There's little consensus about its causes or how to measure it, says Robert MacCulloch, The Matthew S. Abel Chair in Macroeconomics at the University of Auckland Business School.
Inequality is one of the most hotly debated issues in New Zealand and the world today. Yet there is little consensus about how to even measure inequality, let alone determine its causes and consequences. There is also controversy about how inequality should be addressed.
Inequality data compares the gap in living standards between different groups in society. But should we measure income or happiness inequality? Perhaps the rich earn more, but have longer working hours and suffer more stress than others, so end up being no happier.
If our main concern is how many people are living below a certain minimum threshold, then maybe poverty data is more important. What about mobility? It could be argued that being poor doesn't matter so much if one day you will be rich.
Some experts believe that higher inequality is caused by technological changes that have led to education and skills becoming more highly rewarded. Others think globalisation is the problem, since we are trading more with low-wage countries. Maybe Government policies on taxes and benefits are to blame. After the crisis of 2008, corporate avarice has been the focus of much anger.
The consequences of high inequality are also uncertain. It may lead to more crime or give rise to calls for more regulations and taxes that have the effect of slowing down the economy. Some view it as being immoral. Others suggest inequality is a good thing and an inevitable consequence of growth.
How, then, should we address inequality? Should we imitate the 19th century English Luddites and try to slow the rate of technological progress? Few favour that policy. Or should the Government try protectionism, which would reverse the current trend of countries like New Zealand to promote export-led growth through more trade agreements?
It has been argued that the private sector should take on some degree of redistributive responsibility. One way would be to adopt a stakeholder model such as that found in Germany. To date, New Zealand has preferred a shareholder model which sets our companies the goal of maximising profit.
Or perhaps the Government should change its welfare and tax policies, using tools such as minimum wages, welfare-to-work schemes and earned-income tax credits? Some commentators are pushing for the tax system to be more progressive.
Ultimately, the approach we adopt to address inequality depends on our shared beliefs. The 'American Dream' is the belief that with hard work, almost anyone can get to the top. Steve Jobs, the late billionaire founder of Apple, is a hero to many people in the United States. We often ask ourselves whether our business leaders have acted lawfully and ethically to generate wealth, not only for their own benefit but also for the nation.
If the answer is yes, then we may be more likely to celebrate their success and leave their wealth alone.
When the American Dream prevails, inequality may not be perceived as a serious problem. It may be tolerated since it can be justified. The poor may consequently not receive much help from the government or may be required to exert effort in exchange for help. They may, for example, be given a "hand-up" in the form of an income tax credit that is available only after finding a job.
However, many Europeans do not share the notion that everyone is capable of rising to the top. Instead, they tend to believe that the poor may have worked hard but remained unsuccessful due to bad luck or unfairness.
To European eyes, the rich are often seen as undeserving, and there is a perception that some big players have been looting the global financial system. Some are even beginning to question the very legitimacy of capitalism.
Consequently, Europeans tend to more strongly support policies to reduce inequality than Americans. And the poor in Europe are more likely to receive direct government hand-outs with few strings attached.
What about New Zealand? Should we do more to reduce inequality? The answer depends on the shared beliefs of New Zealanders about who should bear the responsibility for those left behind.
Do we embrace our own version of the American Dream - due to our history as part of the 'New World' - and leave it up to low-income individuals to work harder? Or do we relate to the European belief that hard work is often not rewarded, and that those left behind may not be to blame for their situation? After all, along with several European nations, New Zealand has the distinction of having introduced one of the earliest welfare systems in the world.
One thing is clear: the only way for New Zealand to be successful is for a national consensus to emerge on questions such as how well the free market is working to deliver our shared aspirations. And at the heart of that process must be our response to challenges of inequality.