3.3 Addressing income and wealth inequality
- Syllabus
- 9708–2026–2027
- Topic
- 3.3
- Level
- AS
Learning objectives
3.3.1Income vs wealth• Difference between income as a flow concept and wealth as a stock concept3.3.2Gini coefficient• Measuring income and wealth inequality:- Gini coefficient (calculation not required)3.3.3Reasons for inequality• Economic reasons for inequality of income and wealth3.3.4Redistribution policies• Policies to redistribute income and wealth:- minimum wage- transfer payments- progressive income taxes, inheritance and capital taxes- state provision of essential goods and services
Income is a flow; wealth is a stock of accumulated assets
Income is money or benefits received over a period, such as wages per month. Wealth is the value of assets owned at a point in time, such as property, savings and shares, minus liabilities.
Income can add to wealth through saving, while wealth can generate income through rent, interest or dividends. A person can have high income but low wealth, or low current income but substantial assets.
A graduate earning £40,000 a year has income; a homeowner’s house and pension fund form part of wealth.
Income is not “how much someone owns” and wealth is not simply one year’s earnings.
The Gini coefficient summarises inequality on a zero-to-one scale
The Gini coefficient measures inequality in a distribution. A value of 0 represents complete equality; a value closer to 1 represents greater concentration in the hands of fewer people.
It can be derived from the Lorenz curve, but the same coefficient can hide different distribution shapes and does not identify absolute income levels.
Country A can have a lower Gini than Country B but still have lower average incomes; the coefficient compares distribution, not prosperity.
A falling Gini means inequality fell according to that measure, not that every household became richer or that poverty disappeared.
Why income and wealth become unequal
Income and wealth inequality arise when people differ in labour earnings, asset ownership, inherited resources and access to opportunities, and when institutions change the rewards or risks attached to those differences.
| Economic cause | Mechanism | Mainly affects |\n|---|---|---|\n| Education, skills and experience | Differences in productivity, scarcity and labour demand change wages | Income, then wealth through saving |\n| Unemployment, illness or caring duties | Fewer paid hours or no market earnings | Income and ability to accumulate wealth |\n| Technology and globalisation | Demand may rise for scarce skills/capital and fall for routine labour | Wages and profits |\n| Asset ownership and asset-price growth | Rent, interest, dividends and capital gains accrue to owners | Wealth and property income |\n| Inheritance | Assets and opportunity are transferred across generations | Wealth, then future income |\n| Discrimination, bargaining power and unequal access | Similar productivity can receive different pay or opportunities | Income and lifetime wealth |\n| Tax and benefit institutions | Post-tax income and accumulation incentives differ | Disposable income and net wealth |
The channels reinforce one another: wealth can finance education or business ownership, generate property income and be inherited; higher income can be saved into assets. Structural unemployment or discrimination can interrupt the same accumulation process.
If automation raises demand for specialist workers and capital while replacing routine jobs, wage and profit gaps may widen. The extent depends on retraining, labour mobility, ownership of capital and tax/benefit responses.
A correlation such as higher education alongside higher income does not prove one universal causal effect. Reasons and their strength vary by country, period, household group and whether income or wealth is measured.
Compare policies that redistribute income and wealth
Redistribution policies alter market income, disposable income, inherited wealth or access to essential services. Their success depends on whether the chosen mechanism reaches the source and group responsible for the measured inequality.
| Policy | Redistribution mechanism | Main trade-off or condition |\n|---|---|---|\n| Binding minimum wage | Raises hourly pay for workers who remain employed | May reduce labour demanded or miss unemployed/informal workers; effect depends on labour elasticities and enforcement |\n| Transfer payments | Give income without current production, e.g. pensions or unemployment/student benefits | Can reduce poverty quickly but costs revenue and may weaken work incentives if withdrawal is poorly designed |\n| Progressive income tax | Average tax rate rises with income, narrowing disposable-income gaps | Avoidance, migration and weaker work/investment incentives may reduce the tax base |\n| Inheritance and capital/wealth taxes | Reduce intergenerational transfer or concentration of assets/returns | Valuation, avoidance, liquidity and capital-flight problems can limit receipts |\n| State provision of essential goods/services | Education, healthcare or housing raises real living standards and opportunity regardless of cash income | Requires tax funding; quality, access, waiting and long time lags determine impact |
Use a policy package when causes differ: targeted transfers can change current disposable income, education can affect future earning power, and inheritance/capital taxes can address wealth concentration. Compare before-tax market income, after-tax cash income, benefits in kind and wealth separately.
A progressive income tax funding targeted benefits may lower the income Gini immediately. It need not lower wealth inequality unless saving, asset ownership or inheritance is also affected; state education may improve opportunity but only after a longer lag.
A transfer payment is not payment for current output, and a minimum wage below equilibrium is non-binding. No policy is automatically costless, perfectly targeted or certain to reduce both income and wealth inequality.