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Why You Should Care About Income Inequality

Greg de la Cruz works in the tech industry and is the author of two published titles on Amazon.

What's Your Economic Status?

How often have you thought about your own economic status?

It may not cross your mind much, but a growing wealth gap creates a social tension that breeds indifference, or even hate, among different classes. The poorer the poor become, the more they might despise the rich. And the more wealth someone or some select families gain, the more they tend to separate themselves from everyone else.

And those in between? Imagine a rope that’s being stretched on both ends. On one end are the most impoverished, those living hand to mouth, and on the other end are the aristocrats and the oligarchs. The tightest part of the rope, or where it will inevitably break apart, is at the middle. Those who belong to the middle class feel this tightness, this social tension at its worst.

PhilStar columnist Andrew J. Masigan, in his article "Income inequality, a social timebomb," says that the middle class “is where discontent is greatest and tension is highest.”

After all, those who belong to this income class often miss out on social safety nets such as free education, financial assistance, and sponsored housing. These welfare programs were set up for the poor while the rich find no reason to need them. Masigan says:

“History shows that in most societies with acute income inequality, the call for social change through revolutions are instigated by the middle class.”

Income inequality is a serious social issue in every country. But it’s worse in some, like the Philippines, which ranks in the bottom third (around 127th of 168) of countries when measuring income inequality through the Gini index. Let me explain why you should start caring about the wealth gap.

Man in jacket begs from a passerby in a public terminal.

Man in jacket begs from a passerby in a public terminal.

The Meritocracy Myth

Do you still subscribe to the idea that other people make more money because they try harder?

Harvard sociologist Jonathan J.B. Mijs found that the worse inequality is in their society, the more likely it is for people to believe in this idea. He explains in his 2021 publication:

“The more unequal a society, the more likely its citizens are to explain success in meritocratic terms, and the less important they deem nonmeritocratic factors such as a person’s family wealth and connections.”

But Lucia Macchia, a postdoctoral research fellow at Harvard Kennedy School, says it’s a bit more complicated than that. Her research with Plagnol and Powdthavee offers more explanation for the income inequality puzzle.

They argue that people living in a society with so much inequality have a higher incentive to move up the income ranks than those living in a place where most people earn similar incomes, because “each step up the income ladder pays out more in terms of happiness.”

“Quite possibly,” Macchia says, “this larger incentive leads people to ignore or rationalize the negative consequences of income inequality at the collective level.”

Macchia and her colleagues examined national data collected over a six-year period covering 160,000 people across 24 countries. This data was sourced from the Gallup World Poll, and from it they found that individuals who earned more income ranked higher in terms of life satisfaction.

But they also found that increasing a person’s income only improved their life satisfaction if their ranked position also improved. This meant that people were only happier with higher incomes if they also started making more money than others.

They concluded that “the more unequal the society, the more moving up the income ladder contributed to someone’s overall well-being.” And as income inequality in a society rises, “the happiness that can be gained from moving up the income distribution increases with it.”

But in which places around the world can we expect to find inequality to be worse? One metric, devised by Italian statistician Corrado Gini in 1912, attempts to rank societies in terms of income inequality.

Gini Index

In an ideal and impossible society, every person earns the same money as everyone else. The Gini index, or Gini coefficient, is a measure of a country’s degree of inequality. This number is zero when wealth is equally distributed in absolute terms, and this number is one (1.0) when one person keeps all the riches to himself.

While this metric is a valuable tool to analyze income distribution within a country or region, Adam Hayes in an Investopedia article warns that it “should not be mistaken for an absolute measurement of income or wealth.”

Using the Gini index as a measure of inequality, South Africa is dead last with a 0.63, while most European countries are the ones nearest zero with Slovenia, Belarus, Denmark, and Finland each with a Gini coefficient below 0.28.

The Gini index is useful for the following reasons:

  • It’s a good starting point when measuring income inequality.
  • It’s a measure of inequality by means of a ratio analysis, rather than a variable unrepresentative of most of the population, such as GDP.
  • It’s simple enough to be compared across countries and can be easily interpreted.
  • It can be used to show how the distribution of income has changed within a country over time.
  • It opens the door for dialogue and potential solutions.

That said, the Gini index has its shortcomings:

  • Its accuracy is dependent on reliable GDP and income data.
  • It doesn’t show demographic variations among subgroups within the distribution such as the distribution of incomes among race, age, or social groups.
  • And economies with similar incomes and Gini indices can still have very different income distributions—this is because the Lorenz curves can have different shapes and still yield the same Gini coefficient.

While there might never be a perfect representation of income inequalities across different countries, knowing about the Gini index should be enough to make social unrest more tangible. It puts a number to the social tension experienced by people in your country, especially those from the middle-class.

Minimum wage doesn't stretch far enough for workers in today's economy.

