Rising Inequality - why does it matter?

Income inequality has become an important topic of discussion since the economist Thomas Piketty wrote a book titled Capital in the 21st Century. One common measure of inequality is the Gini index, a number between 0 and 1 (or 0 and 100 if it is multiplied by 100), and the closer the inequality level is to 1 (or 100), the higher is the level of inequality. The US does have a high level of inequality, and it is one of the highest in the world. 

How can we visualize inequality in a simple way? Let us suppose there are two countries, A and B, and each country has 2 individuals. In country A, the incomes of the two individuals are 80 and 120 respectively; in country B, it is 40 and 160. In both countries, average income is 100, yet incomes are more dispersed in country B than in country A, so inequality is higher in country B when compared to that of country A. 

Although there is a general belief that in a meritocratic society, there will be some inequality, a high level of inequality can have some negative social consequences. Higher inequality can lead to more social tensions, and insecure property rights. It can also increase the incidence of violent crimes, high rates of mortality, and a deterioration of social trust. All these can reduce the future growth prospects of a nation.

Policymakers need to work into ways to reducing inequality. Increasing access to quality education and empowering trade unions can help. Strong social support programs can help the poor and middle-class recover from a negative shock. A progressive tax system can help to limit the excessive rise in inequality. These steps can help to reduce social ills caused by inequality and promote future growth and sustainability.