Date: June 15th, 2026, Parth Dharmadhikari
In this blog, we will take a deep dive into causes of economic inequality. We will also study effects of inequality, both positive and negative. In next blog, we will look at several efforts and their impact on removing economic inequality.
Main Causes of Economic Inequality
- The level of economic development: Economies throughout the world are at different stages of development. Overtime, the economy of a country goes through various stages and researchers studied correlation between economic growth and inequality. Kuznets documented that the relationship between the two variables relies on the level of economic development of a country. Economic inequality tends to grow with economic development during early stages of development. During mature stage, economic inequality tends to reduce with economic growth. [1]
- Wage levels: As shown in Figure 1, type of work impacts the wage levels. Highly skilled work as a medical professional, attracts high wages, but employ a very few percentage of people (1200 pediatric surgeons or 18,000 cardiologists), however low skilled occupation like fast food workers have low annual wages but employ large number of people. (3.8 million fast food workers). [2]
- Education: Education affects wage levels. High paying jobs normally requires specialized education and training. US median income for households without college degree was $58410, while with bachelor’s or higher degree holders earned average of $132,700. Additionally, earnings of individuals with high school degree but no college increased by 3.2%, while earnings of those with a bachelor’s degree or more increased by 6.3% in last twenty years. [3]
- The level of technological development: New technology requires skilled workforce and training, raises wage levels for those who learn new technology. Growth in middle class family income was primarily driven by growing tech sector during last two decades. However, during the growth phase of tech sector, only people who adapted to new technology benefited from this growth, leading to increased inequality. As the economy and technology move to mature stage, income inequality tends to decrease as more labor shifts to new technologies.
- Social-political unrest: Countries with high levels of social-political unrest can result in concentration of power among few, high levels of corruption, lack of government funding for social policies, leading to high inequality.
- The savings rate: Savings are normally functions of income. As income increases, people have excess money available to support needs and save remaining money. In the presence of high income inequality, rich people earn high incomes which help them to save more, because their marginal propensity to save is relatively high.[5]
- Credit markets: In imperfect credit market, where lender and borrowers have limited information, lenders are more likely to have higher interest rates, leading to higher payment and more inequality.
- The political economy: Government plays a crucial role in economy and social development of the country. Government employs policies to reduce economic inequality like progressive taxes, Medicare, and Medicaid programs.
- Gender inequality: Gender pay gap can lead to different wealth accumulation. However, overtime, the gender pay gap has been reducing across several countries.
- Globalization: Because of increasing trade among countries, workers in richer countries face a higher level of competition from those in poorer countries, especially in jobs that do not require a high level of skill. Wages for low-skilled work in richer countries decline as a result.
- Colonialism and the industrial revolution: Industrial revolution and colonialism result in movement of wealth from colonies in Africa, Asia, and Americas to European countries. Over time, this resulted in inequality amongst countries. Recent technological developments in Asia have resulted in outsourcing of work leading to movement of capital, which may help reduce inequality.
Impacts of Economic Inequality
- Impact on Economy: The World Bank says for the average country in the world, an increase of 1% a year in inequality will slow GDP by about 1% over five years. The country may face more frequent recessions and less resilience, because individuals with lower wealth level ends up borrowing money and increasing debt.
- Decrease in Health / quality of life: The impoverished members of society may not have access to adequate health insurance or routine health checks, may not be able to afford quality food and healthy lifestyle, leading to frequent health issues. Many countries have started some form of health insurance or medical assistance.
- Reduced education: Education in today’s world requires significant investment. Although it is one of the best investments, everyone cannot afford expensive college education. Lack of education leads to lower skill levels and low paying jobs, which further aggravates the situation. Public school system and college aids help to reduce this problem, but not everyone can access the premium resources that a few elites can. A one-point increase in the Gini coefficient translates into a 10% decrease in high school graduation rates and a 40% decrease in college graduation. In the 1980s, the gap between the reading and math skills of the wealthiest 10 percent of kids and poorest 10 percent was about 90 points on an 800-point SAT-type scale.2 Three decades later, the gap has grown to 125 points. This widening gap is largely due to differences in how well prepared children are for school before they enter kindergarten or even pre-kindergarten.3 In this era of economic inequality, wealthier parents have far more resources, both in terms of time and money, to better prepare their children to succeed in school and later in life. [6]
- Social dissatisfaction: People with different wealth levels share the same resources, society, and facilities. However, the struggles of low-income families, and significant excess wealth in hands of a few, leads to divide in society, rising social dissatisfaction.
- Threat of social and political unrest: Significant dissatisfaction, if not addressed can lead to possibility of coups, revolutions, violence, or political uncertainty.
- Inhibits growth: High inequality may lead to high poverty levels, poor public health, reduced purchasing power by many people, and more government funding and support. All of this can lead to increased strain on economy.
- Reduced trust: inequality actually decreases trust and increases country risk, autocracy risk [7]
- Political inequality: Elections are expensive and require significant financial support for campaigning. A small wealthy group can influence the political power to gain advantages through legal practices, influencing policies, even corrupt practices.
Benefits
Even though economic inequality has several disadvantages, it also provides certain benefits.
- Economic Growth: Some researchers claim that inequality can lead to economic growth through variety of ways: Lower paid workers tend to develop new skills, attend education to climb in corporate ladder to gain higher pay. If the gap is small, there is less motivation for less wealthy groups. However, if the economic gap becomes too wide, the low earning group may not feel confident to overcome this gap.
- Investment: Wealth growth is attainable through investments. Investment by wealthy or middle class, can provide required capital for new businesses, providing economic boost to the country.
- Entrepreneurship: The disparity can lead to innovation and entrepreneurship, providing significant boost to economy. Entrepreneurs are more likely to take risks as the reward (due to economic gap) is significant. New businesses and technology leads to increased employment and economic growth.
Source:
[1] Manduca, Robert, 2018. “Income Inequality and the Persistence of Racial Economic
[2] US Bureau of labor statistics, https://data.bls.gov/oes/#/area/0000000/2025
[3] Zach Scherer and Michael D. King, Income Gap Between Householders With College Degrees and Those With High School Degrees but No College Widened Over Last Two Decades, September 09, 2025, https://www.census.gov/library/stories/2025/09/education-and-income.html
[4] May Leung, The Causes of Economic Inequality, Seven Pillar Institute’s series on Inequality, January 22, 2015 https://sevenpillarsinstitute.org/causes-economic-inequality/
[5] Income Inequality, https://inequality.org/facts/income-inequality/
[6] Sean Reardon, Income inequality affects our children’s educational opportunities, September 1, 2014, https://equitablegrowth.org/income-inequality-affects-our-childrens-educational-opportunities/
[7] Drew Keller and Susan Milligan, The broad economic impact of inequality, July 8, 2025, https://www.hbs.edu/bigs/economic-impact-inequality