Labour shares, inequality, and the relative price of capital
Loukas Karabarbounis, Brent Neiman 25 November 2014
The share of compensation to labour in gross value added has declined in recent decades for most countries and industries around the world. Recent work has also used the share of compensation to labour in net value added as a proxy for inequality. This column discusses that gross and net labour shares have declined together for most countries since 1975 – an outcome consistent with the worldwide decline in the relative price of investment goods.
At least since Kaldor (1961), the constancy of the labour share of income has been considered one of the key foundations underlying macroeconomic models. In Karabarbounis and Neiman (2014a), we documented a global decline in the share of labour compensation in gross income (‘gross labour share’) since 1975 and emphasised the role of declining investment prices for this trend. Piketty (2014) and Piketty and Zucman (2014) also discussed this factor share movement and linked it to increases in the capital–output ratio.
Global economy Poverty and income inequality
capital, labour, labour share, Inequality, income inequality, wealth inequality, depreciation, interest rates
Innocent bystanders? Monetary policy and inequality in the US
Olivier Coibion, Yuriy Gorodnichenko, Lorenz Kueng, John Silvia 25 October 2014
There are several conflicting channels through which monetary policy could affect the distribution of wealth, income, and consumption. This column argues that contractionary monetary policy raised inequality in the US, while expansionary monetary policy lowered it. This evidence stresses the need for monetary policy models that take into account heterogeneity across households. Current monetary policy models may significantly understate the welfare costs of zero-bound episodes.
“In recent decades, the Fed has given way completely, at the highest level and with disastrous consequences, when the bankers bring their influence to bear… As the American economy begins to improve, influential people in the financial sector will continue to talk about the need for a prolonged period of low interest rates. The Fed will listen. This time will not be different.” Acemoglu and Johnson (2012)
Monetary policy Poverty and income inequality
US, monetary policy shocks, income inequality, consumption, household heterogeneity
Cross-country differences in perceptions of inequality
Judith Niehues 28 September 2014
Income inequality is high in the US, but the support of social welfare programmes is low. In Europe, income inequality is low and the welfare states are generous. This column argues that this paradox is largely due to perceived inequality. Many Europeans believe that there is high inequality in their countries, justifying the need for redistributive policies. Americans, however, are less concerned with income differences and with respective redistributive state intervention.
The well-known and frequently tested median voter theorem predicts a positive relationship between income inequality and state redistribution; if the decisive median voter’s income is below the social average, he votes for more welfare redistribution because he expects to benefit from progressively financed welfare programmes. However, this theory does not perform very well when confronted with data. Although income inequality is high in the US, support for welfare state programmes is relatively low. In contrast, income differences in European countries are substantially lower.
Poverty and income inequality Welfare state and social Europe
income inequality, perceived income inequality, Europe, US
Volatile top income shares in Switzerland? Reassessing the evolution between 1981 and 2009
Reto Foellmi, Isabel Martínez 31 August 2014
Switzerland has had consistently low tax rates and a remarkably stable income distribution, although in the last 20 years the share of top incomes has risen. This column documents that the top 0.01%’s share doubled, meaning Switzerland is similar to European countries in terms of the top 1%’s income share, but closer to the US for higher top incomes. Labour incomes have grown in importance among top income earners. At the same time, however, top incomes have exhibited large and possibly increasing variations over the business cycle.
The evolution of inequality in income and wealth has attracted substantial attention in recent decades. Academics have been trying to capture the relation between distribution and growth patterns – most recently and prominently Piketty (2014) in his widely discussed book Capital in the Twenty-First Century. Research on income distributions has notably focused on the top of the earnings distribution, in particular because changes in the very top incomes account for a large part of overall inequality in quantitative terms.
Europe's nations and regions Poverty and income inequality
Switzerland, Inequality, income inequality, wealth inequality
Why does inequality grow? Can we do something about it?
Coen Teulings 15 June 2014
Income inequality has increased worldwide in recent years. This column discusses the role of technological progress, globalisation, and the liberalisation of labour-market institutions in this growing inequality. The liberalisation of labour market institutions has made labour markets more flexible and created many jobs. But beyond a certain point, the net effect of further liberalisation might be negative for society.
Over the past couple of years, the OECD has highlighted the rapidly widening income dispersion in OECD countries (see e.g. OECD 2008, OECD 2014). The recent publication of Thomas Piketty’s Capital in the 21st Century, gave new impetus to this debate.
