What are the drivers of wealth inequality in the UK and how can they be addressed?

Nathan Samuel

The rich are getting richer. Let’s find out why.

Wealth inequality refers to how unevenly assets are distributed among a population. Wealth is measured by taking the market value of one’s physical and intangible assets and subtracting the value of their liabilities. Wealth inequality creates significant issues from high crime rates to economic drag and many more.

Thomas Piketty had a famous mathematical inequality that stated r>g. The letter g represents the rate of growth of the economy, referring to the long-run rate of growth in the economy. This is strongly linked to the growth rate of salaries in the economy. The r represents the average rate of returns for an asset, in essence, the overall increase in value of one’s investments, including income streams that these assets generate, each year.

Piketty said that when this inequality holds true for an economy, those who own large quantities of assets earn from their assets completely passively. These income streams can be reinvested into appreciating assets, leading to compounding returns. For those who do not own wealth in the form of economic assets, their regular incomes will not be able to keep up with the compounding value of their wealth-owning counterparts.

Another driver of inequality is skill-biased technological change (SBTC). This is prevalent in the modern day, through new innovations which has been shown through the plethora of new generative AI models such as ChatGPT. The theory is most easily explained through the example of a car manufacturer. Imagine a factory using labour-intensive methods to produce cars, these workers are typically low-skill workers. Then, the firm invests in new capital, imagine they have bought many car-making machines. These machines are more productive than the old workers. As a result, the demand for low-skilled workers decreases, which leads to layoffs, or wage stagnation. On the other hand, the demand for high-skill workers, such as software developers and maintenance labourers who work on these machines increases. The demand for labour is positively linked to the wages that the workers are paid. The wages of these highly skilled workers increase relative to the constant low-skilled workers. This creates a disparity in salary, which drives inequality.

Combating inequality is a problem that has stumped economists for many years. In order to solve the wealth accumulation problem that arises in an economy, Piketty recommended progressive wealth taxes. These taxes would be levied on any net wealth above a certain threshold, for example, £1,000,000. This would mitigate the excessive compounding effect that comes with wealth accumulation and will help redistribute wealth to the lower classes, thereby, reducing inequality. Furthermore, this extra tax revenue could help reduce the size of the budget deficit and could improve the UK’s infrastructure, therefore, increasing productivity.

However, some of the issues that come with this policy would be that it would be very difficult to value some of the non-liquid assets that people own. For example, private business shares, land and art. This would create a grey area within the tax, making it difficult for the government to know how much and on whom to levy the tax, as a result, making it difficult to collect the total amount of tax revenue. In addition, this policy would exacerbate the strain on the tax collectors, and significantly increase the administrative cost of collecting this tax. Also, the effectiveness of this tax is highly dependent on international coordination with this policy. If there is no cooperation, then the wealthy will move their holdings elsewhere to offshore “tax havens”. Some may also argue that it is unfair that they are being double taxed, which is being taxed through means such as income, corporate and capital gains tax; as well as this progressive wealth tax.

To tackle SBTC, one policy that would be effective is a lifelong learning program, similar to those in Singapore. These programs would be able to upskill the low-skill workers. This would increase the skills that these workers have, in turn, causing an increasingly flexible labour market. These programs would help those of all ages, whether that be those in school to those with lots of experience. This could be provided through learning centres and through short online courses; the content could cover a wide scope such as financial literacy, data science, programming and many more. Topics like these are often alluded to as “high-skill”, but this is often a misconception. A state-provided lifelong education system would help break down these barriers and create a more productive society, alongside reducing structural unemployment.

The effectiveness of this lifelong learning program relies on the fact that adults will be willing and able to continue to learn. For some adults, it may not be feasible to cut down their working hours in order to be in part-time education due to the requirement to provide for their children. Moreover, the quality of the courses may not be up to scratch for many firms and the courses’ content may not translate to the demand in the labour market, leading to the newly learned content being futile.

Overall, there is no single policy that will solve the UK’s wealth inequality. It is a multi-faceted problem that has countless causes. The main causes of wealth inequality are the wealth accumulation effect caused by the imbalance of wealth growth and income growth. Thomas Piketty materialised this through his r>g expression, showing that inequality will only get worse if this expression is true. The evidence suggests that a progressive wealth tax will be the most effective way to tackle this issue. The other main driver is the bias that occurs when a firm adopts new technology. This favours higher skilled workers, causing their wages to increase, therefore, to an increase in wealth inequality. A lifelong learning program would be a historically unorthodox approach but seems to be the most effective strategy in combating the bias created by technological change.