Distribution of Wealth

You surely know about the world’s wealthy people, but how do you define wealth? Is it the income you receive at the end of the month? How would you answer if someone asked you how wealthy you are? This explanation will clarify what the distribution of wealth in economics is and how to differentiate it from other economic concepts like income.

Distribution of wealth in economics

In economics, wealth is the aggregate of all assets of a firm, household, or government that generates income for the future.

Fig. 1 - The Elms mansion, Wikimedia Commons

The difference between income and wealth

Table 1. Key differences between income and wealth.

Types of wealth

Net property wealth, net financial wealth, physical wealth, and private pension wealth all contribute to total wealth.

Fig. 3 - Types of wealth

Factors that influence the distribution of wealth

The factors that influence the distribution of wealth are primarily linked to the income individuals generate. That is because the higher the income a person generates, the higher their savings are. The main factors influencing the distribution of wealth include capital gains benefit, private pension assets, inheritance, and the difference in tax between income and wealth.

Fig. 4 - Factors that influence wealth distribution

Capital gains benefit

Capital gains are the value a person receives from property prices or stocks they’ve invested in. Property and real estate usually gain value over time, enabling an individual to gain more wealth.

However, when you have more people who own durable goods such as TV, cars, or more people paying rent, this will influence the distribution of wealth in society. The reason for that is that unlike assets like real estate, durable goods lose value with time. This means that an individual’s wealth is depreciating.

Private pension assets

Usually, private pension assets outperform the pension funds government distributes to individuals. The more people invest in private pension assets, the more wealth they will generate, which in turn influences the distribution of wealth. However, when workers rely solely on a government pension, the distribution of wealth will be more unequal.

Inheritance

The total amount of assets that one inherits plays an influencing factor when it comes to wealth distribution. Individuals who have inherited their wealth and continued to build upon it, like the Rothschild Family, are known as people with ‘old wealth,’ whereas individuals who have built their wealth from the beginning, such as Bill Gates, are known as ‘new wealth’.

Both new wealth and old wealth can significantly influence the distribution of income. Usually, when you have a huge amount of inherited wealth, the wealth will remain concentrated in a family and not flow to other members of society.

The difference in tax between wealth and income

The taxation difference between wealth and income plays an important role in the distribution of wealth. Usually, when income is taxed more, it will cause an unequal distribution of wealth. That is because a part of an individual’s income will be consumed by tax, which will lower their ability to invest in assets that generate wealth.

The UK tax for income is higher than it is for wealth.

Wealth distribution in the UK: the reasons for wealth inequality

During the Covid-19 Pandemic, Britain's wealth gap widened, with the richest 10% of the population receiving an average of £50,000, dwarfing advances for the lowest third of the population according to Resolution Foundation.

Wealth surged during the lockdown as a consequence of a lack of spending possibilities and growing property values, but the gains were skewed to the affluent by a ratio of more than 500 to 1.

The UK has a lot of money, but it's distributed very unequally. Over the last three decades, total net household wealth as a percentage of national income has doubled. Understanding the scale and form of wealth in the United Kingdom is critical for policymakers, and it provides context for the growing interest in wealth taxes in the country.

The reasons for wealth inequality in the UK include:

Fig. 5 - Reasons for wealth inequality in the UK

1. Pension inability: in recent years, wealthier households have invested more of their income in private-sector pensions, which are known to outperform the UK government pensions. For the wealthiest 30% of families, private pension money contributes the most to their overall wealth¹. This has contributed to a rise in wealth inequality in the country as most people can’t contribute to private pension funds.
2. Property prices: since the 1960s, property prices in the United Kingdom have risen at a significantly higher rate than inflation. Rising property prices have resulted in a significant increase in household wealth for property owners. The divide between property owners and non-property owners has grown as a result of this. This has been worked by the rise in second houses and buy-to-let properties, which allow families to build a property portfolio.
3. Savings ability: low-income people rarely have the ability to save. They have a high marginal proclivity for consumption. People with greater salaries have a reduced marginal propensity to consume in comparison, and they have the opportunity to save (for example, in private pensions and personal savings accounts) after their purchasing needs.
4. Increased income disparity: according to an OECD report, the UK has been experiencing an increase in income inequality. This has also contributed to the rise in wealth inequality, as those individuals whose income has decreased were also less able to save².
5. Capital returns: in his book Capital in the Twenty-First Century, Thomas Piketty argues that the rate of return on capital (property, asset investment) has continuously outperformed the rate of return on economic growth³. This indicates that wealth returns are higher than actual income growth. This leads to a rise in wealth disparity, which he observes has been a hallmark of the developed world for the previous 20 years.

Distribution of wealth in the world: some examples

The world’s richest 1%, individuals with more than $1 million, possess 43.4% of the world’s wealth, according to the Credit Suisse Global Wealth Report. Adults with less than $10,000 in wealth account for 53.6% of the worldwide population but only have 1.4% of global wealth, according to their findings. Individuals with assets worth more than $100,000 account for 12.4% of the world population but 83.9% of global wealth.

According to Forbes, the world's top ten billionaires hold a combined fortune of $1,14 trillion, which is more than the entire products and services produced by most countries on an annual basis. According to Forbes' 2021 ranking, the world is home to 2,755 billionaires.

Extremely wealthy people have amassed their riches on the backs of others all around the world who labour for low salaries and in hazardous conditions.

The wealth gap between the world's billionaires and the bottom half of humankind is widening, according to Oxfam. The number of billionaires required to match the wealth of the world's poorest half reduced from 380 to 26 between 2009 and 2018.

A ‘high net worth individual’ according to Capgemini, is someone with at least $1 million in investment assets (not including their primary residence and consumer goods). In 2019, the total number of high-net-worth people surpassed 19 million.

The great majority of them have assets worth less than $5 million. The top tier of these rich individuals, those worth at least $30 million, grew dramatically in 2019 after dipping marginally in 2018 due to a fall in equities markets, according to the Capgemini annual study.

Distribution of wealth graph

The degree of wealth inequality can be depicted on a Lorenz curve graph. Figure 6 below shows a Lorenz Curve.

Fig. 6 - Lorenz Curve, StudySmarter Original

In the Lorenz curve, the population percentile is on the horizontal axis. The vertical axis represents the cumulative wealth percentile. If everyone in an economy possesses the same amount of wealth, there is perfect equality in wealth. In that case, we would have the Lorenz curve match the 45° straight line with a slope of 1, also known as the line of equality.

Interpreting the data from the Lorenz curve is simple. Pick a point from the x axis and read off the y axis. For example, reading off the diagram, 50% of the population has access to up to and including 5% of the country's wealth. In this example, wealth is distributed very unequally as half of the population has a very small share of the country’s wealth.