Wealth and income inequality have become focal points of social and political contention and are often conflated together by politicians. However, the two must be addressed separately. Wealth is the value of an individual’s assets and is often difficult to assess, monitor, and tax. Income includes various streams of revenue that a household or person earns, and drives well being and standards of living. But unequal wealth distribution does not necessarily lead to unequal income distribution. 

According to the NBER, in 2019 the Netherlands was first and Sweden third in wealth inequality as measured by the Gini Index. The “more egalitarian” UK ranked 73rd. Yet their income distributions are more equal than the UK’s. They are 20th and 22nd in income equality, whereas the UK lags behind at 72nd. Wealth inequality is not directly detrimental to a country’s living standards. The issue lies with income inequality. 

There are multiple causes of income inequality in the UK: differences in education/skills, structural changes in employment driven by technology, trade, and immigration, and access to opportunities in deprived areas. These drivers, while raising overall living standards, have combined to negatively impact middle and lower wage jobs. Access to universal health care and government services also causes inequality but is less prominent in Europe than in the US.

First, education is perhaps the most significant driver of income inequality.  The Times reports that IT directors, specialist medics, and financial managers are among the top 10 best paid jobs in the UK. Data from the US Bureau of Labor Statistics cites a direct correlation between education level and median weekly earnings, which almost treble going from some high school to a doctorate. Unemployment rates are five times higher among less educated cohorts, adding downward pressure on low skilled wages. When access to quality education is limited, income inequality grows. According to the UNDP, Sweden and the Netherlands spend 7.7% and 5.5% of GDP respectively on state education, placing them 10th and 41st, demonstrating a positive correlation with income equality. Spending 3.9%, the UK ranks 113th (with the biggest difference in tertiary education spending).

Second, the UK’s relative openness to trade and immigration have combined to bring down the pay of unskilled labourers while raising that of higher-skilled workers. As the UK has de-industrialised since the 1960’s, low wage manufactured imports have replaced local manufacturing. Oxford University’s Migration Observatory estimates that from 1993-2017, EU migrants reduced the income of the bottom 10% of British workers by 4.9% but enabled a 4.4% increase for the top 10%, further widening income inequality.  

In addition, technological change, while improving individual productivity, is rendering less skilled manual labour obsolete. A European Parliament study shows that employment decreased 7.5% in high-tech manufacturing and almost 15% in low-tech manufacturing from 2008-2013, while high-skilled services increased by up to 8%. Innovation can lead to unemployment as people are replaced with machinery which can lead to more people relying on the state as they cannot provide for themselves, which then causes people who were contributing to economic growth but now could burden the state through taking benefits. Technological change raises demand for high skilled jobs, exacerbating the effect of educational differences and worsening income inequality.

Lastly, structural changes in regional economies also drive inequality. Areas that have seen large trade or production declines (e.g. old coal and manufacturing centres) receive less government aid to restructure, reinvest, and retrain. For 2000-2019, The Economist reports that the government invested £10,000 per Londoner into economic development but only £5,000 for the North. With less money, many regions are unable to effectively address social issues, education or retraining. Even larger cities such as Manchester and Birmingham have gross value-added per worker that is only 86% of the British average. The Miner’s strike in 1984 had a significant impact on worsening income inequality as well as regional inequality, as Thatcher closed mines, unemployment rose, leading to a welfare decline in areas of the north.

Some UK economists and political parties support high progressive (takes a larger percentage of income from high-income groups than from low-income groups and is based on the concept of ability to pay) taxes to prevent wealth accumulation and to fund aggressive redistribution and structural programs. But governments in most advanced nations are already taking 35-55% of a country’s GDP. There are risks in a large expansion of government. High tax rates discourage investment and innovation and undermine growth. While inequality may provide the political impetus for high taxation, government spending is often targeted not at those who need it but to those who can apply short term pressure on the state. 

To address inequality, the government will need to tackle the drivers directly. Access to high quality education is key, because of its effect on income and its importance in equipping labour with the skills to meet the challenge of technological change. Maintaining an economy open to trade is important to ensure that the UK continues to specialise in areas where it has competitive advantages. But more resources could be devoted to supporting the “losers” from trade. The same applies to immigration. A policy that manages and controls immigration would be essential for the UK to continue to absorb labour (to maintain growth and the tax base) but also to build popular support for it. The post Brexit labour shortages illustrate how drastic changes to labour movement can impact the economy. The Australian points system is a very effective way of supplying the country with workers demanded of the country. Finally, addressing structural regional issues will be more difficult and complex and require more than just direct transfers. Some regions will decline (as mining towns decline when mines are exhausted). Ensuring a transition from one industry to a diverse economic base will require a combination of new infrastructure, incentives for industries to locate there and retraining. All these solutions take time. More spending would greatly alleviate inequality, although the benefits would show only in the long term. 

Evidence suggests the UK is more open to trade, has more flexible labour markets, and spends less on education and helping regions address the challenges of structural change. All these factors create forces that increase inequality. Addressing them will require more taxes and focused programs. Taxing wealth is politically popular but complex. But taxing the income generated by wealth is typically more effective. According to Trading Economics, Sweden’s personal income tax rate in 2021 was 52.9%, 6th in the world. But the country also spends 19% of its GDP on social protection, 6.7% above the OECD average. Despite Sweden’s wealth inequality, income inequality remains low and living standards stay high. The UK would do well not necessarily to emulate but perhaps to move in that direction.