What’s the difference between wealth inequality and income inequality, and why does it matter?

Wealth inequality is in the news, with our friends at IPPR pointing to just how ‘unevenly divided’ wealth is in the UK. The problem is huge: the top 10% of households are 875 times wealthier than those at the bottom.

But why is there so much focus on wealth inequality – and what’s the difference between that and income inequality?

Personal wealth means a stock of valuable possessions: anything from cash under your mattress, through shares and bonds, to the value of your house or your car. Income, on the other hand, is a flow of money you receive, such as wages for employment.

Here in the UK, we’ve heard talk that inequality hasn’t increased since before the financial crisis. Claims like that refer to income inequality. In July 2017, the Institute for Fiscal Studies (IFS) caused a stir with a report showing that the gap between the highest wages and the lowest has not changed much since 2008.

Statistics on income inequality risk misinterpretation. Although it has fallen by some measures, that doesn’t mean that those at the bottom are doing any better. In fact, as the Resolution Foundation revealed in a report for the Social Mobility Commission today, people on low pay are increasingly finding themselves stuck there, unable to ‘escape’ to better employment. The results in the IFS report are due mostly to salaries in the financial and insurance services sector, which are among the highest, falling dramatically after the crash; it also showed that those same salaries have been climbing faster over the past couple of years.

Wealth inequality is much more severe than income inequality. A tiny fraction of the population owns most of the UK’s pile of riches. In our recent work, we found that, between 2006-8 and 2012-14, the richest fifth of households gained almost 200 times as much in absolute wealth terms compared to the poorest fifth.

So, irrespective of the story on incomes, Britain is becoming much more unequal. Once we consider the consequences of wealth inequality, there’s much more cause for concern.

In the first place, wealth is itself a source of income. Holding stocks and shares on financial markets guarantees a source of income in the forms of dividends and capital gains; holding bonds or savings generates interest. The effect goes further: wealth allows people to purchase better healthcare and education, and assets like a house or a car themselves enable people to save time and take on better jobs (this article over at Quartz has a great summary of this point). 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, as Thomas Piketty’s groundbreaking book Capital in the 21st Century outlined with painstaking historical clarity. 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.

As the authors at IPPR point out, these facts have a necessary intergenerational bite to them. ‘Every generation since the ‘baby boomers’ now has less wealth than the generation before them had at the same age.’ With policies like exemptions for inheritance tax and the crushing weight of the housing market bearing down on young people, wealth inequality doesn’t only reinforce itself within the same cohort – it can multiply to appalling levels from one generation to the next.

Conservative politicians tearing their hair out over attracting younger voters would do well to take a long, hard look at wealth inequality statistics. Income inequality threatens to deteriorate. But the real news is in wealth and the patent unfairness associated with it.