How does all of our preceding discussion play out when it comes to the income distribution? That is, when we examine the incomes of all individuals or households in the economy, how equally or unequally are they distributed?
The study of inequality is a critical part of economic analysis. It recognizes that income differences that are in some sense ’too large’ are not good for society. Inordinately large differences can reflect poverty and foster social exclusion and crime. Economic growth that is concentrated in the hands of the few can increase social tensions, and these can have economic as well as social or psychological costs. Crime is one reflection of the divide between ‘haves’ and ‘have-nots’. It is economically costly; but so too is child poverty. Impoverished children rarely achieve their social or economic potential and this is a loss to the individual and the economy at large.
In this section we will first describe a subset of the basic statistical tools that economists use to measure inequality. Second, we will examine how income inequality has evolved in recent decades. We shall see that, while the picture is complex, market income inequality has indeed increased in Canada. Third, we shall investigate some of the proposed reasons for the observed increase in inequality and examine if the government is capable of doing much about it.
It is to be emphasized that income inequality is just one proximate measure of the distribution of wellbeing. The extent of poverty is another such measure. Income is not synonymous with happiness but, that being said, income inequality can be computed reliably, and it provides a good measure of households’ control over economic resources.
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