economics : theme 2 - wealth and income inequality

income definition

the reward for work - is a flow concept

wealth definition

physical or monetary - a stock concept (you build it up)

what are wealth and income

• mutually reinforcing

• those two possess the most wealth have the highest incomes

5 causes of differentials in income and wealth

• age

• education

• ownership of pension rights, stocks and shares (financial assets)

• ownership of land, property (physical assets)

• impact of state benefits on income distribution

age explanation

• tends to be skewed in favour of the older selections of the population

• due to the fact theyve had longer to build up their income and therefore a pot of wealth

• age is a key determinant of productivity

• workers accumulate experience through labour market participation and become more productive due to this

• earnings potential of workers therefore tends to increase the more years theyve been working

education explanation

• education increases a workers human capital levels and productivity

• distribution of income therefore favour those who are better educated in society

financial assets explanation

• ownership of financial assets offers the opportunity to receive flows of income in the form of interest, profit and dividends

• distribution is therefore affected by factors such as the pension received from their employers or the gov

• equally individuals are able to enhance their stock of wealth and future income potential by purchasing pension rights through a private pension scheme or purchasing other financial assets such as shares

• also could be due to inheritance

physical assets explanation

• can be purchased or inherited

• inheritance of housing is a major cause of inequality in the distribution of wealth

• where property is owned, this tends to constitute a very significant proportion of that persons wealth

impact of state benefits on income distribution

• in the uk the highest source of tax revenue is income tax

• progressive tax system which takes a higher proportion of tax income from high income earners than from those that earn less

• gov then spends this tax revenue on the redistribution of income

• most significantly this includes befits to those on low level incomes

• this is to try and lessen the income inequality gap

monetary assets explanation

• monetary assets are your savings

• when there is an increase in the base rate of interest usually this will be passed onion the form of higher interest rates for savers

• usually the rich are the ones that save as they have the ability to do so

• so if the rate of interest goes up then the wealth of the rich people will increase and for those with no savings they become more distant and the wealth divide increases creating more income inequality