Increasing Capital Income Share and Its Effect on Personal Income Inequality

We tend to assume that those with high incomes from capital are also those who are the richest overall; that is, that the association between being capital-rich and overall-income-rich is very close. This is implicit in Piketty’s analysis. He argues that as the share of capital in national income rises, interpersonal inequality will also rise. In our first chapter addressing the dimensions of inequality, economist Branko Milanovic asks under what conditions this is likely to be true.

Milanovic imagines three kinds of societies: socialist, where there is an equal per capita distribution of capital assets; classical capitalist, where workers draw their entire income from labor and capitalists derive their entire income from capital; and “new” capitalist, where everyone receives income from both labor and capital. He uses these archetypes to examine what happens to the inequality—as measured by the Gini coefficient of interpersonal income inequality—if Piketty’s α—the share of capital in net income—rises. Unsurprisingly, he finds that the institutional setup matters. The way the rising share of capital income gets transmitted into greater interpersonal inequality varies between different social systems as a function of the underlying asset distribution. In new capitalism, a rising share of capital income almost directly translates into a higher Gini, while in classical capitalism, this is true once the share of capitalists becomes sufficiently high. In a socialist world, however, a rising capital share does not imply rising interpersonal Gini.

Link: Increasing Capital Income Share and Its Effect on Personal Income Inequality (PDF)

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