Sources and measures of income inequality

Key Questions

  • Answer:

    Income inequality can result from both macroeconomic factors and microeconomic factors but most differences in income relate to differences in productive capacity.


    Starting with macroeconomic factors, differences between high-income nations and low-income nations usually result from differences in what the economies of those nations can produce. Advanced economies tend to produce goods and services that require higher education and skill levels as well as more sophisticated capital investment and technology. Recent trends in globalization have made technology easier to relocate anywhere, but some of the patterns in technology development remain.

    Within nations, differences in income also relate closely to differences in productive capacity. Education is a major factor. In the United States, for example, workers with higher levels of educational attainment have higher average lifetime earnings.We cannot rule out discrimination and other arbitrary factors that account for some differences. Even adjusting for education, for example, we still see differences in average earnings for women (lower) vs. men and for people of color (lower) vs. Caucasian people.