Capital Income Share Research Articles

Environmental regulation, endowment characteristics and income inequality: A general equilibrium analysis

Environmental regulations such as the “dual carbon” target directly act on the restriction of the total amount of dirty capital to reduce carbon emissions. The change in factor endowment will have a range of effects on production and income distribution. To examine the effects of environmental regulations restricting dirty capital endowment on income distribution, this paper presents a general equilibrium model with two sectors and three factors. The unregulated clean capital-intensive sector is imperfectly competitive and features firm dynamics, using labor and clean capital as factors of production, while the regulated dirty capital-intensive sector is perfectly competitive using labor and dirty capital. We show that a decrease in the dirty capital endowment will reduce the output of the dirty capital-intensive sector and expand the clean capital-intensive sector in the long run, making society transition to green production. The tighter the restriction on the use of the dirty capital endowment is, the more firms will enter the clean capital-intensive sector, while the business-stealing effect will reduce the output of individual clean firms. We further show that the rents of both dirty and clean capital will rise while the wage of labor will fall due to the regulation. Changes in factor prices do not necessarily lead to inequality in income distributions. When the factor substitution effect in the regulated sector is large enough, clean production regulation will increase the share of labor income and decrease the share of capital income.

Income composition inequality of Chinese residents and fiscal redistribution effect: An empirical analysis on individual income tax and transfer system.

Based on the data of China Family Panel Studies (CFPS), this paper decomposed Chinese residents' income into labor income and capital income by income source, and measured the income inequality and income composition inequality of Chinese residents during 2010-2018. We take the Gini coefficient as a measure of inequality and, by decomposing it by income source, analyze the absolute and relative marginal effects of capital income and labor income on the overall income inequality. On this basis, this paper discusses the redistributive effect of financial instruments such as personal income tax and transfer payment on income inequality and income composition inequality. The results show that capital income is not only the main driving factor for the increase of overall income inequality, but also its influence on inequality is gradually increasing. The results of the redistribution effect of fiscal instruments show that although individual income tax and transfer payment both help to reduce the overall income inequality, only individual income tax can reduce the inequality of income composition, while transfer payment will exacerbate it. In the background of the rising share of capital income, it may widen the income distribution gap in the long run. Hence, future fiscal redistribution efforts should consider the income composition inequality. This includes further promotion of individual income tax reforms, optimization of the tax rate structure, enhancement of relevant tax laws governing capital income like property income, and continuous improvement in the redistributive impact of fiscal instruments.

Robot revolution and human capital accumulation: implications for growth and labour income

AbstractWe develop a model of endogenous growth with automation to study the impact of industrial robots on growth and labour income. We incorporate human capital accumulation into that framework to examine the role of human capital in sustaining growth without displacing low-skilled labour. While automation replaces low-skilled labour with industrial robots in conducting routine tasks, horizontal innovation creates new varieties in which low-skilled labour has an employment advantage. Labour-augmenting technology takes place to improve productivity of low-skilled labour. As such, those latter types of innovation help counterbalance the adverse effect of automation on low-skilled labour. Human capital, the essential production factor that takes part in every economic activity, including conducting non-routine tasks, accumulates over time through education and training. We show that there exists a long-run equilibrium at which either robots or low-skilled workers are employed, together with human capital, to produce varieties. In the fully endogenous model, final output grows at the rate of human capital accumulation. An improvement in the quality of education and training leads to an acceleration of both automation and variety expansion, but not human capital growth. Our numerical exercise indicates that a permanent increase in automation entails a permanent impact on the range of automated varieties, long-run output level and human capital wage. The shock lowers long-run growth and low-skilled workers’ wage and their effective income share. However, it has no effect on the effective income share of human capital.

Land supply patterns and the Chinese low consumption puzzle

The challenge of low consumption presents a complex development issue in China, one that has been insufficiently analyzed through the lens of land supply. This paper introduces a fresh perspective to the Chinese low consumption puzzle by shedding light on the constraints imposed by monopolistic/strategic land supply on the final consumption rate. Our findings reveal that China's distinctive land supply patterns systematically restrict consumption, as monopolistic land supply hinders total consumption by widening the share of government sector income and the urban-rural income gap. Additionally, strategic land supply curtails consumption by increasing the share of capital income and driving up housing prices. This study underscores the significance of land supply-side reforms in bolstering consumption, offering valuable policy insights for China and other transitioning economies.

