the wealthy because they involve taking public funds, which often primarily consist of taxes imposed on the rich, and redistributing those resources to the poor.[66]

The beneficial effect of increased GDP growth correlates with higher rates of inequality. From the perspective of the wealthy or liberal economic theorists, fairness is maximized in economically stratified societies that avoid redistributive policies. However, the disadvantages of economic inequality are more numerous and arguably more significant than the benefits. Societies with pronounced economic inequality suffer from lower long-term GDP growth rates, higher crime rates, poorer public health, increased political inequality, and lower average education levels.






[1] Eduardo Porter, Why Voters Aren’t Angrier About Economic Inequality, The New York Times, July 24, 2014,

[2] Christoph Lakner & Branko Milanovic, Global Income Distribution, The World Bank, Dec. 2013,; Income Inequality Is Not Rising Globally. It’s Falling, The New York Times, July 19, 2014,

[3] Shlomo Yitzhaki, More than a Dozen Alternative Ways of Spelling Gini, Hebrew University, Apr. 1, 1997,

[4] Isabel Ortiz & Matthew Cummins, Global Inequality: Beyond the Bottom Billion, UNICEF, April 2011,; Graeme Wearden, Oxfam: 85 richest people as wealthy as poorest half of the world, The Guardian, Jan. 20, 2014,; Chad Stone, Danilo Trisi, & Arloc Sherman, Guide to Statistics on Historical Trends in Income Inequality, Cntr on Budget and Policy Priorities, Apr. 17, 2014,

[5] Working for the Few, 178 Oxfam, 2, Jan. 20, 2014,

[6] Remarks by the President on Economic Mobility, The White House, Office of the Press Secretary, Dec. 4, 2013,

[7] The risking sun leaves some Japanese in the shade, The Economist, June 15, 2006,

[8] John Weeks, Hobbes, Nobel Prize Winners and Inequality, The Huffington Post, July 30, 2014,

[9] China GDP: how it has changed since 1980, The Guardian, March 23, 2012,

[10] Id.

[11] Charles Kenny, Won’t Be Scary Unless They Slow Down, Bloomberg, July 21, 2014,

[12] Yu Xie & Xiang Zhou, Income inequality in today’s China, PNAS, Feb. 20, 2014,

[13] Income Inequality and the Great Recession, U.S. Congress Joint Economic Committee, 2 (Sept. 2010),

[14] Id.

[15] Id.

[16] Jonathan D. Ostry, Andrew Berg, & Charalambos G. Tsangarides, Redistribution, Inequality, and Growth, Int’l Monetary Fund, April 2014,

[17] Example from Edward P. Lazear & Sherwin Rosen, Rank-Order Tournaments as Optimum Labor Contracts, 89 The Journal of Political Economy 841 (Oct. 1981),

[18] Nicholas Kaldor, A Model of Economic Growth, 67 The Economic Journal 591, 622 (Dec. 1957),

[19] Id.

[20] Id. at 623.

[21] Id.

[22] Ioannis Glinavos, Neoliberal Law: unintended consequences of market-friendly law reforms, 29 Third World Quarterly 1087, 1089 (2008).

[23] Id.

[24] See supra at p. 3.

[25] Erik Thorbecke & Chutatong Charumilind, Economic Inequality and Its Socioeconomic Impact, 30 World Development 1477, 1482 (April 22, 2002).

[26] Income Inequalities in the Age of Financial Globalization, Int’l Inst. For Labour Studies, 2 (2008),—dgreports/—dcomm/—publ/documents/publication/wcms_100354.pdf.

[27] See infra p. 10.

[28] Erik Thorbecke & Chutatong Charumilind, Economic Inequality and Its Socioeconomic Impact, 30 World Development 1477, 1484 (April 22, 2002).

[29] Id.

[30] Id. at 1483.

[31] Id.

[32] See Steve Denning, Lest We Forget: Why We Had A Financial Crisis, Forbes, Nov. 22, 2011,; Ian Katz & Simon Kennedy, Geithner Urges End to European ‘Cascading Default’ Threat, Bloomberg, Sept. 24, 2011,

[33] Id. at 160.

