Economic inequality is the unequal distribution of income (earnings) or wealth (net worth or savings) within a society. Inequality can erode social cohesion and lead to political polarization. Excessive inequality may also reduce economic growth. The IMF helps countries address inequality and promotes policies that can help narrow the gap.
A widening of the income gap can be driven by a number of factors including tax policy that favors corporations and wealthy individuals and low labour-market efficiency due to high labour costs or the lack of skills. In addition, globalization has contributed to widening the income gap by affecting wages and jobs in tradable sectors such as manufacturing and services that are increasingly delivered across borders.
The causes of inequality vary, and addressing it requires a broad range of policies such as eliminating corporate tax cuts, strengthening unions, and raising the minimum wage. In addition, many economists argue that redistributive taxes, which raise the income of lower-income households while lowering the tax rates of the rich, are essential for tackling inequality.
The widening of the income gap can contribute to a loss of economic mobility, with people stuck in lower-wage jobs for longer periods and having fewer opportunities to move up the ladder. This can be especially harmful for young people, women, and the elderly. Some of the reasons for this include a “keeping up with the Joneses” phenomenon in which people spend more to have a better product than their neighbour, and a lack of education that prevents them from learning new skills or gaining access to information.