Inequality is a topic that has divided economists for as long as economics has been studied, and probably even longer. One of the central questions that economists are constantly trying to answer is to whom the fundamentally limited resources of an economy should be provided. While there are no correct answers to this question, some answers are obviously wrong. Most people would agree that the wealth of an economy should not be hoarded by authoritarian rulers who don’t answer in any way to their people. On the opposite end of this argument, the accumulation of resources is one of the primary motivators for people to work harder, innovate, and prescribe capital efficiently. These actions by economic participants add value to the entire economic system, but they are also difficult, risky, time-consuming, and not very rewarding. Not rewarding these actions with a larger share of resources will mean that they are not done, which will result in an economic system that is worse off overall for everybody.
There are lots of ways that economists measure inequality. The most popular is something called the Gini coefficient. The Gini coefficient works by plotting out something called a Lorenz curve. The Lorenz curve, named after the economist Max Otto Lorenz, is made by breaking the economy down into percentiles and then graphing out the cumulative share of resources that each percentile owns in that economy. If we are looking at income inequality, the lowest one percent of earners might only make a tenth of a percent of the total national income in the economy. The next one percent will make 0.2 of a percent, which adds together to make a running total of 0.3 percent, and so on until we get to the top one percent of earners, which might make 10 of the total national income in an economy. If we run a line through each of these percentiles, we get the Lorenz curve for that particular economy. We can then imagine an economy that is perfectly fair. The lowest one percent of earners makes one percent of the income. The lowest two percent also makes one percent. The top one percent of earners, if you can call them that, still only makes one percent of the income. If we follow the cumulative total of these data points, we make a 45-degree line. No economy in the real world is ever going to look like this because there will always be some level of income inequality. But if we lay out the Lorenz curve from that real economy over this perfectly equal hypothetical, the graph will have two areas on it: the area above the Lorenz curve and the area below the Lorenz curve. The Gini coefficient is simply calculated by looking at the percentage of the area that is above the Lorenz curve. In the real world, all economies are going to exist somewhere between these two extremes, but the most equal country in the world would simply be the one with the lowest Gini coefficient, and we know exactly which one that is: Iceland, with an income Gini coefficient of 0.369 according to the 2022 OECD report.
Iceland’s Economic Advantages: Geothermal Energy, Fishing, and Tourism
Iceland’s low population helps it in other ways. Iceland is a country rich in geothermal energy, which means electricity there is extremely cheap, making energy-intensive industries like aluminum smelting and even cryptocurrency mining very globally competitive. The country also has a surprisingly strong financial services sector, which is part of the reason that it got into so much trouble in the GFC. It’s also a major commercial fishing hub, and I know fishing doesn’t sound that glamorous or profitable, but Icelandic fishing is done on huge boats employing state-of-the-art equipment to make billions of dollars every year. On top of that, the country is beautiful, which is why, outside of global pandemics, the country had more tourists arriving every year than it had citizens.
So, improving income inequality alone is not enough to address the issue of wealth inequality, and this is where government policies like inheritance taxes and property taxes come into play. These policies are designed to redistribute wealth from the top earners to the bottom earners in the economy.
Another important factor to consider is the gender wage gap. Even in the most equal countries, women are still paid less than men for the same work, which contributes to income inequality. Policies that address this issue, such as equal pay laws and increasing access to education and training for women, can help to close the gender wage gap and reduce income inequality.
It’s worth noting that income inequality is not the only measure of economic well-being, and there are other factors that are just as important, if not more so. For example, a country with low income inequality may still have issues with poverty, lack of access to healthcare and education, and high levels of unemployment.
Additionally, high levels of income inequality can lead to social and political instability, which can be detrimental to the economy in the long run. Therefore, it’s important to focus on creating policies that promote economic growth and improve the well-being of all citizens, rather than just addressing income inequality.
Economic Equality in Europe: Examining Slovakia’s Success and the Nordic Model
While Slovakia‘s achievement of the lowest Genie coefficient after taxes and transfers is commendable, it is also important to note that it is still not a perfect country in terms of economic equality. The country’s poverty rate is relatively high, and it still faces challenges in terms of income mobility and discrimination. Nevertheless, Slovakia’s success in reducing income inequality shows that it is possible for countries to take steps to address this issue.
Another country that is often cited as an example of a more equal society is Denmark. Denmark has a Genie coefficient of 0.252, which is relatively low compared to many other countries. Denmark achieves this through a combination of high taxes, a robust welfare state, and a strong labor market. The country’s welfare state provides a safety net for its citizens, and its labor market is characterized by strong labor protections and high levels of unionization.
The Danish model is often seen as a successful example of how a country can achieve both economic equality and economic growth. However, it is worth noting that the Danish economy is not without its challenges. Denmark has struggled with low economic growth in recent years, and its aging population poses significant challenges for the country’s future economic prospects.
In addition to Denmark, there are a number of other countries that are often cited as examples of more equal societies. These include Sweden, Finland, Norway, and the Netherlands. These countries all have relatively low levels of income inequality, and they achieve this through a combination of high taxes, strong welfare states, and policies that promote social mobility.
In conclusion, income inequality is a complex issue that economists have been grappling with for centuries. While there is no one-size-fits-all solution to this problem, policies that promote access to education, healthcare, and other basic necessities, as well as policies that redistribute wealth and address the gender wage gap, can help to reduce income inequality and promote economic well-being. It’s also important to remember that income inequality is not the only measure of economic success, and policies that promote overall economic growth and well-being should be prioritized.