causes of income inequality, economics, equality, trade, work

The Causes of Wealth Inequality (29): The Declining Share of National Income Going to Labor

capitalist-democracy-illustrated1

(source)

Rest assured: this post is going to be more nuanced than the image above. As usual, what I want to do here is look at a possible cause of increasing income inequality, namely the relative shares of labor and capital income. Your labor income is your wage, your pension, your bonus, your company health insurance etc. Most people have a labor income. You only have capital income if you receive dividend payments, capital gains, interest payments on savings etc.

During the last decades, the share of labor compensation in total national income has declined, and this has been a global phenomenon, occurring in most countries:

labor share in national income

labor share in national income

(source)

Can we blame this decline for the increase in income inequality during the same period? Only in part, I think, because there has also been a divergence within labor in the sense that some people, mostly high earners, have seen their labor income rise much faster than others. Income inequality is indeed, to some extent, wage inequality. The growth of the finance sector, where people are well-paid, is part of the explanation for the increasing wage inequality, at least in some countries. Tax policy, declining bargaining power among the low earners and wage competition from poorer countries – again affecting mainly low-end workers – may be other explanations for rising wage inequality, also depending on the country (unionization rates, for example, haven’t evolved in the same manner everywhere).

But I guess it’s true that not all of income inequality is wage inequality and that incomes from capital, such as profits, dividends, stock options etc. also explain something. Capital income is, compared to labor income, unevenly distributed across a population, and concentrated among the wealthy:

capital income and wage income

(source)

If capital income is more concentrated among the wealthy then a rise in capital income leads to a rise in income inequality. Part of this is just arithmetical: the flip-side of a lower share of national income coming from labor is a higher share of income coming from capital. Capital income needn’t be higher in absolute terms in order to get a larger share. If there’s widespread wage stagnation – perhaps due to international wage competition, trade and outsourcing – then capital income may rise relatively, if not absolutely. However, in some countries we also see an absolute rise of capital income. Here’s the US:

tax-rate-change-impact-capital-gains-realized

(source)

sources of income

(source)

More on capital gains here. More posts in this series are here.

Standard

3 thoughts on “The Causes of Wealth Inequality (29): The Declining Share of National Income Going to Labor

  1. Pingback: Income Inequality at the Extremes, 85 = 3.5 billion. - Pilant's Business Ethics | Pilant's Business Ethics

  2. Pingback: The Causes of Wealth Inequality (31): Automation and the Hollowing Out of the Labor Market | P.a.p.-Blog // Human Rights Etc.

  3. Pingback: Posts About Work on International Workers’ Day | P.a.p.-Blog // Human Rights Etc.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s