Economic Inequality: What It Is and How It Impacts You

Susannah Snider

It's nearly impossible to read the news these days without running across mentions of economic inequality.

In recent months, politicians have debated the merits of raising marginal tax rates on the wealthy, a move proponents say could reduce economic inequalities. Likewise, economic inequality takes center stage when columnists discuss the extreme riches of some of today's business owners, like Jeff Bezos, who could purchase every home in Austin, Texas, according to real estate brokerage Redfin. The concept of economic inequality was even discussed during the recent college admissions scandal in which celebrities and other wealthy parents allegedly paid bribes to secure college acceptance letters for their children.

So what is economic inequality, and how does it impact you? Here's what to know about this important social and financial concept.

[Read: Fight Back: How to Combat Racial Wealth Inequality]

What Is Economic Inequality?

Economic inequality is a broad term that encapsulates the gap between the income and wealth amassed by different groups in a society. Americans reference it when questioning why CEOs earn so much more than their employees or how historical and current policies have barred families of color from accumulating wealth. "Economic inequality is the more generic name and within that you could talk about income inequality and wealth inequality," says Jim Freeland, professor of business administration at Darden School of Business at the University of Virginia.

Understanding economic inequality can be complex, Freeland says. "It's not, by itself, bad," he says. "A lot of people would say, when you see (economic inequality), it's a measure that capitalism is working." But, he adds, "It's a question of: How unequal should it be? A lot of people are concerned we've gone beyond where it should be."

Indeed, wealth and income inequality have increased over the previous half-century. According to the Urban Institute, in 1963, a family in the 90th wealth percentile had about six times the wealth owned by the typical American family. This gap was relatively stable until about 1983, when it quickly widened. By 2016, a family at the 90th percentile had almost $1.2 million in wealth, more than 12 times the amount owned by the typical family.

Similarly, income inequality has risen over the past 50 years, according to the Urban Institute. The income for families near the top of the income spectrum increased by about 90 percent from 1963 to 2016. Meanwhile, the income of families at the bottom increased less than 10 percent.

While income inequality is worth considering, wealth inequality is a more revealing and comprehensive metric to understand, says Signe-Mary McKernan, co-director of the Opportunity and Ownership initiative and an economist at the Urban Institute. Income can have a powerful impact on a person's financial health and status, but the passing down of wealth through generations is a more powerful measure of opportunity and prosperity. "Wealth is important because it's where economic opportunity lies," McKernan says.

[See: 10 Tips for Couples and Young Families to Build Wealth.]

How Does Economic Inequality Impact You?

You may not be thinking about the wealth gap when buying your first home or applying for a credit card, but these economic structures have real-world impacts on your daily life.

"There's a strong correlation between economic inequality and opportunity inequality," Freeland says. An economic imbalance impacts people's abilities to climb the wealth ladder and to get ahead by working hard, he says. It can lead to geographic segregation, gaps in educational attainment and cycles of poverty. "If you can't move, it really makes you feel kind of helpless and you give up hope," he says.

Economic inequality can leave families financially vulnerable, unable to weather small financial setbacks or begin to build wealth. It can put families in financial jeopardy when a crisis such as a job loss arises, Freeland says. On a political level, he says, it can threaten democracy as a small group of elite amass political influence and control.


[Read: Boycotts, Petitions and Campaigns: How Consumers Can Flex Their Financial Power]

How Can I Fight Back Against Economic Inequality?

It isn't easy, but there are individual and community-focused moves Americans can make to battle economic inequality in their lives and in their localities. "I think the thing that helps people do that is to reconcile that, yes, what we do personally matters, and we are within a larger construct," says Saundra Davis, a financial coach and financial behavior specialist at Sage Financial Solutions in San Francisco.

On the personal level, families at all income levels can take steps to shore up their financial stability and ability to survive financial setbacks, including taking advantage of employer-sponsored or public savings programs and safety nets.

Urban Institute's McKernan suggests funneling money into automatic savings vehicles, such as employee retirement accounts, IRAs or via automatic transfers from a checking to a savings account. "Low-income families with savings are more financially resilient than middle-income families without savings," she says.

Prioritizing access to health insurance, either through an employer or a government program, is another key way to avoid medical debt, which can be crippling for many families. While economic inequality is a broad topic, it can be helpful to tackle it head-on in your financial life. "Even if you are poor or low-income, research has shown you can build wealth," McKernan says. "It's not easy, but it's possible."

To combat economic inequality from a community-wide perspective, consider supporting policy ideas that tackle wealth inequality. Policies that improve schools, provide parenting resources and desegregate housing can combat economic inequality, Freeland says. Join programs that improve mobility and help people in need, such as tutoring disadvantaged students or coaching a community sports team. Business owners can close economic gaps when they offer support to their employees, such as paid sick leave, child care resources and paid time off, Freeland says.

McKernan points to recent policies in states such as New York and Oregon, where officials are working to launch automatic retirement plans for workers who don't have access to employer-sponsored 401(k)s. Another policy suggestion that addresses economic inequality: opportunity bonds. One proposal would give newborns a $1,000 savings account at birth, which could accrue additional deposits and interest until that child turns 18.

There may be other kinds of programs specific to your region that aim to close the wealth and income gap and limit economic inequality. Select what coincides with your values and the needs of your community. When it comes to solving economic inequality, "this is a complicated and difficult problem, so there's no one solution," Freeland says. "A whole bunch of people need to do a whole bunch of different things."