민간자산 중 상속과 증여로 형성된 자산의 비중 추정

This study estimates the share of inheritance and gift in aggregate wealth in Korea. Assuming the capital income share of 30% and using long-term (20, 10, and 5-year) averages of the ratio of inheritance and gift flows to national income and saving rates, the share of inheritance and gift is estimated to be 37~38%. If the statistics for 2019 alone, which is the latest year that the data are available, are used, the estimate becomes 45%. In contrast, the estimate from National Survey of Tax and Benefit (NaSTaB), which is a household survey, is only 13~14%. Inheritance and gift flow estimated from NaSTaB is only about 30% of that from the official tax data and the gap is consistent with the gap in cumulated amounts. So the results imply the need for caution when we use household survey data for inheritance and gift. The estimate from this study (37~38%) is lower than the estimates for US and European countries (50~60%) from other studies. Korea has a shorter period of economic development and baby-boomers with significant wealth are beginning to retire. So the share of inheritance and gift is expected to rise in the future.

Falling inequality and the growing capital income share: Reconciling divergent trends in survey and tax data

• Based on a unique array of administrative records and household survey microdata, we provide detailed evidence on inequality trends for the recent period of survey-based inequality reduction in Uruguay (2009–2016). • Inequality trends are sensitive to the data source and inequality measure. • Synthetic indices decreased, but the top 1% and 0.1% income shares fell in household survey data, whereas in the corrected administrative data, they remained steady and even increased in 2016. • Differences result from increasing inequality in the upper tail of administrative data, mainly driven by a growing share of capital income and particularly dividends. • The probability of reaching top income positions is higher for men, liberal professionals, capital income receivers, and occupations associated to health services. In contrast to the remaining regions of the world, the available evidence from household surveys indicates that most Latin American countries experienced substantial reductions in monetary poverty and personal income inequality in the first 15 years of the 21 st century. However, it is still unclear whether these trends are robust to the inequality index and database. Based on a unique array of matched social security and personal and firm income tax records, and household survey microdata, we provide detailed evidence on inequality trends for the period of survey-based inequality reduction in Uruguay (2009–2016), focusing on the top income groups and the evolution of the capital income share. We correct administrative data to account for informality and social security/income tax underreporting. Trends are sensitive to the data source and inequality measure. Synthetic indices decreased in both datasets and the top income shares diverged. This results from increasing inequality in the upper tail of administrative data, mainly driven by a growing share of capital income, and particularly dividends. The probability of reaching top income positions is higher for men, liberal professionals, capital income receivers, and occupations associated to medical services. In contrast to evidence for developed countries, the financial and tech sectors are less represented. These findings have strong implications for the design of public policies aimed to reduce persistent inequalities in developing countries.

Imperfect Competition, Real Estate Prices and New Stylized Facts

In this paper, we develop an overlapping generation model with imperfect competition and land to provide a theoretical foundation for some empirical observations made since the end of the 1970s. The problem is that these new “stylized facts” do not coincide with Kaldor’s stylized facts and unfortunately the standard growth models are not able to explain these new facts. By using our model, we are able to theoretically derive these new facts and to provide a theoretical foundation for them. In particular, increasing market concentration leads to a decline in the labor income share, to a decline in the capital income share, to a decline in the natural interest rate, to an increasing wealth to income ratio, and to an over-proportional increase in land prices in developed countries. The model developed for analysis has close similarity with the standard neoclassical overlapping generation model with endogenous growth and land. The main difference between the standard neoclassical and the model in this paper is the market structure. Instead of assuming perfectly competitive markets, we assume an oligopolistic market structure. This leads to the occurrence of pure profits for firms and, accordingly, the input factors are no longer paid their marginal products.

The Evolution of Income Composition Inequality in Italy, 1989–2016

We study the evolution of inequality in income composition in terms of capital and labor income in Italy between 1989 and 2016. We document a rise in the share of capital income accruing to the bottom of the distribution, while the top of the distribution increases its share of labor income. This implies a falling degree of income composition inequality in the period considered and a weaker relationship between the functional and personal distribution of income in Italy. This result is robust to various specifications of self‐employment income; nonetheless, it hinges crucially on the treatment of rental incomes. While the dynamics of imputed rents has brought about a more equitable distribution of capital incomes across the income distribution, that of actual rents has led to higher concentration of capital incomes at the top in the decade preceding the outbreak of the financial crisis. Finally, we conceptualize a rule of thumb for policy makers seeking to reduce income inequality in the long run.

