Functional Income Distribution and Its Role in Explaining Inequality

Abstract

This paper is motivated by two parallel trends: the declining labor share of income and increasing inequality. Micro and macroeconomic data, covering up to 93 countries between 1970 and 2013, are used to assess whether the declining labor share of income has been a key factor driving growing inequality. The major conclusion is that changes in income inequality across a wide range of countries have been driven significantly by changes in the inequality of wages, while the distribution of income between labor and capital has not been a major factor.

Adjusting the Australian Labour Share for Depreciation, Housing and Other Factors, 1960–2016

“…In particular, recent fluctuations in the labour share appear very closely tied to the terms of trade and the fortunes of the mining industry. Although caution should be used in drawing links between national accounts data and individual-or household-level incomes, our results complement Francese and Mulas-Granados' (2015) and Piketty's (2015) findings that earnings inequalityi.e. inequality within the labour income shareappears to be the most important determinant of income inequality.…”

Income Composition Inequality

“…whereμ π = 1 2n n i=0 i j=0 α j + i+1 j=0 α j andμ w = 1 2n n i=0 i j=0 β j + i+1 j=0 β j are the areas of the concentration curves for labor and capital multiplied by 1 w and 1 π respectively. 20 Similarly, for z = w, we have:…”

“…Specifically, when equation 12 is positive, then the capital is concentrated primarily at 19 For a full discussion on rank-based measures of association, see Dardanoni and Lambert (2001), Atkinson and Lakner (2017), Aaberge, Atkinson and Königs (2018). 20 Note that one minus twiceμ z gives the pseudo-Gini of income source z (see Shorrocks, 1982).…”

Technological Transformation

“…And how what is captured is then distributed within the capital share (which may be distributed between reinvestment, dividend payments, reserves building, or other activity e.g. rents), or within the labor share which may be distributed between employment growth, real-wage growth, or social security entitlements (see discussion of Atkinson, 2009;Francese & Mulas-Granados, 2015). This matters from an individual income inequality perspective, as reductions in the labor share of income are correlated with rising income inequality between individuals (see for detailed discussion, Chapter 3 of IMF, 2017).…”