Functional Income Distribution Research Articles

Demand and distribution in a dynamic spatial panel model for the United States: Evidence from state‐level data

AbstractWe estimate a modified demand‐and‐distribution system for the 48 contiguous US states and the District of Columbia (DC) employing dynamic spatial panel data for 1980–2019. We allow for endogenous regressors, test for the presence, significance, and magnitude of spatial spillovers, and estimate immediate and cumulative effects on our endogenous variables of interest. Without testing for spatial dependence and spillovers, we estimate that output growth and capacity utilization in the sample US states and DC rise in response to an increase in their own wage share. When we test for spatial dependence and spillovers as required by the state‐level nature of the data, and consider that the functional distribution of income and the level of economic activity are jointly determined, we estimate that a higher state wage share raises output growth in the own state and the neighboring states. Yet the effect of a change in the state wage share on capacity utilization in the own state and the neighboring states is not statistically significant. Meanwhile, a higher state output growth raises the wage share in the own state, but its impact on the wage share in the neighboring states is not statistically significant. A higher state capacity utilization raises the wage share in the own state, yet it reduces the wage share in the neighboring states.

Macroeconomic effects of a declining wage share: A meta‐analysis of the functional income distribution and aggregate demand

AbstractThis paper reviews the theoretical and empirical literature on the relationship between the functional distribution of income and aggregate demand, which investigates whether declining wage shares increase (“profit‐led”) or decrease (“wage‐led”) demand. It conducts a meta‐regression analysis of 33 studies with 578 estimates for total and domestic demand, covering up to 163 years and 59 countries and regions. Our results suggest that, on average and across all countries, total demand is predominantly profit‐led and domestic demand mainly wage‐led. The effects in the literature range between 0.8 and −0.3 within one standard deviation for domestic demand and between 0.4 and −0.7 for total demand, which are economically significant at the outer bounds. We find mixed evidence for publication selectivity, which may affect the size but not the direction of the results in the literature. If one was to nonetheless correct for this, then total demand would be less profit‐led or statistically insignificant. A set of moderator variables, including publication characteristics, estimation strategies, the covariates included in the studies’ estimation functions, and, in particular, controls for time and space, help explain the variation in the empirical estimates.

Foreign Price Shocks and Inflation Targeting: Effects on Income and Inflation Inequality

ABSTRACT Foreign price shocks have significant effects on functional income distribution and on inflation inequality. By increasing prices in domestic currency that are linked to foreign prices, they increase the profit share in some sectors and reduce real wages, in particular of workers whose consumption basket is more sensitive to the price of certain goods (e.g., food prices for low-wage workers). We propose a new extension to the conflicting-claims inflation model by incorporating workers heterogeneity (in terms of nominal income and consumption patterns) in an open economy model following an inflation-targeting regime. Then, we investigate the impacts of foreign price shocks on income and inflation inequality by increasing the foreign inflation rate and analyze how monetary policy influences these outcomes. Our simulation results indicate that a positive foreign price shock increases the profit share and the within-workers inequality (in real terms), since low-wage workers are more affected by these shocks. Yet, such effects are mediated by the strength of the monetary policy's transmission channels (domestic economic activity or nominal exchange rate), indicating that the monetary authority response may exacerbate or attenuate these distributive effects.

The distributional effects of labour market deregulation: Wage share and fixed-term contracts

Since the 1980s, most advanced economies have massively ‘flexibilized’ their labour markets by reducing the protection against layoffs and introducing temporary and flexible contracts. Concurrently, a well-established economic stylized fact – the stability of the wage share of income – has been challenged as empirical evidence reveals a substantial decline in labour share across numerous countries. In this study, we aim to empirically investigate the causal link between these two phenomena by examining the impact of changes in the regulation of fixed-term contracts, as measured by variation over time in the temporary contracts EPL index, on the functional distribution of income. We employ Jordà’s local projection method for a panel of 18 advanced countries over the period 1985–2019 and show that reforms that deregulate fixed-term contracts consistently reduce the wage share.

