Wealth and Income Inequality

1. Because assets accumulate over time and can be inherited, wealth is usually distributed far more unequally than income.
   1. The two also reinforce each other, since wealth generates income through rent, dividends and interest, so wealth inequality tends to breed income inequality.

The Lorenz Curve and Gini Coefficient

1. The horizontal axis shows the cumulative percentage of the population ranked from poorest to richest, and the vertical axis shows the cumulative percentage of income.
2. The 45-degree line is the line of perfect equality, along which each share of the population receives an equal share of income.
   1. The Lorenz curve bows below this line, and the further the curve lies from the line, the greater the inequality.
3. The Gini coefficient is the ratio of the area between the line of equality and the Lorenz curve, call it A, to the whole area beneath the line of equality, A plus B.
   1. It ranges from 0 (perfect equality) to 1 (perfect inequality), so a higher Gini, like a curve bowing further out, means greater inequality.
   2. Real economies span the range: Denmark and other Nordic countries have among the world's lowest Gini coefficients, whereas Brazil and South Africa are among the most unequal, with high Gini values.

$$G=\frac{A}{A+B}$$

Causes of Inequality

1. Within a country, differences in skills and wages create income gaps, as workers with scarce, highly demanded skills command higher wages than the low-skilled.
2. Unequal ownership of assets and inheritance concentrates wealth, since those who own property and shares receive extra income and can pass assets to the next generation.
3. Education shapes opportunity by determining which workers can access higher-paid employment.
4. The tax and benefits system can narrow or widen inequality depending on how progressive it is, as progressive taxes and welfare transfers redistribute income towards poorer households.
5. Globalisation and technology raise the rewards to capital and high-skilled labour while reducing demand for low-skilled work.
6. Between countries, differences in development, resources and capital drive inequality, as richer countries hold more physical and human capital and stronger institutions.

Development and Inequality

1. Early industrialisation concentrates the gains among owners of capital and urban workers.
   1. As the economy matures, education, welfare and wage growth spread the benefits more widely and inequality falls.
2. The evidence is mixed, however, as inequality has risen again in several advanced economies, which challenges the simple Kuznets pattern.

Capitalism and Inequality

1. Private ownership of capital is a major source of inequality, because owners of firms and assets receive profit and returns that are distributed more unequally than wages.
2. Yet unequal rewards perform an incentive function, since the prospect of higher income motivates workers to train and entrepreneurs to invest and innovate.
3. Returns to capital have tended to grow faster than wages from labour, $r>g$, concentrating wealth among asset owners over time.
4. The case for greater equality rests partly on the diminishing marginal utility of income: a given sum adds more to the welfare of a poor household than a rich one, so redistribution can raise total welfare.

Is inequality always bad?

1. Some inequality is beneficial because unequal rewards create incentives to work, train, take risks and innovate, which can raise efficiency and growth.
2. But high inequality can lower welfare, since the diminishing marginal utility of income means a given sum is worth more to a poor household than to a rich one.
3. Extreme inequality can even harm growth itself by limiting the poor's access to education, health and capital and by weakening social cohesion.
4. On balance, it depends on the level and cause: inequality that rewards genuine effort differs from inequality entrenched by inherited wealth, so the judgement turns on the equity-efficiency trade-off.