Introduction to Income Inequality

Income inequality means that the total household disposable income in an economy is not shared equally among households.

Consider an imaginary town. Sarah owns a small bakery, and Patrick is a senior software engineer. Their incomes differ because of differences in their skills, hours worked, how the market values the goods and services they help produce, and whether they earn income from assets like stocks.

Now shift focus from individual households to the town as a whole. Economists study inequality by looking at how total household disposable income is shared across all households.

A common approach is to divide households into five equal-sized groups, known as income quintiles.

Suppose there are 100 households in the town.

These households are arranged from the lowest to the highest based on yearly disposable income.

These ordered households are grouped into quintiles. Suppose the lowest quintile earns only five percent of the total household disposable income, while the highest quintile earns fifty percent. This shows that income is not distributed equally.

This simple example helps us see one way to measure inequality.