Costs of Income Inequality
(billions 2012 $)

Costs of Income Inequality

What are we measuring?

The cost of income inequality is based on the economic phenomena of declining marginal utility of income, which essentially means that people on the high end of the income spectrum get less usefulness out of an increase in earnings. For instance, a person earning $15,000 a year getting a $1000 dollar raise would mean a great deal to their quality of life, allowing them to purchase additional groceries and perhaps health insurance. Whereas a $1000 dollar raise for someone earning $200,000 a year would mean very little in terms of their everyday life and consequently have very little impact on their experienced well-being.

Trends 2012-2019

The cost of income inequality increased from 2012 to 2019 by over 19%. 2018 was the high at $38 billion but decreased by 10% from that level in 2019.

Calculation

The cost of income inequality is calculated using equations from Layard et al. 2008 of the marginal utility of income. The marginal utility of additional income declines as total household income increases, beginning at household incomes greater than 79,000 per year and peaking at the top income bracket considered, $1.2 million being equivalent to $277,000 when adjusted for utility. Please refer to Layard et al. 2008 for detailed methodology.

Layard, R., Nickell, S., Mayraz, G. 2008. The marginal utility of income. Journal of Public Economics 92 (2008) 1846–1857. http://darp.lse.ac.uk/papersdb/Layard_etal_(JPubEcon08).pdf ​