4th gen is newer, not necessarily "better." Functionally, they are similar, with the one (already mentioned) obvious difference. Apple went for "ultra-minimalist" with the 3rd gen shuffle. It comes with headphones that have control buttons on the cord; the shuffle itself does not have any playback control buttons. If you don't like the Apple headphones, or you wear them out (or lose them), you need to find replacement headphones with compatible control buttons. The current Apple EarPods headphones are not compatible. Or get an adapter with the control buttons, like this
http://www.amazon.com/Griffin-Headphone-Control-Adapter-iPod/dp/B003A5AXP4
to use the 3rd gen shuffle any standard headphones. The 4th gen shuffle has the familiar control buttons on the shuffle, and it can use compatible headphones with remote control buttons too. And it IS compatible with the current Apple EarPods.