Income Distribution and the Lorenz Curve

The distribution of income and wealth is one of the most important and contested issues in economics. How equally or unequally a society distributes its economic resources affects everything from health outcomes and educational attainment to social cohesion and political stability. This lesson examines how economists measure inequality and what the UK data reveals.

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Income vs. Wealth

It is essential to distinguish between income and wealth — a distinction that students frequently confuse:

Key Definition: Income is a flow of money received over a period of time (wages, salaries, interest, dividends, rent, pensions, and benefits).

Key Definition: Wealth is a stock of assets owned at a point in time (property, savings, shares, pensions, physical assets such as cars and jewellery, minus any debts).

Feature	Income	Wealth
Type	Flow (per week/month/year)	Stock (at a point in time)
Measurement	£ per year	Net worth (assets minus liabilities)
Sources	Wages, benefits, investment income	Property, pensions, financial assets
UK data source	HMRC, ONS ASHE, DWP HBAI	ONS Wealth and Assets Survey
Distribution	Unequal, but less so than wealth	Very unequal

Key fact: Wealth is far more unequally distributed than income. In the UK (2020, ONS Wealth and Assets Survey):

• The wealthiest 10% of households held 43% of total wealth.
• The least wealthy 50% of households held just 9% of total wealth.
• Total UK household wealth was approximately £15.2 trillion.

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Measuring Income Inequality

The Lorenz Curve

The Lorenz Curve was developed by Max Lorenz (1905) as a graphical representation of the distribution of income (or wealth) in a society.

How to construct a Lorenz Curve:

1. Rank all individuals (or households) from lowest to highest income.
2. Plot the cumulative percentage of the population on the horizontal axis.
3. Plot the cumulative percentage of income on the vertical axis.
4. Join the points to form the Lorenz Curve.

Interpretation:

• The line of perfect equality is a 45-degree diagonal line — it represents a hypothetical distribution where every individual has the same income (the bottom 20% earn 20% of income, the bottom 50% earn 50%, etc.).
• The Lorenz Curve lies below the line of equality. The further the curve bows away from the diagonal, the more unequal the distribution.
• The area between the line of equality and the Lorenz Curve represents the degree of inequality.

Population Percentile	Cumulative % of Income (Perfect Equality)	Cumulative % of Income (UK, approximate)
Bottom 20%	20%	7%
Bottom 40%	40%	18%
Bottom 60%	60%	34%
Bottom 80%	80%	56%
Top 100%	100%	100%

Exam Tip: When drawing a Lorenz Curve, always include: (1) the 45-degree line of equality, (2) the Lorenz Curve bowing below it, (3) clear labels on both axes (cumulative % of population; cumulative % of income), and (4) shade or label the area between the two curves as representing inequality. A second Lorenz Curve can be drawn to show a change over time or to compare two countries.

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The Gini Coefficient

The Gini coefficient was developed by the Italian statistician Corrado Gini (1912) and provides a single numerical measure of inequality.

Key Definition: The Gini coefficient is the ratio of the area between the Lorenz Curve and the line of equality to the total area under the line of equality. It ranges from 0 (perfect equality) to 1 (perfect inequality).

Gini = A / (A + B)

Where:

• A = area between the line of equality and the Lorenz Curve
• B = area under the Lorenz Curve

UK Gini Coefficient (Income)

Year	Gini Coefficient (Disposable Income)	Context
1977	0.25	Pre-Thatcher era; strong unions, progressive taxation
1990	0.34	Sharp rise under Thatcher: tax cuts for high earners, union decline, deregulation
2000	0.35	Broadly stable under Major and early Blair
2010	0.34	Slight reduction under Labour's tax credits and minimum wage
2022	0.33	Relatively stable; impact of Universal Credit and NLW

Source: ONS, Institute for Fiscal Studies (IFS)

Key trends:

• The UK experienced a dramatic increase in inequality between 1979 and 1990 — the Gini coefficient rose by almost 10 percentage points, the largest increase in any OECD country during that period.
• Since 1990, income inequality has been broadly stable at historically high levels.
• The UK's Gini coefficient is higher than most Western European countries (France 0.29, Germany 0.30, Sweden 0.27) but lower than the USA (0.40).

International Comparison

Country	Gini Coefficient (2022, approx.)
Sweden	0.27
Germany	0.30
France	0.29
UK	0.33
USA	0.40
Brazil	0.49
South Africa	0.63

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Causes of Income Inequality