Income Inequality: The Gap Between Rich and Poor has Widened in Most Nations

While per capita income has continued to rise in most markets over the last five years, this disguises significant disparities between the upper and lower ends of the income spectrum. In fact, the income gap between rich and poor has widened in most nations, which has fuelled the recent protests on New York’s Wall Street as well as in the UK.

A sign of the growing gap between the rich and poor is the increase in the number of high net worth individuals (HNWIs), those having investable assets of US$1 million or more. Globally, their financial wealth increased by almost 10% in 2010, to US$42.7 trillion.

Over the last two decades, the prevailing view among developed market policy makers has been that income inequality is acceptable, provided that the poorest are becoming better-off. However, this has changed, due to growing social problems associated with income disparity. There are many reasons for economic equality including:

  • Changes in employment patterns (growth in demand for high-skilled at the expense of low-skilled labour)
  • Access to education
  • Technological progress
  • Globalisation and removing of trade barriers
  • Urbanisation
  • Cultural factors and discrimination
  • Level of government intervention, e.g. taxes and welfare polices
  • Economic growth
  • Property prices
  • Sociological/demographic factors, e.g. more single parents and ageing populations
  • Disproportionate wage increase for executives

Country Analysis via the Gini Coefficient

A standard measure of income inequality is the Gini coefficient, a value between 0 and 1 which is calculated from the percentage of households in each income decile. The closer the value is to 1, the more unequal the distribution of household disposable income.

Analysis of Gini coefficients by country shows that South Africa has the least egalitarian society, with a coefficient of 0.636 in 2010. This is largely a legacy of apartheid, under which a small white minority controlled the country’s resources.

Latin America has become the most unequal region in the world, with studies showing that 20% of the wealthiest in Latin America hold almost 57% of resources, while the poorest 20% account for less than 4% of the region’s wealth, with many of these living in city slums.

China has become another of the world’s least egalitarian societies since adopting capitalist practices as part of its change to a “socialist market economy”. The richest 10% of households in China controlled 40% of the total household disposable income in 2010.

The US has the highest Gini coefficient among the major developed markets, at 0.471. Here, company shareholders and executives have received the benefits of corporate earnings, while rising immigration has depressed wages at the bottom, keeping the poor mired in poverty.

Western European countries are the most egalitarian, with most having a Gini coefficient of less than 0.380. The coefficient in 2010 was as low as 0.276 for Norway, whose generous welfare system protects the poorest citizens.

Most Eastern European countries also score relatively low on income inequality, due to principles of equality that were enforced during the Communist era. The Czech Republic had the lowest Gini coefficient of 0.257 in 2010.

Over the forecast period, Gini coefficients are expected to remain stable or increase slightly in almost all of the countries under review. Brazil and Mexico are possible exceptions, but even in these markets the gap is only expected to narrow marginally.

Rich and Poor Expenditure Patterns

Expenditure patterns show rich and poor consumers allocate different proportions of their income for different things. Low-income households tend to spend a higher proportion of their expenditure on alcoholic beverages and tobacco while higher income consumers spend a much larger share of their income on luxury holidays, air travel and dining out.

One category where expenditure remains similar between rich and poor consumers is health goods and medical services since this category is considered a necessity for most consumers.

For many “middle of the road brands,” this gap between rich and poor could be detrimental. A polarisation within the market for consumer goods and services exists as premium brands and budget brands cater to the rich and poor, respectively.

Retailers and manufacturers are adapting to this new frugal mindset in various ways, for example by adding new packages in smaller sizes and at lower price tags, expanding the selection of cheaper private label products, or offering credit cards with across-the-board discounts. The high – and in some cases growing – income gap between rich and poor will continue to provide marketers with opportunities to segment their offer.