Unequal distributions of income

Posted: 8 November 2015 in Uncategorized
Tags: , , ,

“Capital and Labor” in Punch (1842)

We all know that the distribution of income has been increasingly unequal in recent decades—in the years leading up to the crash of 2007-08 and, now, during the current economic recovery.*

But, as I explained to my students in class this week, there are two different ways of conceiving of and measuring inequality within capitalism. One is the size or interpersonal distribution of income—the distribution of income to individuals or individual households. Thus, for example, the Gini coefficient, the share of income going to the top 1 percent, and the 90-10 ratio are all ways of measuring the size distribution of income. The other way is the functional distribution of income—the distribution of income to groups that are functionally related to process of generating income. Thus, we often refer to and measure the income shares going to capitalists and workers (and, less often these days, to landlords) in the form of profits and wages (and, of course, rents).

The question is, what is the relationship between the functional distribution of income and the size distribution of income?

Branko Milanovic (pdf), in a recent paper, usefully clarifies the issue by exploring the conditions that link a higher capital share to a larger share of income going to the tiny group at the top of the household distribution of income. They are two. First, the concentration of capital income has to be high.

Working with only two factor incomes, that of labor and capital, for the overall inequality of personal income to go up, the requirement is that the more unequally distributed source has to grow relatively to the less unequally distributed source. With capital income, this condition is relatively easily satisfied since in all known cases, the concentration of capital income is greater than the concentration of labor income.

Second, there has to be a high association between households that are capital-rich and households that are income-rich. This requirement is

expressed in the form of a high correlation between rankings according to capital income and rankings according to total income. Put simply, this requirement means that people who receive large capital incomes should also be rich. Empirically, this requirement is easily satisfied in most countries.

In other words, if there’s an unequal distribution of capital ownership (and thus capital income) and if the capital owners are themselves the richest members of society, then a more unequal functional distribution of income will result in a more unequal size distribution of income.

Or, to put it differently, if the capital share (consisting of profits and other distributions of the surplus, e.g., in the form of dividends and CEO incomes) is rising then we should expect the share of income going to the top 1 percent to also be rising.

And that’s exactly what we’ve seen in the United States in recent years and decades: both the functional and size distributions of income have become increasingly—indeed, obscenely—unequal. Capitalists and the top 1 percent are pulling further and further away from labor and the 99 percent.

*In fact, TPM is hosting a promising series on “The March to Inequality,” edited by Josh Marshall, which I look forward to reading.

  1. […] deal to recommend in the series on inequality in the United States edited by Josh Marshall, which I mentioned a few weeks […]

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