PREVIOUSNEXT

Types of Inequality: Wage, Income and Wealth

SG Inequality Logo Mini2.jpg
  • SG Inequality Facebook

15 May 2011

In Singapore, debates on social inequality have so far revolved around differences in earnings from works (i.e. wages). But inequality exists not only in terms of wages but also income and wealth. It is therefore important to be able to distinguish between wage, income and wealth. The terms wage and income, for example, have often been used interchangeably but understanding their difference goes a long way in seeing the underlying dynamics driving social inequality.

 

Wage, to begin with, is what employers pay to employees in return for work performed by the latter, on the basis of either part-time or full-time as well as on contract or permanent employment. Income, on the other hand, takes into consideration interests from savings or returns from investment assets (e.g. dividends, rentals and capital gains from sales of assets), in addition to wage. Both wage (from work) and investment income (from capital) therefore are flow of earnings that recur periodically. In general, high-wage earners are more likely to be left with higher unspent earnings which they can invest to generate investment income.

Wage Income & Wealth copy.jpg

Wealth, in contrast, is a stock concept that points to the net worth of an individual or a household at any point in time. It is the summation value of all assets, net of all debts. These assets, including cash holding, savings in the bank, equity (shares), debt (bonds), and property can either be accumulated in current generation or also inherited from previous generations.

In general, the higher flow of wages and investment income, the higher is the stock of wealth a household is likely to possess. Wealthy households therefore may have little wage income but live off investment incomes derived from the assets. Over time, wealth can be invested in assets to breed more wealth in the forms of investment income and capital appreciation.

Wealth is accumulated for various reasons. The Life Cycle Model, for example, depicts wealth accumulation as the need for one to save during his younger and more productive years to finance his retirement or to tie him over during periods of unexpected and unfortunate eventualities. On the other hand, wealth can be accumulated also for handing down to future generations. In the Dynastic Model, the wealth that is passed down not only affords the offspring a life of abundance but also gives them a head start over their peers. The inter-generational transfer of wealth in the Dynastic Model therefore not only perpetrates but also magnifies inequality across generations.

In short, inequality is not just about wages. To see the true extent of the social gap, it is important to also look at inheritable income and wealth inequality

Income and Wealth Inequality is more Damaging than Wage Inequality

 

Of the three types of inequality, wage inequality usually raises the most alarm because the pains are immediate for households in the lower rungs. But over the longer term, inequality is accelerated by incomes from investments which households in the lower rungs have less means to do.

 

For a long time, it was presumed by many researchers that inequality had been driven more by wages than by income from capital because, even though capital income was less equally distributed, it accounted for a relative small share of overall income for most families. The publication of Capital in the 21st Century by French professor Thomas Picketty, however, fundamentally invalidates that presupposition.[1]

Based on data collected from tax records rather than income surveys, Picketty and his associate researchers have argued that capital income has played a very significant role in the recent trend of increasing inequality, and is likely to play an even more important role in the future especially against a background of declining labour shares  across developed countries. In the US, for example, Gini coefficient rose from 0.48 to 0.59 between 1979 and 2007 if capital gains were included in the calculation of the index. [2]

But across generations, it is the unequal inter-generational transfers of wealth that will really magnify inequality. This is because wealth breeds more wealth and the longer the time frame, the more wealth is accumulated. In the end, the unequal wealth distribution will inadvertently undermine social mobility and results in the emergence of social classes that cause division to a society.

In the US, for example, 42% of children born in poverty would never get out of poverty.[3] A 2008 study by Pew Charitable Trusts comparing social mobility in different countries also shows that in low mobility countries like the US and the UK, 50% of parental earning advantages are passed down to benefit 6 generations before advantage disappear. In contrast, in high mobility countries such as Canada, Norway, Finland, and Denmark, less than 20% income advantages are passed down to offspring and it would take 3 generations to cancel out that advantage.[4]

Finally, what makes wealth inequality even more worrisome is the fact that and it is evolving pretty much under the radar. In many countries, there is often no systemic studies over time, whether by policymakers or academics, of the wealth gap. Moreover, in the past, wealth was usually invested in immovable assets such as land and property. In the context of globalized finance today,  wealth can be easily shifted and hidden. As a result, no one can put a finger on exactly how unequal wealth distribution really is.

NEXT02 Different Ways of Calculating Gini Coefficient Using Different Data

MUST READ List

TOP

REFERENCES

[1] See Piketty. (2014)

[2] See Boushey, H. & Hersh, A. (2012)

[3] Robert Reich. Public Lecture “Inequality for All”

[4] See Isaacs, J.B. (2008)