Capitalist Systems and Income Inequality

Abstract

The paper investigates the relationship betweencapitalism systems and their levels of income andcompositional inequality (how the composition ofincome between capital and labor varies along incomedistribution). Capitalism may be seen to range betweenClassical Capitalism, where the rich have only capitalincome, and the rest have only labor income, andLiberal Capitalism, where many people receive bothcapital and labor incomes. Using a new methodologyand data from 47 countries over the past 25 years, weshow that higher compositional inequality is associatedwith higher inter-personal inequality. Nordic countriesare exceptional because they combine highcompositional inequality with low inter-personalinequality. We speculate on the emergence ofhomoploutic societies where income composition maybe the same for all, but Gini inequality nonethelesshigh, and introduce a new taxonomy of capitalistsocieties. (Stone Center Working Paper Series) Revised

Global Distributions of Capital and Labor Incomes: Capitalization of the Global Middle Class

“…A high level of compositional inequality implies a strong relationship between the functional and the personal income distributions: if income-rich individuals earn from capital income and incomepoor from labor income, than an increase in the capital share of income, all else being equal, will automatically accrue to the income of the rich and increases the level of income inequality in society. Furthermore, high levels of compositional inequality are associated to classical capitalism, where rich and poor separately earn from different income sources, whereas low levels to liberal, or multiple-sources-of-income societies (Ranaldi and Milanovic, 2020). To measure the dynamics of world compositional inequality, we use the incomefactor concentration (IFC) index, a synthetic measure recently introduced by Ranaldi (2021).…”

“…A detailed description of the database and its main variables can be found in the Description File. This paper also aims to contribute to the more recent stream of research on compositional inequality (Ranaldi, 2019, 2021, Ranaldi and Milanovic, 2020, Iacono and Ranaldi, 2020, Iacono and Palagi, 2020.…”

“…While classical capitalism describes a society composed by rich capital earners and poor laborers, liberal capitalism is characterized by individuals earning from multiple sources of income. 5 In a recent paper, Ranaldi and Milanovic (2020) show that the distributions of capital and labor income tell us which type of capitalism each country can be identified with. This paper looks at the world population as a whole, and shows that the world is moving from classical to liberal capitalism -or, in other words, that the composition of income in capital and labor is increasingly more equally distributed across world citizens.…”

“…Between 2000 and 2016, the global IFC fell from 32 to 4 percent points. Such a change is equivalent to moving from the compositional inequality level of Latin America, to that of Canada and the UK (Ranaldi and Milanovic, 2020). This fall can be fully attributed to China: when China is removed from the sample, the IFC increases from 19 to 26 points.…”

Homoploutia: Top Labor and Capital Incomes in the United States, 1950—2020

“…We focus on the top or bottom shares, yet it is possible to define homoploutic capitalism in a more expansive way, as the situation where capital and labor shares are the same throughout income distribution, that is, where the poor receive the same percentage of their total income from capital as do the rich. Such an approach to homoploutia was recently studied by Ranaldi and Milanovic (2020). The difference between these approaches is similar to the difference between studying the inequality of the full distribution using synthetic measures like Gini coefficient, and studying the same income distribution by focusing on the top, as in works that look at the top 1% or 10% shares only.…”