3.3 Addressing income and wealth inequality

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 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.

Inequality can arise from differences in education and skills, labour-market bargaining power, inheritance and asset ownership, discrimination, technology, tax systems and access to opportunities.

These causes interact: a family with assets can finance education, while unequal schooling can shape future income. Distinguish a cause from an observed correlation.

Automation may raise demand for skilled labour and returns to capital while reducing demand for routine work, widening some income gaps.

No single cause explains all inequality; country context, time period and the chosen income/wealth measure matter.

Governments redistribute income and wealth through progressive taxes, benefits, pensions, minimum wages, education, health care and other public services.

Policies can reduce inequality and improve opportunity, but may affect incentives, administrative cost, government finances and the distribution between current and future generations.

A progressive income tax combined with targeted benefits can raise the disposable income of low-income households; funding and behavioural responses determine the net effect.

Redistribution is not automatically costless or perfectly targeted; evaluate who pays, who receives and what changes in behaviour.