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Understanding economic inequality
Understanding economic inequality

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4.1 Differences between individuals or households

These types of explanations for inequality point out that income inequality is shaped by, for example, differences in the level of human capital, parental wealth and type of work between individuals or households in the economy.

Human capital

Human capital refers to the set of skills and knowledge that a worker has. This is acquired through education, training and work experience.

As described in Section 2, some variation in income is expected due to differences in skills and experience among workers.

Activity 10 Human capital and wage inequality

Timing: Allow about 5 minutes

Who do you expect to earn more? Stagger the boxes below from the highest to the lowest earning worker.

Using the following two lists, match each numbered item with the correct letter.

  1. A senior worker with ten years of relevant work experience

  2. A junior worker who undertakes a training programme

  3. An unskilled worker

  • a.Lowest

  • b.Highest

  • c.Middle

The correct answers are:
  • 1 = b
  • 2 = c
  • 3 = a

Discussion

Labour skills may vary due to natural ability, education or work experience. A senior worker with a large amount of relevant work experience would expect to receive a higher wage than someone without that experience. Similarly, a junior worker who has invested in education or training would be paid more than an unskilled worker with more generic skills.

Parental wealth

Inequalities in income may arise due to differences in the level of wealth owned by the previous generation.

Receiving parental wealth through inheritance or gifts can improve a person’s capital income. It can provide opportunities for better education and healthcare, which can result in differences in incomes among the younger generation.

Changes in working patterns

When comparing income levels across households, changing working patterns can influence levels of inequality. For example, since the 1970s the proportion of women going to work increased substantially in the UK, rising from 53% in 1971 to almost 71% in 2017 (source: ONS). This brought more income into households and contributed to a decline in income inequality across men and women.