6.9 Consequences of Inequitable Income Distribution

Measuring Income Inequality

Economists use the Lorenz curve to visualize income distribution, plotting the cumulative percentage of income against the cumulative percentage of population. Perfect equality is a 45-degree diagonal line. The Gini coefficient quantifies this gap, ranging from 0 (perfect equality) to 1 (perfect inequality) — the farther the Lorenz curve bows below the diagonal, the higher the Gini coefficient.

Causes of Income Inequality

Inequality arises from differences in education, skills, discrimination, inheritance, market power, and luck. Human capital differences mean workers with more education/training earn higher wages. Structural factors like discrimination in hiring or wages, and unequal access to capital and opportunity, also widen gaps between income groups over time.

Consequences & Government Response

Severe inequality can cause social unrest, reduced economic mobility, underinvestment in human capital, and lower aggregate demand since lower-income households spend a higher share of income. Governments respond with progressive taxation, transfer payments (welfare, unemployment benefits), minimum wage laws, and public education to redistribute income and reduce poverty.

Key terms

Lorenz Curve

A graph showing the cumulative percentage of income earned by cumulative percentage of population; used to visualize income distribution.

Gini Coefficient

A numerical measure (0 to 1) of income inequality derived from the Lorenz curve; higher values mean more inequality.

Progressive Tax

A tax system where the tax rate increases as income increases, used to redistribute income and reduce inequality.

Transfer Payments

Government payments (e.g., welfare, unemployment benefits) that redistribute income to lower-income individuals without requiring goods/services in exchange.

Human Capital

The skills, education, and training possessed by workers; differences in human capital are a major source of income inequality.

Try an AP-style question

A Lorenz curve farther from the line of equality shows…

1. perfect equality
2. greater inequality
3. less inequality
4. no income