Is it a problem that income inequality is increasing?

Income inequality has seem to become a subject of concern recently, primarily because it has been increasing steadily over the past few decades.  Is increasing inequality a moral issue?

The only way that I can understand income inequality as a moral problem is through its effect of welfare. If it turned out that people lived equally good lives no matter how much money they had, it wouldn’t matter whether some people made a lot more money than others.

I see two ways that income inequality could matter to welfare. First, income inequality could translate directly into welfare inequality, and hence the problem with income inequality could be understood as a problem of unfairness.

Second, income inequality could translate into inefficiency. If less well-off people would stand to gain much more from a certain amount of wealth than more well-off people, the existence of inequality would imply that we are collectively worse off than we might otherwise be. This might be true even if there is no notable difference in welfare between the rich and the poor.

I think that income inequality is a serious issue. However, both of these ways of making sense of the significance of inequality significant take some of the significance out of the fact that income inequality has been increasing. The reason is that while income inequality may be increasing, it doesn’t follow that either welfare inequality or welfare inefficiency has been increasing.

Income has a tenuous connection with welfare. First, income has a decreasing impact on welfare. The more money one makes, the less each additional dollar matters.  The difference between $10,000 and $20,000 a year is greater than the difference between $1,000,000 and $10,000,000. Thus, if increasing income inequality coincides with an overall increase in wealth, the decreasing marginal value of money will dampen the effect on welfare.

Suppose that at time 1, a society consist of one population that makes 10,000 and one population n that makes 40,000 and at time 2, the society consists of one (equally sized) population that makes $1,000,000 and one that makes $40,000,000. Income inequality will have greatly increased, but welfare equality would have gone down. If everyone were getting wealthier, increasing inequality might be undermined by a decreasing marginal value of money.

Even if median incomes hold constant as inequality increases, the rate at which income impacts welfare may change. A hundred and twenty years ago, in order to listen to music, one would need to find a live show. Fifty years ago, one would have to buy many records to have access to greater variety. Today, one can get unlimited free music through services like Spotify or youtube. The sheer amount of knowledge and culture at our fingertips now greatly exceeds any time in the past.

Today, those who are poor or middle class can still afford things that would be unimaginable luxuries to people in the past. Computers, cell phones, microwaves, televisions, dishwashers, washing machines, etc. are common across all socioeconomic groups, and continue to improve every year.

It is hard to know how income inequality translates into welfare inequality today, as compared to the past. We can do more with our money, and things that were nonexistent or exceedingly expensive in the past are now cheap and readily available. The marginal value of money plausibly decreases a lot faster today than it did in the past.