The economics of inequality

Evolution of inequality

Dr. Matthias Schnetzer

November 04, 2022

Recap

• Which data sources for the measurement of income do you know?
• How do they measure income and what are their drawbacks?
• How do we calculate the functional distribution of income?

Changes in the wage share since the 1980s

The wage share in Austria

Note: Adjusted wage share as percentage of GDP at current factor cost.
Source: Ameco (ALCD2)

Functional income distribution in Continental Europe

Note: Adjusted wage share as percentage of GDP at current factor cost.
Source: Ameco (ALCD2)

Functional distribution in Anglosaxon countries

Note: Adjusted wage share as percentage of GDP at current factor cost.
Source: Ameco (ALCD2)

Factors influencing the wage share

• Labour market
• Organization (e.g. collective bargaining, workers councils)
• Leverage (e.g. unemployment rate, strength of unions)
• Product markets
• Globalization
• Technological change
• Politics
• Influence of capital income earners

Reading recommendation: Stockhammer (2015)

Changes in personal income inequality in Austria

Net annual income of employees

Source: Rechnungshof

Net annual income by gender

Source: Rechnungshof

Gross annual income by social status

Source: Rechnungshof

Evolution of the Gender Pay Gap

Source: Eurostat

The evolution of global inequality

Historical development of inequality: 3 views

Kuznets

Piketty

Milanovic

Determinants of the change in inequality

Increase

• Rents:
  • Technological revolution
  • Globalization
• Cumulative causation:
  • Capital income
  • Homogamy
  • Political influence

Decrease

• Benign factors:
  • Rising education (decreasing education premium)
  • Low-skill biased technological progress
  • Labour scarcity
  • Global income compression
  • Social political pressure (e.g. unions)
• Malign factors:
  • Wars
  • Social unrest
  • Epidemics (see also Scheidel, 2018)

Source: Milanovic (2018)

Global inequality 1820-2020

Source: Chancel et al. (2022)

Decomposition of global inequality

Source: Chancel et al. (2022)

Global growth of real income, 1980-2008

Rising incomes in emerging economies

Stagnation of middle class in industrial countries

Booming global top 1%

Source: Milanovic (2018)

Global growth of real income, 1980-2020

Source: Chancel et al. (2022)

Change in global income distribution

Source: Chancel (2019)

Global income distribution 1990

Source: Chancel et al. (2018)

Global income distribution 2016

Source: Chancel et al. (2018)

Regional composition of global top 10%

Source: Chancel et al. (2022)

Regional composition of global bottom 50%

Source: Chancel et al. (2022)

The Piketty argument: Capital is back

Wealth-to-income ratios

Source: Piketty/Saez (2014)

A question of savings rate and growth

\[ \beta = \frac{K}{Y} \approx \frac{s}{g} \]

The ratio of savings rate and economic growth (population + productivity growth) determines the wealth-to-income ratio in the long run.

\(s=10\%; ~g=3\% \rightarrow\) wealth-to-income: \(300\%\)
\(s=10\%; ~g=1.5\% \rightarrow\) wealth-to-income: \(600\%\)

Capital is back because low growth is back!

The controversial inequality of \(r\) and \(g\)

Capital share (\(\alpha\)) increases if the rate of return to capital \(r\) is larger than the growth of national income (from work) \(g\): \(r > g\)

\[ \alpha = r\beta = r\left(\frac{s}{g}\right) \]

When the rate of return on capital significantly exceeds the growth of the economy […], then it logically follows that inherited wealth grows faster than output and income. People with inherited wealth need save only a portion of their income from capital to see that capital grow more quickly than the economy as a whole.

Thomas Piketty (2014, 26)

Evolution of \(r\) and \(g\)

Source: Piketty/Saez (2014)

Bibliography

Chancel, Lucas (2019). Ten facts about inequality in advanced economies (Working Paper). WID.world.

Chancel, Lucas/Piketty, Thomas/Saez, Emmanuel/Zucman, Gabriel (2018). World inequality report 2018. World Inequality Lab.

Chancel, Lucas/Piketty, Thomas/Saez, Emmanuel/Zucman, Gabriel (2022). World inequality report 2022. World Inequality Lab.

Milanovic, Branko (2018). Global inequality. A new approach for the age of globalization. Harvard University Press.

Piketty, Thomas (2014). Capital in the twenty-first century. Harvard University Press. DOI: 10.4159/9780674369542

Piketty, Thomas/Saez, Emmanuel (2014). Inequality in the long run. Science, 344(6186), 838–843. DOI: 10.1126/science.1251936

Scheidel, Walter (2018). The great leveler. Princeton University Press. DOI: 10.23943/9780691184319

Stockhammer, Engelbert (2015). Determinants of the wage share: A panel analysis of advanced and developing economies. British Journal of Industrial Relations, 55(1), 3–33. DOI: 10.1111/bjir.12165