Essential definitions

Human capital

Knowledge, skills and health that support productive work.

Intergenerational inequality

Differences in economic advantage that persist between parents and children.

Why earnings differ

Education, experience and health affect people's ability to perform particular work. Technology can raise demand for some skills while replacing routine tasks. Trade can expand one industry and contract another, leaving different effects across regions. These changes influence earnings even when workers make similar efforts.

Pay also depends on bargaining power, networks and access to jobs. Discrimination can exclude equally capable applicants. Not every income difference therefore measures a difference in productive contribution. Identify the mechanism rather than treating all gaps as either deserved rewards or proof of one single cause.

How disadvantage can reinforce itself

Assets such as land and shares generate rent, interest and profit. Inheritance can fund study or a business and protect a household during unemployment. A poorer household may face expensive credit and be unable to make the same investment. Lower education then limits future earnings, making saving harder for the next generation.

This is a possible poverty cycle, not an unavoidable destiny. Effective schooling, healthcare and access to finance can interrupt it. Tax and benefit rules also change the gap between market and disposable income. Weaker bargaining protection or lower support may improve some incentives while exposing vulnerable workers to losses.

Explain the wider consequences

Some income differences reward training, enterprise and risk-taking. But barriers preventing capable people from studying or starting firms waste productive talent. Exclusion can damage health, trust and social participation, while concentrated influence may protect existing advantages. The effect on growth depends on what creates and sustains the inequality.

Imagine factory workers displaced while nearby technology firms need qualifications they lack. Income support addresses immediate hardship; relevant training, transport and childcare address access to new work. Judge a proposal by which link it changes, its timing and its costs. Rising aggregate output alone does not show whether those displaced workers share the gains.

Apply and evaluate

• Distinguish incentives for productive effort from unequal access to opportunity; their growth effects can differ.

Real-world application

Sources and applications

• IB Economics guide: first assessment 2024, updated October 2022 · 2022-10