Learn all about income versus wealth inequality in just a few minutes! Professor Jadrian Wooten of Penn State University explains how income inequality differs from wealth inequality.
Income inequality refers to the degree to which income is unevenly distributed among a population, while wealth inequality refers to the unequal distribution of wealth across members of a society.
Income is money or a money-equivalent received through the selling of capital, including land, or labor. Capital is any asset that can enhance a person's power to perform economically useful work. Income can include money generated by a salary, an hourly wage, accrued interest, a dividend (the portion of a company's earnings distributed to a shareholder) from owning shares of stock, rent, and profits from selling something at a higher amount than its original price. Income may also include in-kind compensation from work (like fringe benefits) or government transfers. Across all rankings, income earners receive most of their income from labor income (wages), but top income earners receive a larger share of their income from returns on investments (capital income), and lower income earners receive a larger share of their income from other areas, like government transfers.
Income inequality is the unequal distribution of income across members of an economy. Income inequality is often represented in the form of percentages, usually the percentage of income related to a percentage of the population.
Wealth, on the other hand, is the total value of all assets minus any debts or liabilities, also known as the net value or worth. Wealth is a stock concept that sums total possessions, whereas income is flow of money received for goods and services. Wealth can include savings and accounts held at a commercial bank, any financial assets (i.e. ownership of shares of companies through the stock-market, corporate bonds, government bonds), property ownership, and pension and life insurance plan ownership. Income is the flow of money between households and firms throughout the production process, whereas wealth measures the value of one’s stock assets at a particular moment. Two people could have the same annual income, but one is much more wealthy through the assets he possesses.
Wealth inequality is, similarly, the unequal distribution of wealth across members of an economy. Like income inequality, it is typically represented in percentages of wealth in possession by percentages of the population. However, wealth inequality is very difficult to measure, primarily because any savings and financial assets, much of what wealth is composed of, yields varying levels of income through interest, which also would change the level of wealth. It is most difficult to measure amongst the wealthiest in an economy because of their variety of assets and the record-keeping of those assets.
In the United States, income is typically the measure for inequality within an economy, primarily because income must be claimed to the Internal Revenue Service (IRS) whether it is taxable or tax-exempt. Therefore, the data for income is much more accurate than the data record of wealth.