6.1: Distribution of Income and Wealth
Difference between income and wealth
Income is a flow of money to a factor of production, usually labour, and includes wages, welfare benefits
and profits
Wealth is a stock of valuable assets, like property, shares and pensions
Both income and wealth tend to be unequally distributed between households in UK
Factors leading to unequal distribution of income
Differences in skills/qualification
Individuals with skills, qualifications/work experience may be in higher demand and earn more than those
lacking these
Differences in wealth
Wealthier individuals/households tend to earn more income from their holdings of assets, in form of
interest/dividends
This is likely to further the unequal distribution of wealth and income
State impact
A free market economic system would provide fewer welfare benefits than a command economic system
Depends on whether country/economy has fiscal resources to operate a welfare state and reduce
inequality
Factors leading to unequal distribution of wealth
Differences in income
Higher earners are more able to save money and earn interest and so increase their wealth
Inheritance
Property and other valuable asset can be passed down from one generation of wealthy families to the
next
Marriage
Wealthy people tend to marry other wealthy people, leads to wealth concentration among relatively few
families
Property
Wealth can generate wealth for those who own valuable assets, like property
This is evident if income earned from rental is saved/used to purchase further valuable asset
Equality vs equity
Equality means income/wealth are shared equally between all members of society, while equity regards
idea of fairness
Under notion of equity, may be seen as fair that income and wealth are unequally shared out by different
people
, This may be justified if some work is longer/harder than others, or includes element of sacrifice/risk as an
entrepreneur
E.g. those undertaking higher education may have sacrificed earnings while studying
Measuring inequality
The Lorenz Curve
The Lorenz Curve shows degree of income/wealth inequality in a given
economy/population
The further Lorenz curve is from 45-degree line of perfect equality, the greater
the inequality A
B
The Gini Coefficient
Statistical measure of degree of inequality, producing a coefficient between 0 and 1
Perfect equality (everyone has same income) is at 0, while perfect inequality (individual receives all
income) is at 1
The higher the number, the greater the degree of income inequality
A coefficient above 0.4 is frequently associated with political instability/growing social tensions
Calculating Gini coefficient
Ratio of area between 45-degree line and Lorenz curve divided by the total area below the 45-degree line
Area A ÷ (Area A + B) in the above diagram
Evaluating inequality
Costs of income/wealth inequality
Social tensions
Significant inequality in the distribution of income/wealth may fuel social tensions
If poorer members of society become resentful of richer members of society, this may lead to friction,
crime and rioting
Creation of the ‘underclass’
Occurs when there is a relatively low standard of living and little prospects of bettering position despite
‘social mobility’
Leads to a significant segment of society that becomes reliant on welfare benefits
Benefits of income/wealth inequality
Incentive effect
Existence of high earners and the ‘super rich’ may suggest possibility of others being able to earn high
salaries/profits
This may be through hard work, innovation or setting up businesses as entrepreneurs
Free market capitalists argue these incentive effects help generate economic growth, making average
incomes higher
Trickle-down effect
Refers to free market view that poorer members of society will benefit from high earners and the
relatively wealthy
Difference between income and wealth
Income is a flow of money to a factor of production, usually labour, and includes wages, welfare benefits
and profits
Wealth is a stock of valuable assets, like property, shares and pensions
Both income and wealth tend to be unequally distributed between households in UK
Factors leading to unequal distribution of income
Differences in skills/qualification
Individuals with skills, qualifications/work experience may be in higher demand and earn more than those
lacking these
Differences in wealth
Wealthier individuals/households tend to earn more income from their holdings of assets, in form of
interest/dividends
This is likely to further the unequal distribution of wealth and income
State impact
A free market economic system would provide fewer welfare benefits than a command economic system
Depends on whether country/economy has fiscal resources to operate a welfare state and reduce
inequality
Factors leading to unequal distribution of wealth
Differences in income
Higher earners are more able to save money and earn interest and so increase their wealth
Inheritance
Property and other valuable asset can be passed down from one generation of wealthy families to the
next
Marriage
Wealthy people tend to marry other wealthy people, leads to wealth concentration among relatively few
families
Property
Wealth can generate wealth for those who own valuable assets, like property
This is evident if income earned from rental is saved/used to purchase further valuable asset
Equality vs equity
Equality means income/wealth are shared equally between all members of society, while equity regards
idea of fairness
Under notion of equity, may be seen as fair that income and wealth are unequally shared out by different
people
, This may be justified if some work is longer/harder than others, or includes element of sacrifice/risk as an
entrepreneur
E.g. those undertaking higher education may have sacrificed earnings while studying
Measuring inequality
The Lorenz Curve
The Lorenz Curve shows degree of income/wealth inequality in a given
economy/population
The further Lorenz curve is from 45-degree line of perfect equality, the greater
the inequality A
B
The Gini Coefficient
Statistical measure of degree of inequality, producing a coefficient between 0 and 1
Perfect equality (everyone has same income) is at 0, while perfect inequality (individual receives all
income) is at 1
The higher the number, the greater the degree of income inequality
A coefficient above 0.4 is frequently associated with political instability/growing social tensions
Calculating Gini coefficient
Ratio of area between 45-degree line and Lorenz curve divided by the total area below the 45-degree line
Area A ÷ (Area A + B) in the above diagram
Evaluating inequality
Costs of income/wealth inequality
Social tensions
Significant inequality in the distribution of income/wealth may fuel social tensions
If poorer members of society become resentful of richer members of society, this may lead to friction,
crime and rioting
Creation of the ‘underclass’
Occurs when there is a relatively low standard of living and little prospects of bettering position despite
‘social mobility’
Leads to a significant segment of society that becomes reliant on welfare benefits
Benefits of income/wealth inequality
Incentive effect
Existence of high earners and the ‘super rich’ may suggest possibility of others being able to earn high
salaries/profits
This may be through hard work, innovation or setting up businesses as entrepreneurs
Free market capitalists argue these incentive effects help generate economic growth, making average
incomes higher
Trickle-down effect
Refers to free market view that poorer members of society will benefit from high earners and the
relatively wealthy