Minimum wage doesn't stretch far enough for workers in today's economy.

Minimum Wage Eroded in Value

The minimum wage has been a government’s attempt to bring everyone up to a certain living standard. It’s even synonymous with "living wage" in many countries, as the hourly or daily payout should be enough to fund an individual’s basic needs.

But come the 21st century, with the influence of unions minimized as industrial jobs in Western countries (where the presence of labor unions is stronger) have mainly moved overseas, the minimum wage has stagnated.

“The wage stagnation of the past 40 years,” say Jay Shambaugh and Ryan Nunn in a 2017 Harvard Business Review article, “is also linked to some developments that may have suppressed productivity growth, which has slowed since 1973, with an exception of a surge from 1995 to 2004.” Shambaugh and Nunn continue:

“Since the global financial crisis, wage growth has continued to be slow. In part, this represents low inflation—real wage growth in recent years has actually surpassed the rates in the 1980s, 1990s, and 2000s, but is still low—and it may also represent the hangover from a severe recession.”

A wider wealth gap only serves to devalue the minimum wage, as high inflation tends to favor the rich who are hardly affected by price increases. Tax on consumption such as VAT only makes income inequality worse, because those earning low income pay a higher amount of VAT relative to their income.

6 Reasons To Be Concerned About the Wealth Gap

To best sum up the issues on income inequality and emerge with a sense of urgency, the following are key reasons to be concerned about worsening inequality:

1. As a member of the middle class, you feel its impact the most.

Like the overstretched rope analogy mentioned above and as Andrew J. Masigan explained in his article, the middle-class will feel the effects of income inequality the most.

Your standard of living will start to degrade and you’ll find it difficult to keep up. Your socioeconomic position becomes ambiguous, as you’re either forced to surrender so the government can support you—or you scramble to look for extra work or more hustles at the expense of your well-being.

2. Better income equality gives better chances to move up the income ladder.

In governments where taxes are tough on inheritance so as to discourage the accumulation of wealth across generations, people experience better equality—not just in wealth distribution, but also in terms of opportunity.

The perception that there’s less inequality is almost just as valuable as it being the true state of things, because citizens have more incentive to try harder knowing there’s a level playing field.

3. Less income inequality eases social tension and provides stability.

There seems to be more social unrest when corporations make record profits and the richest people in the world only grow richer. And meanwhile, wages stay put and the prices of goods and services keep increasing.

It’s no surprise that more call for changes to the status quo, such as movements like "the great resignation" and "quiet quitting" happen, because the social tension only seems to get worse. Less income inequality promotes stability—perhaps these social movements wouldn’t have happened if the middle class thought they were being treated fairly in the first place?

4. Inequality fans the flame of insurgency.

In a country like the Philippines where insurgents pounce on social unrest, and especially when there's a public consensus clamoring for change, inequality strengthens the position of insurgents. These leftists take advantage of any momentary political instability.

And it’s not only the Philippines where the threat of Communism exists—in decades past, the United States has always tried to sweep out any hint of communism in other countries through the CIA. Communist leftists tend to pin the blame on the capitalist system for widening the wealth gap, and they can further advance their agenda if inequality continues to worsen.

5. Equality alleviates pressure to hike minimum wage rates, benefiting both employers and employees.

Hiking minimum wage rates is a constant pressure to employers, because increasing the labor cost across industries affects the prices of everything. The call to keep increasing the minimum wage contributes to high inflation, as every product or service has that labor cost component factored in to its pricing.

There’s a healthy, sustainable pace in increasing minimum wages, and businesses and governments know this. If you ask people if they want to earn more money, the answer will always be yes—so both governments and businesses have to keep their focus on the wealth gap issue.

6. More equality promotes a higher quality of life overall.

Perhaps the main objective of striving for income equality and better parity is to achieve a higher quality of life overall. The minimum wage as an economic tool can only do so much—it has never been adequate in itself to address income inequality.

When policies are in place, and they work so that metrics like the Gini index are near zero while the percentage of people living under the poverty line continue to decrease, then you know you’re on the right track.

The Gini index will never be zero, but we can all help to make it close to zero as possible. We can all do our part by spreading awareness about income inequality. It’s a social issue that affects all income classes—it makes the rich grow indifferent; it makes the poor so relatively below any acceptable living standards, and it makes those in the middle fight for change.

For deeper understanding on the income inequality issue, I highly recommend watching the video from TED-Ed, "Is inequality inevitable?" on their YouTube channel.

Further Reading

Thanks to freely available resources online, I became more aware of the income inequality issue. You, too, can help spread the word especially after making the most out of these useful references:

This content reflects the personal opinions of the author. It is accurate and true to the best of the author’s knowledge and should not be substituted for impartial fact or advice in legal, political, or personal matters.

© 2022 Greg de la Cruz