Functional Distribution of Income, Floating Exchange Rates and Inflation Targets in a Macrodynamic Model

Functional Distribution of Income, Floating Exchange Rates and Inflation Targets in a Macrodynamic Model

Rentiers and distributive conflict in Brazil (2000–2019)

Abstract The paper examines the determinants of rentier income in contemporary financialised capitalist economies by analysing the case of Brazil. It argues that different drivers of rentier income may have comparable potential to channel a substantial share of aggregate income to asset owners. The paper estimates an expanded functional income distribution for Brazil for the period between 2000 and 2019, which distinguishes between rentier income, wages, profits of enterprise and government income. In the last two decades, the share of rentier income in Brazilian GDP has fluctuated around an approximately stable trend even though its composition has changed profoundly. The estimation presented allows for an analysis of the role played by financial expropriation (i.e. interest payments out of wage income) in this expanded functional income distribution, which points to alternative results concerning the recent trajectory of the wage share of income and of the distributive conflict.

Monetary Policy and Income Distribution: The Post-Keynesian and Sraffian Perspectives

ABSTRACT This paper examines the post-Keynesian and Sraffian perspectives on the relationship between monetary policy and income distribution, highlighting their endogenous demand-led money approach and rejection of the neutrality of interest rates, and monetary policy as tool of redistribution among social classes. Both approaches acknowledge that the central bank can influence interest rates and hence, the functional distribution of income. These shared ideas recognize the political nature of interest rates and the distributive impacts of monetary policy. Although all are crucial common points, some differences persist; PK theory often emphasizes the impact of monetary policy on rentiers vs. non-rentier classes, while Sraffians focus more on wage earners vs. non-wage earners. Further, while PK theorists advocate for alternative monetary policy rules, Sraffians favor discretionary policy tailored to each economy's unique institutional framework. The paper concludes by suggesting that these shared critical conceptions, despite minor differences, should stimulate collaborative efforts to further develop heterodox theories of monetary policy and income distribution.

TESTING KALDOR’S FACT: EMPIRICAL EVIDENCE FROM EUROPEAN COUNTRIES

This paper discusses the functional distribution of income, as a consequence of decoupling phenomenon between workers’ compensation and labor productivity. This issue has been observed since the mid- 1970s in most developed economies, resulting in a trend of decreasing labor income in national income or GDP. Despite conventional economic theory predicting a proportional increase in workers’ income with increases in labor productivity, empirical results suggest that this relationship is not being realized. The study analyzes the distribution of labor income and capital income in relation to GDP in European countries, in order to gain insight into the conditions and trends of labor income and to evaluate the functional distribution of income at the level of an individual country. The paper provides a detailed analysis of labor share on the example of all countries in Europe and compares countries to determine the direction and degree of trend of the labor share. The results highlight the need for further research on this topic and provide insight into the factors contributing to the decoupling of productivity from workers’ compensation.

Import Dependence of Exports, Aggregate Demand and Income Distribution in the Turkish Economy: A Post-Keynesian Econometric Analysis

This study aims to investigate the impact of import dependence on exports on the relation between aggregate demand and functional distribution of income in the Turkish economy. To achieve this, the model proposed by Stockhammer, Hein, and Grafl (2011) was employed and applied to the Turkish economy throughout 1988-2019. The findings indicate that the demand regime was wage-led in Türkiye throughout the sample period, and the integration of import content of exports into the analysis renders the demand regime even slightly more wage-led. Subperiod analyses show that even though the negative effect of a higher labor share in total income on net exports has doubled in absolute value from the 1995-98 subperiod to the 2008-18 subperiod, the positive effect of a higher labor share on private consumption expenditures did not only counterbalance but exceeded it, while its negative effect on private investment remained relatively small and constant over the subperiods. Our findings also show that the integration of import content of exports into the analysis also rendered all the subperiods moderately more wage-led.

The general equilibrium effects of localised technological progress: A Classical approach

We study the general equilibrium effects of localised technical progress à la Atkinson–Stiglitz in economies in which capital is a vector of reproducible and heterogeneous goods. We show that there is no obvious relation between ex-ante profitable innovations and the functional distribution of income that actually emerges in equilibrium. Unlike in the standard macroeconomic approach to technical progress, localised innovations may lead to indeterminacy in equilibrium factor prices, and individually rational choices of technique do not necessarily lead to optimal outcomes. Innovations may even cause the disappearance of all equilibria.

Income inequality in terms of a Gini coefficient: a Kaleckian perspective

Abstract This study presents a theoretical framework that connects functional income distribution and personal income distribution from the Kaleckian perspective and investigates the effects of changes in mark-up rate and interest rate on income inequality in terms of the Gini coefficient. The results demonstrate that a rise in the mark-up rate with weak bargaining power of workers raises the Gini coefficient irrespective of a profit-led or wage-led demand regime. The analyses also demonstrate that a decline in the interest rate negatively affects the Gini coefficient if and only if the bargaining power of workers is sufficiently strong.

