Myths or realities: what do we know about income and wealth inequalities?

Jerome De Henau and Jonquil Lowe are educators on The Open University’s free online course, “Inequalities in Personal Finance: the Baby Boom Legacy.” In this post, they discuss some of the myths and realities that surround these inequalities.

A scale with pennies on one side and a stack of bank notes on the other, representing financial inequalities

As the gap between rich and poor, young and old, and the haves and have-nots appears to grow ever wider, there are heated debates about what types of inequality we mean, how they come about and what to do about them.

Our course addresses these issues, teases out the controversies and scrutinises a number of popular myths. Here are a few of them:

1. Income inequalities are good for economic growth

Growing differences in income between rich and poor help boost economic activity and thus growth, because when rich people get richer, they invest in new businesses and hire people. This also reflects the popular acceptance that earnings differences stimulate aspiration and hard work, thereby fuelling economic performance.

2. A growing gap between rich and poor in each country is an inevitable effect of globalisation

Competition from emerging countries, such as China, India and Brazil, pushes market prices down and makes it harder for less skilled workers in affluent countries to get by. There is an inevitable downward pressure on their wages, to try to keep businesses in these countries afloat.

3. Wealth will always trickle down

As rich people get richer, they will consume more goods and use the paid services of a number of other people, thereby spending their wealth for other people to benefit from. They will also invest more of their money in lucrative businesses, boosting employment and earnings as a result.

4. Private pensions are the best way to provide financial security in old age

Giving people the choice of their financial security is more effective in guaranteeing their future than providing them with a state pension. People know best what sort of lifestyle they want to have, and the circumstances and life events they will face.

5. The only way to tackle housing inequality is to provide financial support for buyers

In many countries house prices have risen sharply, even after the financial crisis that started in 2008. If people who currently live in private rental accommodation aspire to buy their own home, government support with the cost of buying could prove very effective for them.

6. Income differences are justified as long as there is equality of opportunity

The problem is not inequality in outcomes (how rich or poor one has become), as this reflect choices people have made during their lifetime, as well as some luck. Tackling inequality of opportunities (the chances a person has of success in their lifetime) is the issue that those worried about growing income differences should focus on.

So, do you agree with these statements? Do you think they should be challenged? Leave your comments below or join “Inequalities in Personal Finance: the Baby Boom Legacy” to explore the debate further.

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Comments (49)

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  • Manuel Gutierrez

    I think all of the statements above have to be placed within the economic context of a country. I look forward to learning how they are explored and addressed in this course.

  • Freddy

    I really liked your post.Much thanks again. Awesome.

  • marcus cooper

    Three comments from me, a couple of weeks before the course starts:
    1. I was born in 1944, so am even slightly too old to be a boomer by most definitions.

    2. I am puzzled by the statistics on wealth. Yes, I pay income tax but as far as I am aware, I am not asked to declare my wealth. So who knows what it is? (Yes, I do own my own house, but are there integrated data-bases which include its value in my wealth?). Additionally, I have made trusts of modest size, setting aside some of my assets for the benefit of future generations. Do these count as my assets too?

    3. My wife and I have made wills. Our current wealth will pass down to our heirs (family, charities and (inevitably) the government through IHT etc). So our “wealth” is temporary -“no pockets in shrouds” -to quote the old saying -and will pass on to future generations.

    So, I look forward to discussing this problem of inter-generational wealth differences

  • Ron Page

    It is unclear (no doubt intentionally) what you consider to be myth or reality in these statements. The issue of growing inequality and its symptoms and causes should be a hugely important and urgent part of the debate on the future economic success and social stability within and between countries, but there appears not to exist any coherent national or international framework within which a sensible debate on policy options can even begin. The trivial approach to issues raised in this debate thus far is exemplified provocatively in your course headline “…..BabyBoom Legacy”, a narrow but important subject; and one that even ex Gov minister “two brains” Willets corrupts in his efforts to popularise his views in the manner of media headline writers, who commonly use it as a term of abuse, or to imply “well off”. When in ‘reality’ he and informed others know that:
    – up to a third of 65-69 year olds have no personal or private pensions
    – one in four live in rental accommodation
    – fewer than 1 in 5 went university
    etc etc

    This misrepresentation definitely sells stories, but it also creates division and resentment between the generations and debases the debate.

  • areg

    well stated thank you.

  • Edwin Wood

    This does get at my conscience. I am of the “Baby Boomer” generation and I do thank my lucky stars. No, I do not have an index linked public service pension. I have been self employed all my life, always worked at least six days a week, usually at least 10 hours a day, and started to phase out of work at age 73. I have my own house and quite modest savings; not enough to make me a UK tax payer but enough to make me feel secure in a modest life style. But I really feel for my grand children. I have no idea how I could have faced what they have in front of them. It pricks my conscience and I feel that I should help them.
    Yes, I also feel for the huge numbers of refugees on the southern borders of Europe and wish I could help everyone but my human instinct is to do what I can to protect the continuity of my genes. I call it love for my family.

  • Grace-charity

    The trickle down effect can be experienced yes. but the rich have much influence and if not checked others would take exploit of the poor who are working for them by paying them inadequately. Transparency and incentives to the rich for employing the poor could bring in fair remunerations to the poor.

    I would also wish to see Govts in developing countries supporting their pple acquire assets/houses by offering favourable loan conditions to all and addition special considerations for those in much need than the rich.

