Determinants of Income Composition Inequality

Abstract

A rich literature examines the determinants of income inequality. Less is known about the distribution of income composition, or the extent to which different socio-economic groups hold different sources of income. This article explores the drivers of income composition inequality (ICI). Contrary to recent studies, which show that the composition of government has ceased to shape redistribution and income inequality dynamics, this article posits that left-wing parties are associated with lower income composition inequality. We test this expectation with data from thirty European countries between 2003 and 2017. Our results suggest that the polarization between capital and labor income holders declines under left-wing governments. We establish that this is mainly because left-wing parties seek to broaden access to capital income.