Growth in China’s New Economy

This paper analyzes socially optimal shares of output invested in research and development (R&D), education and physical capital to sustain China’s economic growth as population growth slows. China’s high human capital income share closes the gap between individual skill and the technology frontier. The long run level of output per person is independent of population size. China’s spending on R&D and education contributes more than physical capital investment to economic growth.

Income inequality and stock market returns

We show that the drop in the equity premium since the 1970s can partially be explained by the shifts in the level and composition of U.S. income inequality. To show it, we use a framework that extends the standard production-based Consumption Capital Asset Pricing Model by allowing for heterogeneity of agents, who differ in their ability to hold financial assets and their labor shares of income. The top income group, capital owners, own the firms and provide labor and the rest of the economy is populated by workers who consume their labor income and income from risk-free government and corporate bonds. Intuitively, an increase in the share of capital in income rises the riskiness of consumption and predicts higher equity premium. A rise in the share of capital owners' non-risky labor income leads to lower excess return. Time-series U.S. equity premium regressions and cross-country excess return comparison significantly and robustly validate predictions of the model. The quantitative experiment of shifting capital and labor income shares of capital owners explains one third of the observed reduction in the U.S. equity premium. The reason is that, during the last five decades, capital owners benefited from higher average growth in their non-risky labor income relative to the capital income.

Compensation and Capital Income Inequality, Business Cycles, and Monetary Policy: United States, 1957-2016

The causes and consequences of the cyclical fluctuations in the top compensation share (TCS) and top capital income share (TKIS) are studied through the lens of an estimated two-agent New Keynesian model, featuring top and middle-class earners, capital-skill complementarity, and differences in workers' market power and investment opportunities. Heterogeneous wage developments are important for the TCS fluctuations. Variations in demand and firms’ pricing power are important for the TKIS fluctuations and the post-1980 reduction in the cyclicality of top shares. Although income heterogeneity has moderate effects on the sources of output cycles, it has considerable implications for labor market fluctuations. The monetary policy effectiveness decreases (increases) with the TCS (TKIS). Responding to inequality affects policy trade-offs little.

Tax progressivity and top incomes evidence from tax reforms

We study the link between tax progressivity and top income shares. Using variation from Western tax reforms in the 1980s and 1990s and synthetic control method estimation, we find that reductions in tax progressivity had large and lasting positive impacts on top income shares. The effects are largest within the top percentile and almost zero in the lower half of the top decile, and all results are robust to different model specifications, placebo tests in time and space, and controlling for other contemporaneous reforms. Searching for mechanisms, we find that the effects seem to operate mainly through reductions in top marginal tax rates and that the share of capital income in top incomes increased after the reforms, indicating that tax avoidance behavior could explain some of the observed effects.

Distributional Implications of Corporate Financing

It is shown that the pecking order of corporate financing causes perpetual growth in corporate income inequality via concentrated growth of capital income share in total corporate income. Moreover, equity financing is shown to cause a perpetual decline in corporate income inequality via participative growth of capital income share, without any significant compromises notable in the growth rate of capital income.

Property and capital in the person: Lockean and neoliberal self‐ownership

Understanding neoliberalism remains a crucial task for critical theories of the present. While Marxist approaches such as David Harvey’s tend to underestimate its novelty and struggle to explain its pervasiveness, Foucauldian perspectives are better equipped to understand neoliberalism in its singularity. These perspectives culminate in the diagnosis of the emergence of a specifically neoliberal subject, the entrepreneurial self. One implication of this diagnosis that has not received nearly enough attention is neoliberal’s implicit subscription to the doctrine of self-ownership: The entrepreneurial self is necessarily self-owning, even if that often remains implicit in neoliberal theory. Starting with a discussion of liberal self-ownership (Levellers, Locke), the article shows that neoliberal rationality is premised on self-ownership, discussing human capital theory and Income Share Agreements. The focus on neoliberal self-ownership and its consequences, it is argued, can be used for an immanent critique of neoliberal rationality.