Poverty and income inequality
income inequality, minimum wage, wage-setting
Global income distribution: From the fall of the Berlin Wall to the Great Recession
Christoph Lakner , Branko Milanovic 27 May 2014
Since 1988, rapid growth in Asia has lifted billions out of poverty. Incomes at the very top of the world income distribution have also grown rapidly, whereas median incomes in rich countries have grown much more slowly. This column asks whether these developments, while reducing global income inequality overall, might undermine democracy in rich countries.
The period between the fall of the Berlin Wall and the Great Recession saw probably the most profound reshuffle of individual incomes on the global scale since the Industrial Revolution. This was driven by high growth rates of populous and formerly poor or very poor countries like China, Indonesia, and India; and, on the other hand, by the stagnation or decline of incomes in sub-Saharan Africa and post-communist countries as well as among poorer segments of the population in rich countries.
Global economy Politics and economics Poverty and income inequality
democracy, income inequality, globalisation, Inequality
Taxing, spending, and inequality – what is to be done?
Benedict Clements, David Coady, Ruud de Mooij, Sanjeev Gupta 15 April 2014
The causes and consequences of rising inequality have stirred a lively debate on appropriate policy responses. This column reviews how governments have successfully used fiscal policy to address distributive concerns. It also examines the policy alternatives that countries can pursue in order to reduce income and wealth inequality at a minimum cost to efficiency. Such policies include exploitation of property taxes, reductions in tax deductions that favour upper-income groups, investing in increasing the human capital of low-income groups, and reforming social benefits.
The causes and consequences of rising inequality have attracted considerable attention, including the recent study by Thomas Piketty (2014). This has also touched off a lively debate on the appropriate policy response to rising disparities in income and wealth (Mankiw 2013, Berg, Ostry, and Tsangarides 2014). But this is just one of the many challenges facing ministers of finance – reducing public debt ratios and raising growth are also priorities. So what’s a minister to do?
Poverty and income inequality Taxation
income inequality, redistribution, fiscal policy
Who let the Gini out? Searching for sources of inequality
Davide Furceri, Prakash Loungani 13 February 2014
Income inequality has been growing in many economies over the past two decades, and it is currently historically high. This column adds two new contributors to the popular explanations of increased inequality. Fiscal consolidations, especially those following the recent crisis, can increase inequality, mostly by affecting the long-term unemployment. A second source that leads to a persistent increase in inequality is capital account liberalisation. Therefore, the effects of these policies on inequality should be taken into account when deciding upon policy designs.
Last month’s World Economic Forum at Davos will be remembered as the one where the rich realised that incomes were unequal. One suspects the rich had always been dimly aware of this fact, but even they seem to have been astounded by the degree of inequality.
Poverty and income inequality
income inequality, fiscal consolidation, capital account liberalisation
Rising wealth-to-income ratios, inequality, and growth
Thomas Piketty, Gabriel Zucman 26 September 2013
According to many measures, inequality has been increasing in the developed world and is now approaching prewar levels. Income inequality does not tell the whole story. This column documents the increase in the ratio of private wealth to national income. This macroeconomic change, precipitated by slowing GDP growth, exacerbates the problem of wealth inequality and makes the economy more susceptible to bubbles.
Reducing inequality is one of the defining challenges of our time. In recent decades much of the discussion has centered on the need to invest in education (Goldin and Katz 2010). Fostering access to education is a powerful way to reduce the dispersion of wages in the long run, but it is not enough.
One issue is that in the US – as in many countries – the rise in income inequality has been driven by the top 1% of income earners, and not by the following 9%, although both groups have the same diplomas (Alvaredo et al., 2013).
Poverty and income inequality
income inequality, Inequality, wealth inequality
The trend reversal in income inequality and returns to education: How bad is this good news for Latin America?
Augusto de la Torre, Julián Messina 07 March 2013
The last decade has seen unprecedented economic and social achievements in Latin America. This column investigates the relationship between changes in the labour market and the drop in income inequality across the continent. There is certainly room for more research to help us better understand Latin America’s spectacular decline in income inequality, but what is clear is that the good news is tempered by the fact that the specialisation of the region’s economies are relatively low in skill intensity and therefore productivity.
Latin America witnessed unprecedented economic and social achievements during the last decade. In particular, the year 2003 appears as an important inflexion point for the region’s economic history, a point that we have highlighted in several World Bank publications1. Specifically, moderate poverty (less than US$4 purchasing power parity per capita, which leveled around 45% of total population during the 1990s and until 2003, steadily falls to less than 30% by 2011, allowing more than 70 million Latin Americans to leave poverty in less than a decade.
education, income inequality, Latin America