Unit 2 Macro: Income and Wealth in the UK

In Unit 2 economics it is important to distinguish between flows of income and stocks of wealth. This revision note looks at this topic and the scale of income inequality in the UK.

Income is a flow of money going to factors of production:
1. Wages and salaries paid to people in work
2. Money paid to people receiving benefits such as the state pension and tax credits
3. Profits flowing to businesses and dividends going to shareholders
4. Rental income flowing to people who own and lease out property
5. Interest paid to owners of capital who hold money in deposit accounts or who own bonds etc.

Wealth is a stock concept – it is a large amount of money or valuable possessions and can be held in different ways:
1. Savings held in bank and building society deposits
2. Ownership of shares issued by listed companies and equity stakes in private businesses
3. The ownership of property
4. Wealth held in corporate bonds, national savings certificates and other government bonds
5. Wealth tied up in private (occupational) pension schemes and life assurance schemes

Wealth generates income for if you have built up savings balances they ought to pay interest (although interest rates are very low at the moment!). Shares lead to a flow of dividend payments. An occupational pension scheme will eventually allow someone to receive a regular income when they have retired.

Inequality in the distribution of income and wealth

The extent to which there are big inequalities in how income and wealth is distributed is an important topic and issue in your Unit 2 macroeconomic course. Living standards depend on the level of economic activity and on the redistribution of economic resources within society as a whole. We will look briefly at some of the data from the UK and compare and contrast with a range of developed and developing countries.

The level of inequality of income and wealth can be measured in several ways:

• The share of national income going to different groups in society, the poorest 20% of households at the bottom of the income scale through to the richest 20%
• The proportion of all households who must live on an income below an official ‘poverty line’. For the UK and other European Union countries, the current poverty line is an annual income of less than 60% of median income. The median individual is in the middle of the income distribution
• In 2009, 18% of individuals in the UK were in households with an income below the poverty line

Mean and median income in the UK

For 2009 the figures (in £s per week) were as follows:
• Median income = £407 per week
• Mean income = £507 per week
• The official poverty line is 60% of the media = £244 per week

6 per cent of individuals live in households with disposable incomes of £1,000 per week or more and this helps to explain why the mean value for household income exceeds the median.

Background on poverty and inequality in the UK

These figures are drawn from the latest survey on poverty and inequality produced by the Institute for Fiscal Studies

• Inequality has remained steady over the course of the recent recession
• Taking the 13-year period of Labour government as a whole, income inequality as measured by the Gini coefficient has increased but at a slower rate than in the 1980s
• Looking over Labour’s 13 years in office, headline rates of relative poverty fell from 19.4% in 1996–97 to 17.1% in 2009–10
• The fraction of children in poverty fell from 26.7% in 1996–97 to 19.7% in 2009–10. This still leaves the rate of child poverty well above the previous government’s target to halve child poverty by 2010
• Using the official relative poverty measure of having an income below 60% of median income, in the UK in 2009–10, there were 13.5 million individuals in relative poverty