Income and wealth inequality

Overview

Income and wealth, wealth typically distributed more unequally than income and gini coefficient measure.

What you need to know

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Questions from this subtopic

Each one with the model answer underneath.

1. 1

   Distinguish between income and wealth.

   Model answer

   Income is a flow: it is received over a period of time, such as wages per month, interest per year or benefits per week. Wealth is a stock: it is the value of assets held at a point in time, such as property, pension entitlements, shares and savings, net of any debts. The two are linked, since income can be saved to build wealth and wealth generates income, but they are measured differently and are distributed differently.

2. 2

   Why is wealth typically distributed more unequally than income?

   Model answer

   Wealth accumulates over a lifetime and passes between generations, so past inequalities compound rather than reset each year. Households with higher incomes can save a larger share of what they receive, and the assets they buy generate returns that add to wealth without further effort. Inheritance transfers accumulated holdings intact. Meanwhile many low-income households have no surplus to save at all and may hold negative net wealth through debt. Income differences of a given size therefore translate into larger wealth differences over time.

3. 3

   What does the Gini coefficient measure, and what do the ends of its scale mean?

   Model answer

   It is a summary measure of how unequally income, or sometimes wealth, is distributed across households. It runs from 0 to 1. A value of 0 represents perfect equality, in which every household receives an identical income. A value of 1 represents complete inequality, in which a single household receives all of the income and everyone else receives nothing. A rise in the coefficient means the distribution has become more unequal.

4. 4

   Give the main causes of inequality in income.

   Model answer

   Differences in earnings are the largest single source, reflecting skills, qualifications, experience, occupation and hours worked. Unemployment and long-term sickness remove earnings altogether for some households. Ownership of assets adds income from rent, dividends and interest, and that is concentrated among those who already hold wealth. Household composition matters, since one income supporting several people goes less far. Finally the tax and benefit system reshapes the distribution, so inequality before redistribution differs from inequality after it.

5. 5

   What are the main causes of inequality in wealth?

   Model answer

   Inheritance transfers accumulated assets across generations, so households start from very different positions. Growth in house prices raises the wealth of owners while leaving renters behind, and property is the largest single asset for most households. Pension entitlements built up over a long, well-paid career can be worth a great deal, while others accumulate almost none. Saving capacity differs with income, and returns on financial assets compound over decades, so early advantages widen with time.

6. 6

   Analyse the consequences of income inequality for households at the bottom of the distribution.

   Model answer

   Living standards are lower, with poorer diet, colder housing and less protection against unexpected costs, which raises the risk of problem debt. Access to education and training is restricted, both by direct costs and by the need to earn immediately, so future earning power is reduced and disadvantage persists into the next generation. Health outcomes tend to be worse, which reduces earning capacity further. The overall result is lower social mobility, so outcomes depend heavily on the household a child is born into.

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