    However, in some cases even the poor need to work hard to earn their living instead of always waiting for the Govt or some charitable organisations to alleviate their dillemas.

    The Govts should also promote technologies together with necessary skills to all citizen to ease the burdens of hard labour less returns.

    perhaps using both mandatory pension (proportional) and letting a citizen choose own financial security would provide a safety net in case the privately financial security falls off.

  • AC Palmer

    #2. One cause of the increasing disparity within a country is the disappearance of low-skilled jobs — and this loss would occur with or without globalization. Mechanization and other non-manual technology is replacing many workers who do not have the ability (or desire) to take on different work in this new world. The mantra of “more education” will not solve their problem in finding employment. We must consider how to create meaningful jobs for all levels of skills. I fear that the “services” industries (hospitality, food, health, etc) may not be enough, and most certainly don’t pay enough.

  • Pat Rudkins

    Right wing provocation, methinks. What about the growth of capitalism? Are fair shares for all, anti- militarism & ecological awareness, concepts too difficult to grasp?

  • Nuhu Ajodi

    Each of the statements does have some logics on the surface. However extrapolating the statements to the nation where I leave, some of them will not hold water. Because in most developing countries especially in Africa, the Leaders just do outright stealing and stash their loots abroad. The so called business men get Government patronage and rather than invest in the same economy they invest instead in UAE and western world. However like I mentioned earlier, there is definitely looking gif behind those statements and may hold water in the developed world.

    • Manuel Gutierrez

      Hi, I made a statement above that all the positions mentioned in the intro can’t be taken without a context. You are right in stating that both government and business graft (or cronyism) are a problem.
      A good question is why do businesses not invest in African countries? Is it because of greater risk for the investment?

  • anng

    All of those statements have some insight – but are far, far, too simplistic.

  • zakie

    after read your sentences, I think the problem in both countries between developing countries and developed countries is how we get what,why and when? each countries have their problem . lets me explain first about the developed countries, they have so much of capital or people who has many money which can be used to build some coorporation, and they also have the higher intelectualities than developing countries people . but theproblem is on how they can use their money if in their domain there’s no field to build some factories, and also poor on their natural resources so that’s why they need developing countries to spend their money ang make it still keep in cyrcle. in the otherhand developing countries, they have many resources but they havent had the high technology to manage the resources althought many intelectual people in their maybe the problem in theri policy maker itself, but the problem where often happening in this case when the Foreign coorporation get the high profit or advantages but the developing copuntries just get the little bite from their efforts and it is not comparable with what they give and what they will get so. thats why this case makes wealth inequal

  • Frances

    I don’t really agree with any of the above statements. They strike me as either/or type of statements and do not address the realities of economic spaces.

  • Lee

    Difficult to answer. I have gut responses but hesitate because of the following. I don’t understand the fundamental principle behind money ! growth, why we need to grow, who invented money, why does it need to grow. Is there more and more money in the world every decade or is the same amount of money with a differnt value attached to it. My head hurts.
    What / where is the source. The big bang if you like, where it begin my friends ?

  • V

    1 + 3: wealth trickles down/redistributed? Ha. Not much
    2. This is why they’re pushing everyone into university even though there aren’t enough graduate jobs, forcing graduates into traditionally non-graduate jobs (& reducing these jobs for less educated people as they are taken by graduates, European migrants and sometimes the older people forced to work longer). It means you need a MA/PhD now, more debt and lower financial returns over your lifetime coupled with greater job insecurity.
    4. If you can afford a private pension. Look forward to a tough time if not, since we have an ageing population we are struggling to pay for.
    5. In debt to the government (unless they sell that debt too) & ever worsening new housing bubble probably. Interest only mortgage you didn’t save for? Not planning for future interest rate increases? Oh dear.
    6. There’s never been or likely will be equality of opportunity. From the age of 2 the inequality begins with education & it just gets worse as wealthy parents gift their children ever more advantages, which the non-wealthy never can. Btw, why are private schools given charitable status? What a joke. Acadamies are another inequality and Tory con.

    • Sharon

      My thoughts exactly. There is to my knowledge NO evidence that that when the rich get richer they spend more creating a waterfall effect, money passing downward to the less rich and eventually the poor. T was under the impression that this idea had been debunked in the 1980’s under the Reagan and Thatcher administrations (West).

  • davinder

    i do firmly agree

  • Winnie Wong

    Point 1. The rich people have a lot of power esp in countries like China & India. This could lead to immorality as they can buy their way out even when they commit a crime ie one law for the rich, one law for the poor. Corruption is common place. I consider myself extremely fortunate that I am Not living in China or India.
    Point 4. It is debatable that one knows one’s lifestyle best or circumstances best. No one can predict what their future holds. Even elderly couples get divorced. Instances such this can dramatically change one’s financial situation.

  • Winnie Wong

    Point 1. The rich people have a lot of power esp in countries like China & India. This could lead to immorality as they can buy their way out even when they commit a crime ie one law for the rich, one law for the poor. Corruption is common place. I consider myself extremely fortunate that I am Not living in China or India.
    Point 4. It is debatable that one knows one’s lifestyle best or circumstances best. No one can predict what their future holds. Even elderly couples get divorced. Instances such this can dramatically change one’s financial situation.

  • David Thatcher

    A question, please, how does this course compare with that on line earlier this year,which I found very good.

    • david thatcher

      How does this course compare with that on line earlier this year, which I found very good?

  • Charles Tutt

    I think each and every one of those assumptions are challengeable.