Inequality, Consumption Emulation, and Growth

We develop a short-run neo-Kaleckian model to investigate the interplay of the functional and personal distribution of income and their impact on growth. Personal distribution becomes relevant in light of the institutionalist hypothesis of consumption emulation, which makes aggregate saving dependent on the concentration of wages and profits. A more equal distribution of wages and/or profits increases aggregate demand and the rate of capacity utilization. But the wage- or profit-led demand regime crucially depends on the difference between the propensity to save out of profits and that out of wages, as well as on the impact of changes in the profit and wage shares on the concentration of personal incomes. Preliminary evidence on Italy over the period 1980s–2010s highlights that demand regimes might be a relatively short-term and cyclical characteristic of that economy, with changes in the demand regime partly explained by changes in personal income distribution. JEL Classification: E11, D31, B52

Revisiting income inequality among households: New evidence from the Chinese Household Income Project

The Gini coefficient has been widely used as a key indicator to measure income inequality. However, differences in the measurement methods and information in the sample are the main reasons for the bias in the Gini coefficient in China. In order to improve the accuracy of the measurement, we revisit income inequality among Chinese families and propose a multi-group Gini coefficient method from the perspective of optimizing the income distribution function. Based on the disposable income of households in the Chinese Household Income Project (CHIP), a generalized logistic distribution function is used to measure national, urban and rural Gini coefficients and their contribution rates. The results indicate that: The multi-group Gini coefficient method based on the particle swarm optimization (PSO) algorithm makes full use of valid microdata-related information, improves the accuracy of traditional methods of fitting urban or rural income distribution and reduces measurement bias based on the realities of China's binary economic structure and the large size of the population. Overall, the income inequality in China has widened over the five-year period from 2013 to 2018. On the one hand, it has been consistently found that the urban-rural income gap is the most important source of income inequality in China (making a contribution exceeding 50%); on the other hand, the contribution of income inequality within urban areas has increased significantly. Education and industry of urban and rural households as well as the difference in their rates of return are the main causes of the income gap between the urban and rural areas in China. Addressing the root causes of income inequality warrants the creation of institutional conditions for equitable access and points of departure in education and industry.

Labor share as an "automatic stabilizer" of income inequality

We provide a new and unexplored explanation of the relationship between the functional and personal distribution of income. By proposing a simple theoretical framework, we show that, in the noncomprehensive personal income tax (PIT) hypothesis (i.e., when some or all capital income items are excluded from the PIT base), the correlation between disposable and market income inequality depends on the labor share level, which may influence the overall effectiveness of the tax-benefit system in addition to the PIT progressivity. We test our hypothesis using panel data on 33 OECD countries from 2000 to 2017 and find that a 10-pp increase in labor share is related to a 0.06 reduction in the correlation between market and disposable income inequality. This significant result obtained after controlling for country and year fixed effects, country-specific linear trends, and several confounders capturing the characteristics of the tax-benefit system suggests that labor share may act as an "automatic stabilizer" of market income inequality. Relevant implications for tax policy concern the role of the PIT's base for the public budget's overall redistributive effect.

Distributive Profiles Associated with Domestic versus International Specialization in Global Value Chains

The present article sets out trends in functional income distribution implied by countries’ integration in Global Value Chains (GVCs), taking also into account interregional interactions (North-North, South–South and North–South). Through the application of an innovative input-output methodology, it quantifies inter-country differences in functional income distribution by means of a novel indicator to estimate the distributive profile associated with domestic vis-à-vis international specialization. The focus is on trade flows, and the analysis carried out allows to single out the distributive implications of alternative regional integration projects, in view of a more inclusive multilateral trade system.

Functional distribution of income as a determinant of importing behavior: An empirical analysis

We examine the dynamic impact of the functional distribution of income on the demand for imports in developed and developing countries. Drawing upon a motivating accounting structure suggesting a potentially causal effect of the functional distribution of income in an extended version of a standard import function, we find evidence that a fall in the wage share has a statistically significant positive (negative) impact on the volume of imports in developing (developed) countries and the entire sample of countries. Therefore, the neglect of such income distribution effects in import demand functions represents the omission of both an empirically relevant variable and a further theoretically significant structural channel through which the functional distribution of income affects output growth. A key implication is that the impact of the functional distribution of income on the demand for imports has to be considered in growth empirics based on either a binding balance-of-payments constraint in the Kaldor–Thirlwall tradition or a demand-led regime approach or a competitive real exchange rate.

