Income can be defined as a flow measured over a given period of time. Whereas stock is a concept measured at a given point in time – assets constitute wealth.
The UK has a very high level of income inequality compared to other developed countries. In the bottom 10% of the population households have a net average income of just £9,277 (2014 – 2015 ONS). The top 10% however, have net incomes over £83,977 (2014 – 2015 ONS). Although inequality is a lot higher amongst original income than net income as the poorest 10% of the UK’s population have an average original income of £4,467; The top 10% have an original income of £107,907.
Wealth on the other-hand is more unequally divided than income. The richest 10% of households own 45% of all UK wealth whereas the poorest 50% only own 8.7%.
Reasons for Differentials in income and wealth
- Age – wealth will accumulate over time. Higher incomes generally generate increased wealth due to increased MRP of labour over time.
- Inheritance – Ownership of financial assets for example government bonds or property.
- Wage differentials
Measuring income and inequality can be measured in many ways for example via the Lorenz curve and the Gini coefficient.
The Lorenz Curve is a visual indicator of inequality, it shows the percentage of income earned by a given percentage of the population. A distribution of income where the percentage of income is equal to the percentage of population, would be described as ‘perfect’. The further the Lorenz curve is from the line of perfect equality, the more the proportion of income is taken by the richer in society.
The Gini Coefficient is a mathematical indicator of income inequality. It is calculated to a single number between 0 and 1. With 1 being the point at which one person in the country accumulates all the income and zero where everyone in the country receives the same income. In 2012 to 2013 the Gini coefficient for the UK was calculated to be at 0.332 according to the Office for National Statistics (0NS).
Costs of Unequal Distributions of Income
Income and wealth inequality will generate poverty of which also comes with low living standards. The Government will then have to spend more on welfare – increasing the strain on Government Finances. Large income inequalities can reduce growth in the long run as the poor has the largest MPC, so if their income growth is restrained, spending will also be restrained. Whereas the rich have the largest MPS therefore you are restricting growth in the long run. With large inequality comes high social costs for example higher crime rates and possibly more mental health issues such as depression. Meaning the Government will have to spend more on crime and health care.
Benefits of Unequal Distributions of Income
Unequal distributions of income could also bring incentives, for example it may encourage workers to gain skills, training, qualifications to boost productivity and their MRP allowing them to access those higher wage professions. This will also improve the economy due to more productivity – LRAS will shift to the right, increasing Real National Output and Economic Growth.
High wage earners and those who are wealthy will have a lot more disposable income and will therefore spend more resulting in the trickledown effect and also the multiplier effect. Also if countries have a progressive tax rate this can be used to redistribute income to the poor. The signalling function will also play a part as labour will move where its is most productive and wages are higher – promoting efficient resource allocation.