THE COLLAPSE AND RECOVERY OF THE CAPITAL SHARE IN EAST GERMANY AFTER 1989

After the 1990 unification, East Germany's capital income share plunged to 15.2% in 1991, then increased to 37.4% by 2015. To account for these large changes in the capital share, I model an economy that gains access to a higher productivity technology embodied in new plants. As existing low productivity plants decrease production, the capital share varies due to the nonconvex production technology: plants require a minimum amount of labor to produce output. Two policies—transfers and government‐mandated wage increases—have opposite effects on output growth, but contribute to lowering the capital share early in the transition. (JEL E20, E25, O11)

A Pareto upper tail for capital income distribution

We present a study of the capital income distribution and of its contribution to the total income (capital income share) using individual tax income data in Romania, for 2013 and 2014. Using a parametric representation we show that the capital income is Pareto distributed in the upper tail, with a Pareto coefficient α∼1.44 which is much smaller than the corresponding coefficient for wage- and non-wage-income (excluding capital income), of α∼2.53. Including the capital income contribution has the effect of increasing the overall inequality measures.

Road infrastructure and the share of labor income: Evidence from China’s manufacturing sector

To shed light on the effect of public expenditure on the functional income distribution, this paper represents a first attempt to analyze the impact of road infrastructure on the share of labor income. Based on data from China, we initially find that improvement of the road infrastructure is negatively correlated with the share of labor income and that the results are robust to endogeneity checks. We then explore two transmission channels underlying this negative relationship. First, since road infrastructure leads to expansion of markets, it helps promote the mobility and bargaining power of capital, raising the share of capital income, especially under the current hukou system, which impedes labor mobility. Second, the share of labor income declines as an economy transforms from being labor intensive (dominated by the agriculture sector) to being capital intensive (dominated by the manufacturing sector). China has been undergoing industrialization, which is reinforced by the development of the road infrastructure, contributing to the decline in the share of labor income associated with structural transformation. Finally, when the two transmission channels are controlled for, road infrastructure is found to help raise the labor share and therefore reduce income inequality in China.

Capital in South Korea: 1966–2014

Using a recently released consistent set of data on stocks of wealth, we estimate wealth and its associated variables in South Korea during the period of 1966–2014. We find the following. First, with some fluctuations, the capital-income ratio $$(\beta )$$ has been steadily rising from 1966 to 2014. The level of the capital-income ratio in South Korea is also high relative to other OECD countries. A part of the reasons for it is a high level of government wealth in South Korea; the government in South Korea played an important role in capital accumulation. Another reason is that housing and land prices in South Korea have been high relative to national income levels; the capital-income ratio is likely to fall if housing and land prices fall in the future. Second, the capital income share $$(\alpha )$$ has also been increasing over the last half century, and it moves largely in the same direction as the top decile income share. Third, the rate of return on capital (r) has been lower than the income growth rate (g) until the late-1990s, but inequality is reversed after the late-1990s. That g having been bigger than r in South Korea for a long period of time (30 years) is sharply in contrast with the tendencies observed in other OECD countries, and is due to unusually fast economic growth in South Korea. Fourth, it appears that the capital gains-induced wealth growth is more important than savings-induced wealth growth in South Korea. In particular, the period of 1966–1979 exhibits the most significant capital gains-induced wealth growth; about 79% of the wealth growth is due to capital gains in that period.

Rent extraction by capitalists

Rent extraction by capitalists is present if the capital income share exceeds the capital output elasticity. Based on a sample of 111 countries during the period 1970–2010, panel model estimates show that: (i) the average capital income share significantly exceeds the average capital output elasticity; (ii) the difference between the average capital income share and the average capital output elasticity has increased over time; (iii) in democracies the average capital income share is not significantly different from the average capital output elasticity. The findings suggest that there exists more rent extraction by capitalists in autocracies and anocracies than in democracies.

A Note On Piketty’s Logic

I derive a simple model that allows us to see some hidden assumptions behind Thomas Piketty’s predictions of increasing inequality in his widely selling book Capital in the 21st Century. Although his proposition about the increasing share of capital income in the national income has not held true in the last six decades, I briefly explore whether his prediction (and past trends) will continue in the future.