Income inequality

Income vs Wealth

Income is a flow — money received over a period of time. It includes wages and salaries, investment returns, rental income, and state benefits. Income is what people earn or receive regularly.

Wealth is a stock — the total value of assets owned at a point in time. It includes property, savings, shares, pension funds, and other assets. Wealth is what people own.

The two are related — wealth generates income (rent, dividends, interest), and income, if saved and invested, builds wealth. However, they can diverge significantly: a high-income earner who spends everything may have little wealth; an elderly homeowner on a small pension may have substantial wealth tied up in property.

Inequality: Causes

• Differences in earnings — skills, qualifications, productivity, and labour market power create wide wage differentials.
• Inheritance — wealthy families pass assets to children, compounding wealth inequality across generations.
• Returns on capital — those who own assets (property, shares) benefit from rising asset prices and investment income. Rising asset prices since the 1990s have concentrated wealth at the top.
• Education and social mobility — unequal access to quality education perpetuates income inequality across generations.
• Discrimination — gender, ethnic, and disability pay gaps contribute to income inequality.
• Regional disparities — wages, employment rates, and house prices differ significantly between London/South-East and other UK regions.

Consequences of Inequality

• Social — higher inequality is associated with worse health outcomes, higher crime rates, lower social trust, and reduced social mobility
• Economic — inequality may reduce aggregate demand (lower-income households have higher marginal propensity to consume) and limit access to education and opportunity, reducing long-run productivity
• Political — extreme inequality can generate political instability and undermine democratic institutions

Government Policies to Reduce Inequality

• Progressive income tax — takes a higher percentage from higher earners, redistributing income through public spending
• Benefits and welfare state — Universal Credit, housing benefit, child benefit support lower-income households
• Minimum wage / National Living Wage — sets a floor on earnings, raising incomes of the lowest-paid workers
• Inheritance tax — taxes wealth passed between generations, limiting inter-generational wealth concentration
• Investment in public services — education, healthcare, and housing accessible to all reduce the practical impact of income inequality