An unequal society creates economic inefficiencies, as only a subset of the population is afforded the opportunity to do highly productive work. If people do not have equal opportunity to attain skills and to pursue professional advancement, firms are left with a limited talent pool when looking to fill high-skill positions. This inefficiency lowers overall economic output, making us all poorer.¹ Inequality also suppresses many other social and economic benefits – from stifling intergenerational mobility to hampering innovation.²

By some measures, income inequality in the US has risen substantially over the past half-century. For example, in their influential 2018 paper on US income inequality, economists Thomas Piketty, Emmanuel Saez and Gabriel Zucman found that the share of income going to the country’s top 1% of earners nearly doubled from 8% in 1970 to more than 15% in 2019. On the other hand, the wealth gap in America, while sizable, has not changed much over the past several decades, according to some measurements, largely due to Social Security benefits accrued to the lower and middle class.³ As of March 2024, 10% of US households owned two-thirds of the country’s household wealth, while the bottom half owned just 2.5% of US wealth, according to the Federal Reserve Bank of St. Louis.⁴ The US has some of the highest levels of income inequality among Organization for Economic Cooperation and Development member countries after accounting for government transfers,⁵ and while some economists argue that this low level of income equality hinders optimal economic performance, others say that allowing for bigger incomes at the distribution’s high end incentivizes productivity and innovation and thereby increases the size of the economic pie.

But first, what do we mean when we talk about “inequality”? The one-word term would seem to have a straightforward definition, one relating the quality of being unequal. Yet, there are numerous ways to measure inequality, each method with its relative strengths and weaknesses. Indeed, the topic of inequality incites contentious debate, and even expert economists who have spent decades studying the subject do not always agree on basic elements of its measurement.

To assess inequality for policymaking, we must first define it. Which form of inequality do we wish to address? Are we chiefly interested in wealth inequality? Or unequal health outcomes? What about disparities in intergenerational mobility? Or perhaps differences in job stability? And unequal levels of opportunity – can that even be measured?

We must be clear about what we mean.

Wealth and Income Inequality

Commonly, “inequality” means unequal wealth or income, which are often used interchangeably despite being distinct measures. These forms of inequality are the most studied and discussed, particularly by economists, because they are the most easily quantifiable and because material wealth has been shown to matter for well-being. Yet while wealth and income are quantifiable in theory, they are challenging to measure in practice. A key consideration complicating income measurement is how to deal with government interventions – namely taxation and transfers.

Many economists factor taxes and government benefits into their calculations of household income, contending that this “net” basis method produces a meaningful measure of an individual’s income because there is no sense in counting federal taxes withheld from someone’s paycheck if that money never hits their bank account. Using the same logic, one could argue that government programs, such as Medicare or Medicaid, should be given monetary values and assigned as income. Precisely how to calculate the monetary value of these benefits is fraught with controversy because while health insurance may boost a household’s well-being, it is not fungible income, like money, or near-cash assistance, like Supplemental Nutrition Assistance Program benefits. Receiving zero- or low-cost health insurance would not directly help a poor family pay for other basic needs, such as food and shelter.

Employer-sponsored nonwage benefits are another important constituent of compensation, and now account for more than 30% of total compensation in the US.⁶ Including health benefits has considerable weight on compensation inequality estimates, as healthcare is a significant and growing expense for Americans. But a given employee may not use available employer-sponsored health insurance. In fact, only 75% of workers who had access to employer-sponsored health insurance in 2023 chose to participate.⁷ These complex considerations demonstrate the value of assessing income – or, more broadly, compensation – on a “cash” basis as well, using a method that does not account for government aid and nonwage firm compensation because these benefits are not perfect substitutes for cash. 

Life, Health and Happiness: Other Kinds of Inequality

Economists tend to assign monetary values to pretty much everything because this allows for measurable comparisons and because money matters for well-being. Just as in-kind benefits are not perfect substitutes for money, assigning cash values to real-world experiences can be problematic. Not every quality of life yields nicely to quantitative measurement, and there are some things money cannot buy.

It is not easy to put a dollar amount on health and longevity, for example, and there’s robust literature observing significant disparities in health outcomes and lifespan between high-income and low-income households.⁸ How much is good health and a long life worth? Low-wage workers, for instance, have less job stability and flexibility than do high-wage workers. This means that low-wage workers are more likely to lose jobs in a downturn and are more likely to have unpredictable work hours imposed upon them. These factors exacerbate income inequality, and they also burden low-wage workers with disproportionate levels of psychological distress.⁹ What is the price tag on peace of mind?

Inequality Is Bad for the Economy and for Individuals

And what about equity? Inequality in opportunity is patently unfair, imposing disadvantages on individuals from birth. A child born into a poor household, for instance, may not see many examples of neighbors and family members in high-paying professional roles, and she may not have the financial or social capital of wealthier peers. These differences can affect future success. Inequality of opportunity is particularly difficult to measure, yet it is especially deterministic and historically challenging to mitigate.¹⁰

We observe this sort of inequity in data on innovation. Children of wealthy parents in the top 1% of America’s income distribution go on to create patents at a rate 10 times that of children born into households earning below the median. This discrepancy narrows but persists when we control for ability, using third grade math test scores as a proxy for aptitude. If we were to eliminate the unequal outcomes in this one arena and children from low-income families were to go on and patent their ideas at the same rate as children from high-income families do, America’s innovation rate would increase many times over.¹¹

Inequality’s Intersections

Inequality is so expansive that it touches everything. Nearly every policy decision has at least some inequality implications, and policies intended to reduce income inequality often have mixed results, as taxation and transfers have inherent limitations. Research has shown, for instance, that forcing employers to raise wages may disadvantage small businesses and increase disparities between firms, leading to worse household inequality at the national level.¹² Meanwhile, financial globalization has made wealth inequality increasingly difficult to measure.¹³

With 170 million workers spread unevenly across 50 states, the sheer size and diversity of the US presents a distinct challenge to policymakers trying to reduce inequality. The subject’s extreme complexity means that inequality does not have one true measure. Certainly, policy that opens or widens avenues of opportunity for underserved populations is a keen starting point for increasing equality and improving equity, yet a single approach will not suffice. Researchers and policymakers must consider multiple dimensions of inequality in their measurement and prescriptions. From cradle to grave, inequality intersects with every aspect of life and is reflected in an individual’s every economic interaction. As we continue to discuss and formulate economic policy, we will incorporate this expansive notion of inequality and its profound effects.

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