Personal income distribution and the endogeneity of the demand regime

Abstract This paper deals with two intrinsically linked issues: the endogeneity of the demand regime and the personal distribution impact on aggregate demand. By assuming that saving is a function of personal rather than functional income distribution, an increase of the labour share is effective in boosting consumption and aggregate demand, not per se, but only as long as it reduces personal inequality. As the labour share increases, both the demand regime type—the sign of the slope of the demand schedule—and its strength—the size of the slope of the demand schedule - can endogenously change. Concerning the former, there can be a threshold value for the wage share beyond which there is a shift from wage-led to profit-led demand. The analysis shows that, unlike most Kaleckian models, profit inequality is just as important as wage inequality in determining the demand regime type and its strength.

A wage-led or profit-ledge demand regime: the case of Jordan (1990-20220)

Purpose- For too long, the performance of the Jordanian economy has been dissapointing. During the period 2010-2020, the mean annual growth rate in real Gross Domestic product (GDP) was equal to 2.0 percent. In addition, the overall unemployment rate increased from 12.5 percent in 2010 to 23.2 percent in 2020. To decrease the doublie-digit unemployment, any growth strategy requires a good understanding of the characteristics of the Jordanian economy. In other words, increasing the profit share in a wage-led economy, and increasing the wage share in a profit-led economy will both have negative consequences to economic growth. Therefore, it important to identify whether the Jordanian economic regime is wage-led or profit-led. Methodology- This paper investigates the effect of changes in the functional income distribution on economic growth in Jordan during the period 1990-2020. An autoregressive distributed lag (ARDL) approach is used to assess the presence of the long-run relationship between changes in income distribution and aggregate demand. Findings- Based on the estimated results, it is argued that the the demand regime in the Jordanian economy Jordan is wage-led. In other words, an increase in the wage-share leads to higher economic growth. Conclusion- Given the challenge of unemployment, the Jordanian government and the leaders of the private sector should not allow the supply and demand sides of the labor market determine wages. The economy needs pro-labor institutional reforms to realize strong and sustainable economic growth rates. Keywords: Jordan, growth, unemployment, wage-led, profit-led, net exports, ARDL, cointegration. JEL Codes: B50, E11, E12

Do Wages Reflect Growth Productivity – Comparing the European East and West?

ABSTRACT The research determines the gap (Great Decoupling) between labour productivity and workers’ compensation in the two blocks of EU countries (Western versus Eastern). The division of countries into two groups provides a basis further to determine whether the previous socio-economic and political evolutionary development of these countries blocks still has a significant impact on the functional distribution of national income, on the extent to which labour productivity growth is transmitted to workers. The results are heterogeneous. In the sample of highly developed Western EU countries where higher levels of labour productivity, as well as high levels of technological development, lead to an increase in labour productivity to be followed by a lower increase in workers’ compensation. On the sample of Eastern EU countries, results indicate different relationships and the strength of causality between productivity and labour compensation. Central-East EU countries had a more positive relationship between real workers’ compensation and labour productivity, compared to the Southeast Europe (Balkan) countries where an increase in workers’ compensation causes a reduction in labour productivity. The results also offer a solid basis for understanding wage/income/productivity relationships d for creating policies for a more efficient distribution of national income.

Worker household debt, functional income distribution and growth: A neo‐Kaleckian perspective

AbstractIn a stock‐flow consistent neo‐Kaleckian macro‐model, along with worker households' debt dynamics, we incorporate distributional dynamics and examine the dynamic stability of the economy in the long‐run. Both wage‐led and profit‐led but a debt‐burdened demand and growth regimes are possible in the short‐run and the long‐run. We show that the interaction between the debt and distributional dynamics may lead to instability in the economy. We find that a rise in the targeted profit share of firms or an increase in the bargaining power of firms vis‐à‐vis workers may cause a deterioration in functional income distribution. We show that a fall in animal spirits leads to a decline in functional income distribution vis‐à‐vis workers and may also lead to a fall in capital accumulation rate in the long‐run.