2.7 - Income, wealth, poverty and inequality
Average income can rise while some households become poorer. Learn to distinguish income from wealth, read distributions and Lorenz curves, and evaluate why poverty and inequality matter without treating every difference in income as the same problem.
Income flows and wealth stocks
Income is a flow received over a period; wealth is a stock of assets less liabilities at a particular date.
Wages, pensions, interest and dividends are income. Savings, property and investments are assets; loans are liabilities. A household with a £250,000 home, £20,000 savings and £150,000 mortgage has net wealth of £120,000. That does not mean it receives £120,000 each year or can easily spend its housing wealth. A retired owner may have high wealth but low current income, while a graduate can earn a high salary and have low net wealth because of debt.
Inequality concerns how unevenly a resource is distributed. Income inequality and wealth inequality need not move together: asset prices and inheritances affect wealth, while wages, transfers and taxes affect income. Compare like measures. Gross earnings, disposable household income and equivalised income answer different questions. Equivalisation adjusts household income for size and composition, because £30,000 supports a single adult differently from a family of five. Housing costs can also change purchasing power substantially.
An increase in national income need not benefit each household proportionately. If returns to capital rise mainly for existing asset owners, average income can increase while low-wage households gain little. The distribution is therefore relevant alongside the total.
Absolute and relative poverty
Absolute poverty concerns resources below a fixed real standard, often linked to basic needs; relative poverty concerns resources far below the standard of others in the society.
A relative threshold can be a fraction of contemporary median equivalised disposable income. In an illustrative economy using 60%, median weekly income of £500 gives a £300 threshold. If the median rises to £550, the threshold rises to £330. A household rising from £310 to £320 could therefore cross into relative low income despite a nominal income increase; its real position also depends on prices.
A fixed-real threshold changes in money terms with inflation, rather than following the current median. If its base amount is £300 and prices rise 10%, it becomes £330. That is an absolute measure tracking purchasing power. The label alone is insufficient: identify the actual standard, base year, income measure and price adjustment. The UK's official HBAI measure of absolute low income uses a fixed reference-year median adjusted for inflation; it is not directly a global subsistence basket. Its reference year can change when methodology changes. DWP guidance updated March 2026 explains the current definitions.
Before-housing-cost and after-housing-cost measures can differ. A family with reasonable recorded income but exceptionally high rent may struggle to afford essentials. Income surveys can miss some people, and income alone does not capture material deprivation, access to services, disability-related costs or assets. Poverty and inequality are related but distinct: everyone can have equally low incomes and serious poverty, while unequal incomes can exist where everyone meets basic needs.
Quantiles and summary measures
Quantiles locate positions in an ordered distribution; they reveal differences that a single average can hide.
The median, or 50th percentile, divides observations into two halves. Order the observations first: with an odd number take the middle value; with an even number average the two middle values. Quartiles divide into four equal groups, deciles into ten and quintiles into five. The “top quintile” means the highest-income fifth of people; it is a group, whereas the 80th-percentile boundary is a cutoff. A top-quintile share is the income received by that group divided by total income, not its population share, which is 20% by construction.
For illustrative incomes £10,000, £15,000, £20,000, £25,000 and £80,000, the mean is £150,000/5 = £30,000 and the median £20,000. A large top income pulls up the mean; neither measure alone tells us the bottom group's position. If the top income rises to £130,000, the mean rises to £40,000 while the median remains £20,000. Compare percentile cutoffs or group shares to investigate the change. Quantile interpolation conventions can differ for small samples, so use the stated method when calculating cutoffs.
The Gini coefficient summarises inequality across the distribution, commonly on a 0–1 or 0–100 scale. Zero denotes equality; a larger value indicates greater inequality under the same definition and scale. A move from 0.30 to 0.36 is an increase of 0.06, or six points on a 0–100 scale, not a six-percentage-point rise in everyone's income share. A Gini of 0.36 does not mean that 36% of people are poor. Different distributions can share a Gini, so also examine quantiles, poverty and whether the measure concerns income or wealth, before or after taxes and transfers.
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