Income inequality across many advanced economies has risen significantly over the last three decades. In the UK, for instance, the share of total household income captured by the top 10% of earners rose from 21% in 1980 to over 30% by 2022. While market-driven systems argue that such disparities provide necessary incentives for innovation and investment, critics point to the damaging social consequences of deep relative poverty.
Historically, policy debates have focused on the tax and benefits system to correct these outcomes. By using progressive taxation alongside transfer payments (such as Universal Credit), the government aims to redistribute income after it has been earned in the marketplace. However, some economists suggest that this 'repair job' is insufficient and creates economic drags, such as welfare traps and reduced work incentives. For example, high marginal deduction rates can discourage low-income workers from taking on extra hours.
Consequently, there is growing support for 'pre-distribution'—policies that target supply-side obstacles to reduce inequality at source. These measures include state-funded retraining programs, capital investment in deprived regions, and raising the National Living Wage. By boosting the productivity of lower-skilled workers and strengthening their bargaining power, market outcomes themselves become fairer. However, supply-side interventions can take years to show results, and regional investments do not always guarantee the creation of high-quality local jobs.
Using the data and your economic knowledge, evaluate the view that reducing income inequality is more effectively achieved through fiscal policies that redistribute income after it is earned, rather than through supply-side policies designed to reduce market inequality at source.
