Sources of Income and Wealth Inequality

Start from factor markets. A firm hires workers up to the point where wage equals marginal revenue product, the extra revenue one more worker generates. A surgeon's hour generates far more revenue than a cashier's hour, so the surgeon is paid more. That alone explains much of the income gap: different skills, different equipment, different industries, different marginal products, different pay.

Wealth gaps grow faster than income gaps because advantages compound. Human capital, the education and skills a person builds, raises marginal product and future earnings, and people with more resources invest more in it for themselves and their children. Inheritance hands down assets directly, so wealth starts unequal before anyone works a day. Bargaining power matters too: workers or firms with more alternatives, information, or union strength can claim a larger share of the value created, even holding productivity fixed. Over generations these forces feed each other, since higher income funds more education and larger inheritances, which fund still higher income.

This connects back to the factor market pricing from earlier in the unit and forward to policy. Governments cannot change marginal products overnight, but they can change the after-tax distribution through progressive taxes, transfers, and public education. That is why measured inequality statistics, like the Gini coefficient, separate pretax from after-tax figures: the market failure story explains the gap before intervention, and tax policy explains how much of that gap survives it.