[34] Id. at 178.

[35] Lisa Stolzenberg, David Eitle, Stewart J. D’Alessio, Race, economic inequality, and violent crime, 34 Journal of Criminal Justice 303, 303 (2006).

[36] Income Inequalities in the Age of Financial Globalization, Int’l Inst. For Labour Studies, p. 11 (2008),—dgreports/—dcomm/—publ/documents/publication/wcms_100354.pdf.

[37] Richard Fry & Paul Taylor, The Rise of Residential Segregation by Income, Aug. 1, 2012, Pew Research,

[38] Bardhan, Bowles, & Wallerstein, Globalization and egalitarian redistribution, Princeton University Press (2006).

[39] Julie Beaulac, Elizabeth Krisjansson, & Steven Cummins, A Systematic Review of Food Deserts, 1966-2007, Preventing Chronic Disease, July 2009,

[40] Steven Cummins & Sally Macintyre, “Food deserts” – evidence and assumption in health policy making, 325 BMJ 436,

[41] Julie Beaulac, Elizabeth Krisjansson, & Steven Cummins, A Systematic Review of Food Deserts, 1966-2007, Preventing Chronic Disease, July 2009,

[42] Michele Ver Ploeg, et al. Access to Affordable and Nutritious Food – Measuring and Understanding Food Deserts and Their Consequences: Report to Congress, USDA, June 2009,

[43] Adult Obesity Facts, CDC (last accessed Apr. 6, 2014),

[44] See Elena V. Kuklina; Margaret D. Carroll; Kate M. Shaw; Rosemarie Hirsch, Trends in High LDL Cholesterol, Cholesterol-lowering Medication Use, and Dietary Saturated-fat Intake: United States, 1976-2010, CDC, Mar. 2013,

[45] The Facts About Rising Health Care Costs, Aetna (last accessed Apr. 14, 2014),

[46] Id.

[47] Adult Obesity Facts, CDC (last accessed Apr. 6, 2014),

[48] Eric A. Finkelstein et al., Annual Medical Spending Attributable To Obesity: Payer-And Service-Specific Estimates, 5 Health Affairs 822 (July 27, 2009),

[49] Economic Costs, Harvard School of Pub. Health (last accessed Apr. 6, 2014),

[50] James A. Levine, Poverty and Obesity in the U.S., American Diabetes Ass’n, Nov. 2011,

[51] Sharon Saydah & Kimberly Lochner, Socioeconomic Status and Risk of Diabetes-Related Mortality in the U.S., 125 Pub. Health Rep. 377 (2010), May-Jun,

[52] USDA Defines Food Deserts, Am. Nutrition Ass’n (last accessed Apr. 6, 2014),

[53] Id.

[54] Naming names; Campaign finance, Nov. 24, 2012, The Economist (London).

[55] Paul Steinhauser & Robert Yoon, Cost to win congressional election skyrockets, CNN, July 11, 2013,

[56] Philip Bump, Does More Campaign Money Actually Buy More Votes: An Investigation, The Wire, Nov. 11, 2013.

[57] Ryan Grim & Sabrina Sidiqui, Call Time for Congress Shows How Fundraising Dominates Bleak Work Live, The Huffington Post, Jan. 8, 2013,

[58] Id.

[59] Frederick Solt, Economic inequality and democratic political engagement, 52 American Journal of Political Science, 48 (2008).

[60] Id. at 49.

[61] Erik Thorbecke & Chutatong Charumilind, Economic Inequality and Its Socioeconomic Impact, 30 World Development 1477, 1488 (April 22, 2002).

[62] Id.

[63] Benjamin Powell, Sweatship In Bangladesh Improve The Lives of Their Workers, and Boost Growth, Forbes (May 2, 2013),

[64] See supra note 61 (empirical data showing that educated societies tend to have more equal income distribution).

[65] See supra page 10.

[66] See supra page 5.

Cartoon from Robert Reich: Inequality for All, A Film