Impact of Income and

Wealth Inequality
Unit 12 - Lesson 4
Learning outcomes:
● Evaluate the impact of income and wealth inequality on: (AO3)
○ Economic growth
○ Standards of living
○ Social stability
Inequality and Economic Growth
It is becoming increasingly evident to economists that the greater the inequality in
the distribution of income the more it negatively impacts economic growth.
A report(s) by the International Monetary Fund (IMF) concluded that:
● Lower inequality results in more sustainable economic growth.
● Policies to redistribute income to the lower quintiles do not negatively impact
economic growth.
○ In fact it is beneficial for economic growth:
■ If the income of the top 20% increases, then economic growth
slows or declines.
■ If the income of the bottom 20% increases, this is associated with
increasing economic growth.
● Also, there was more likelihood that periods of economic growth would end in
countries where there is a more unequal distribution of income.
Lower Economic Growth and Inequality
Reason why inequality results in lower economic
growth:

● The greater the inequality reduces the ability

of those households from investing in human
and physical capital.
○ Results in lower spending on education
○ Lower quality schools making it difficult
for them to continue university education.
○ The inability to invest in human capital
results in lower productivity (output per
worker) which leads to lower economic
growth.
Lower Economic Growth and Inequality
● Countries with high inequality in income and wealth have higher levels of
inequality in opportunities for education.
○ It is highly likely that children of low income families will also have low
incomes due to the lack of opportunity for education and wealth.
■ UNICEF and Tanzania education link
● High income earners spend a smaller fraction of their incomes than middle
and lower income households resulting in slower economic growth and
development - leakage out of the circular flow.
● Concentration of wealth in the hands of a few may exert significant political
influence.
○ May use this increased influence to impact government policies that
benefit their interests and possibly conflict with the interest of society as
a whole.
Lower Economic Growth and Inequality
● Increased political control by the wealthy may also lead to a decrease in the
government provision of merit goods.
○ This decrease in government provision of merit goods negatively
impacts the lower income households.
■ For example, the provision of merit goods such as quality education
leads to increased earning potential for lower income individuals
leading to economic growth through improved efficiency from
human capital.
● Improvements in the distribution of income leads to an increase in demand
for locally produced goods leading to increases domestic production resulting
increases in local employment and investment. SOUTH KOREA UBI
○ With high inequalities those potential benefits are not realized.
○ This is especially true for developing countries.
Lower Economic Growth and Inequality
● High income inequality makes it difficult for the poor to obtain credit due to
low or no wealth for collateral.
○ This results in fewer investments for poorer individuals negatively
impacting economic growth and development.
■ This also reduces the ability of the poor to invest in education and
healthcare thus not positively impacting the human capital.
● Organizations like KIVA work to help make credit available.
Check it out for stories and examples!
● More equitable distribution of income leads to political stability.
○ If there exists a high level of unequal distribution of income it can lead to
political instability, social issues resulting in lower economic growth.
Low Living Standards
Higher income inequality will most likely result in lower living standards.

Low living standards are associated with psychological stresses, substance

abuse, poor nutrition and low levels of health.

● Lack of access to education and health care

○ The inability to access education and health care results in lower levels
of human capital.
■ This leads to lower productivity and incomes possibly resulting in
households being stuck in the poverty cycle.
● Higher levels of infant and maternal mortality
○ The consequence of inability to access healthcare.
Low Living Standards
● Inability to access healthcare results in higher levels of treatable
diseases.
● Social problems can also be a consequence of low standards of living.
○ Higher crime rates
○ Family issues
○ Homelessness
● Lower standards of living are also linked to individuals not being able to
realize one’s full potential.
○ The inability of an individual to reach their full potential is an inefficient
use of human capital which may result in lower economic growth.