Question

1. How would you define income inequality and how is it measured?

2. What has happened to income inequality in the United States since the end of the Second World War in 1945 and what evidence can you provide to support your answer?

3. What are the reasons for the changes in income inequality since 1945.

Answer 1

1) Income inequality is the disparity among various entities or participants in an economy . It is the uneven or unequal distribution of income over the economy among various individuals . The most popular measure of income inequality is Gini coefficient derived from Lorenz Curve . It gives us the relation between percentage of population and income distribution among them . There are other measures too , like Hoover index ,coefficient of variation etc .

2) After the second World War ended in 1945 the income inequality in US underwent dramatic changes . Firstly , just after the War inequality started to reduce in US . It was known as the Great Compression . Income rose for prople who were in the bottom 90% of income distribution . If we see the past data we will find that at that time high marginal tax rates prevailed . So the wealth of the top 1% was kept in check or not allowed to rise . Hence the disparity fell .

But after that in the past 35 years , reverse thing happened . Marginal tax rates fell , income rose for top 1% . Also due to globalization , breaking of labour unions , competitive economies , incomes of bottom 90% did not rise much . The gains from economic growth did not get evenly distributed in US as can be seen from the previous data .

3) In the first phase during Great Compression , the postwar boom led to high demand for labourers , With the combination high marginal tax rates for top earners the inequality fell .

In the second phase when marginal tax rates fell sharply , the income of the executive class rose but the income of labourer class remained stagnant . This again widened the gaps in income distribution .