Wealth inequality is the single most important metric by which equality of outcome is measured and debated. A low level of wealth inequality is a prerequisite to achieving genuine equality of opportunity, as explored below, and is also important for ensuring that everyone receives equal treatment.
This analysis focuses on wealth rather than income as the main metric of economic inequality, although it also looks at income inequality (and its relationship with poverty). There are several reasons to focus on wealth inequality more than income inequality:
- Wealth is far more unequally distributed than income, as Thomas Piketty’s book Capital in the 21st Century outlines. Income can be stored as wealth, but wealth begets income. This means that wealth is stockpiled by the rich and inequality gets worse over time. Since the return on capital (wealth) is higher than the rate of economic growth in general, wealth comes to dominate wages as the determinant of how prosperity is shared.
- Wealth has doubled compared to incomes since the 1980s, so it is more important in determining living standards, and in the last decade low earnings growth has hit people of working age while many wealth gains have accrued to older generations. Wealth is a more holistic measure of economic resources than income because it captures intergenerational transfers by which parents pass on economic advantage to their children.
- Inequalities in wealth matter because they affect the opportunities and choices that people have. Some people may have greater access to educational or business opportunities than others because they have inherited more wealth. People with wealth also have more choices available to them (like the option of walking away from a job that they do not like). As the IFS Meade Committee on direct taxation argued in 1978, “the holding of wealth itself, whether it arises from inheritance or from the owner’s own effort and savings, can confer on the owner benefits of security, independence, influence and power, quite apart from any expenditure which the income from it may finance”.
- Statistics on income inequality risk misinterpretation. Although income inequality has fallen by some measures, that doesn’t mean that those at the bottom are doing any better. In fact, people on low pay increasingly find themselves stuck there, unable to ‘escape’.
Very few thinkers have made the case for a society based on equality of outcome, in which everybody holds the same amount of wealth, regardless of their talent or hard work. But economic inequality has reached such a high level in many countries, including the UK, that many argue that reducing it is a priority. For example, The Spirit Level argues that reducing inequality benefits everyone in society by tackling a range of social issues such as physical and mental health, crime, trust and social mobility.
More fundamentally, it is impossible to achieve equality of opportunity without reducing economic equality (particularly wealth inequality). ‘Weak’ meritocracy, which simply tackles the most overt barriers to equality of opportunity (such as racial discrimination) without addressing the underlying disparities in life chances, depends for its legitimacy on promoting the idea of social mobility, by which the brightest and hardest working people are able to 'escape poverty', as some kind of proof that the system works and is just. But achieving social mobility is unachievable without reducing inequality; the ‘Great Gatsby curve’ shows the strong correlation between economic equality and social mobility.
‘Strong’ meritocracy tries to understand and correct for the deep-rooted issues that undermine ‘deep’ equality of opportunity. It understands that wealthier parents can buy a better education for their children, among other advantages, and that unless this is corrected for, meritocracy simply reinforces inequality. However, achieving this is also impossible if there is a high level of economic inequality. Unequal outcomes in one generation will always give rise to some degree of unequal opportunities in the next, no matter how many interventions are put in place to level the playing field (or rather, to compensate for the lack of a level playing field).
A fair society therefore needs to take active steps to reduce excessive levels of wealth inequality, recognising that much of it results from unfair inequalities of opportunity and that allowing it to continue will prevent the achievement of genuine equality of opportunity, while accepting that some level of wealth inequality is fair insofar as it reflects differences in talent and effort. A lower level of wealth inequality will also help to create a society in which everyone enjoys a broader ‘equality of condition’ in which their social status and standing as a citizen is not dictated by their wealth.
Governments have a range of policy tools to tackle wealth inequality. These include the redistribution of income through taxation, in order to fund transfer payments and to provide public services. But they also include the predistribution of income, meaning the setting of laws and policies that determine peoples’ pre-tax incomes, such as the regulation of minimum wages, housing markets and so on. Several ‘redistributive’ and ‘predistributive’ measures are covered in other issue briefings.
While inequality is concerned with the full distribution of wellbeing, poverty is focused on people at the lower end of the income distribution, who fall below a ‘poverty line’. It can be defined in several ways and either in absolute or relative terms. Poverty is often self-reinforcing, as its negative impacts (including inadequate education, health, nutrition, security and employment) prevent people from enjoying equal opportunities to succeed in life compared to their peers, breaking the links between talent and effort on one side and reward on the other. Everyone needs a baseline level of wealth in order to attain basic security and a decent standard of living for them and their family, and lack of wealth in a society with high wealth inequality leads to insecurity as well as a poor quality of life.