Income and wealth can become unevenly distributed when market outcomes and institutions reward some people more than others. This page explains the main mechanisms in the syllabus and how each can widen gaps over time.

Foundations: what drives unequal outcomes?

Differences in opportunity, productivity, and market power can translate into persistent differences in income (a flow, like wages) and wealth (a stock, like assets).

This Lorenz curve compares an equal distribution (the 45° line) with an unequal distribution (the bowed curve). The farther the Lorenz curve lies below the line of equality, the more concentrated income/wealth is among higher-ranked households. The shaded “gap” between the two is the geometric intuition behind summary inequality measures like the Gini coefficient. Source

Many causes interact: for example, inheritance can fund education, which raises human capital, which increases bargaining power.

Key causes of income and wealth inequality

Tax structures

Tax structures shape after-tax income and the ability to build wealth.

• Progressive taxes reduce after-tax inequality by taking a larger percentage from higher incomes.

• Regressive taxes (often consumption-based) can increase inequality because lower-income households pay a higher share of their income.

• Preferences for taxing income vs. capital gains can affect wealth concentration, since high-wealth households receive more income from assets.

Human capital

Differences in human capital lead to different earnings because more productive workers tend to earn higher wages.

• Unequal access to high-quality schooling, training, healthcare, or stable childhood environments can limit skill development.

• When returns to education and specialised skills rise, wage gaps can widen even if employment is strong.

• Skill differences can compound: higher earnings allow more investment in further education and credentials.

Social capital

Social capital (networks, norms, and connections) can affect access to information and job opportunities.

• Referrals and professional networks can raise hiring chances and promotions, even at similar skill levels.

• Strong networks can reduce job-search time and improve match quality, raising lifetime earnings.

Inheritance

Inheritance can increase wealth inequality directly and indirectly.

• Large transfers of assets (property, shares) increase the recipient’s wealth immediately.

• Inherited wealth can generate capital income, allowing faster wealth growth than wage income alone.

• Families with wealth can fund education, unpaid internships, housing in high-opportunity areas, and business start-ups, reinforcing income advantages.

Discrimination

Discrimination can reduce earnings and wealth-building for affected groups, even when productivity is similar.

• Hiring, pay, promotion, and lending discrimination can lower income and limit asset accumulation.

• Occupational segregation (channeling workers into lower-paid roles) can persist through norms and biased screening.

• Lower expected returns to education due to discrimination can reduce incentives or ability to invest in human capital.

Financial access

Unequal financial access changes who can borrow, save securely, and invest.

• Limited access to affordable credit can prevent education, training, homeownership, or entrepreneurship.

• Higher interest rates for riskier borrowers raise repayment burdens, reducing saving and wealth accumulation.

• Lack of banking services can increase transaction costs and reduce safe saving options.

Mobility

Low economic mobility means starting position strongly predicts lifetime outcomes.

• Barriers to moving to high-opportunity areas (housing costs, zoning, job relocation costs) can lock in disadvantage.

• Under-resourced schools and limited local job networks reduce upward mobility.

• When mobility is low, inequality becomes more persistent across generations.

Bargaining power

Differences in bargaining power affect wage setting and working conditions.

• Workers with scarce skills, strong outside options, or union support may negotiate higher pay.

• Employers with hiring power (limited competition for workers) can hold wages below workers’ marginal contributions.

This diagram shows a monopsony labor market where the employer faces an upward-sloping labor supply curve and a higher marginal cost of labor (MC$_L$). The firm hires where MC$_L$ intersects labor demand (D$_L$), then pays the wage on the supply curve at that employment level—creating a wage below the competitive benchmark. The figure illustrates how employer market power can lower both wages and employment relative to perfect competition. Source

• Bargaining outcomes influence not only wages but also benefits, scheduling stability, and career progression, affecting long-run income and saving.