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What Factors Affect Economic Inequality?

By Osmand Vitez
Updated May 16, 2024
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Economic inequality typically describes conditions that separate individuals in terms of wealth or income. All nations and economic systems have some type of inequality. A few of the biggest factors that affect this situation include demographic, political, and macroeconomic factors. Not always a bad thing, economic inequality helps create an environment where individuals desire to reach the top rung of the economic ladder. The presence of inequality factors and how much they suppress an economy can dictate the environment by which individuals succeed or fail.

Demographic factors are one of the most common in terms of inequality. The factors may be sex, age, education, race, or any other type of demographic in a region. Inequality can exist when either one or more of these factors are present. Essentially, demographic factors play a role in terms of labor in the overall economic environment. For example, when a working class comprises a large part of a particular group, there may be a lower probability for success in terms of economic growth.

Political factors also play a large role in economic inequality. Command or planned economies may restrict the growth of individuals, creating inequality. This occurs when one group is more favored than another, allowing this group to succeed better economically. Market economies can have this problem as well, though the freer the market can help restrict government intervention and the possibility for economic inequality. Another problem here is that a particular political group may pander more to individuals in a specific economic category, allowing inequality to foster.

Macroeconomics represents the larger policies and constructs a nation implements to help grow its economy. Poor fiscal or monetary policy, however, can create economic inequality due to misguided intent. For example, allowing increases to the money supply through loose central banking can create rampant inflation, which eats away at the purchasing power of a nation’s currency. Lower-income individuals can experience more problems with inflation as they have fewer dollars by which to create a standard of living. Forced inequality can be a result from this and other macroeconomic policy problems.

Again, economic inequality is not always a bad thing. It can create a desire to improve one’s life and move from one economic class to another. On the other hand, it may also drive individuals into the political arena, where they become involved in voting and changing poor macroeconomics policies that restrict economic freedom.

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Discussion Comments

By burcinc — On Feb 18, 2012

@simrin-- We're not perfect about economic equality but we're still way better than many countries.

There are some countries where the number of families which hold majority of the wealth in the country can be counted on two hands. These are countries where a single family or party has been ruling for a long time, where corruption runs high and where social programs are few and far in between.

Discrimination and poverty are widespread. The elite groups live in luxury whereas the common folk are literally starving or barely getting by.

By SteamLouis — On Feb 17, 2012

@fify-- I'm not sure if these statistics about equality are exactly correct. I think there is a general understanding that economic equality is very high in the US. And it's true that people can move between social and economic classes.

But there is also a wealth distribution statistic which says that 20% of Americans hold 85% of the wealth in America. If this is correct, it doesn't sound like economic equality is that high to me.

I'm not saying that 100% of Americans should have 100% of wealth. That's not possible, in any circumstance. But for being one of the most developed and wealthy countries in the world and where religious and ethnic equality runs high, I think that we need to aim for more economic equality.

By fify — On Feb 17, 2012

I do agree that some economic inequality creates ambition in people to move up to a better economic class and live a better quality life. But not all systems and countries let people do that.

I think this is one of the measurements that researchers use when they're looking at economic equality or inequality in a country. They look at whether people can move up from one social economic class to another. If they can't do this at all, or they can't do this easily, then, it means that there is high economic inequality there.

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