Skip to main content

Advertisement

SpringerLink
Log in

Capital income shares and income inequality in 16 EU member countries

  • Original Paper
  • Published:
Empirica Aims and scope Submit manuscript

Abstract

In this paper, we estimate the effect of changes in capital income shares on inequality of gross household income. Using EU-SILC data covering 16 EU countries from 2005 to 2011 we find that the level of capital income shares is positively associated with the concentration of gross household income. Moreover, we show that the transmission of a shift in capital income shares into the personal distribution of income depends on the concentration of capital income in an economy. At the mean of the distribution of capital income a 1 percentage point increase of the capital share is associated with a 0.8 percentage point increase of the Gini coefficient of gross household income. Our findings imply that in many industrialized countries income inequality has by no means evolved independently from the observed structural shift in factor income towards a higher capital income share over the last decades.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7
Fig. 8
Fig. 9
Fig. 10

Similar content being viewed by others

Notes

  1. For approximating personal income inequality the authors use Gini indices from the World Institute for Developments in Economic Research (WIDER) dataset. Data on labor shares in the manufacturing sector are from the United Nations Industrial Development Organization (UNIDO) database.

  2. Gini coefficients are either constructed in line with information from Brandolini (2003) or taken from the WIDER dataset. Labor shares are from the OECD Structural Analysis (STAN) database.

  3. Their analysis is based on the British Household Panel Survey (BHPS) for the UK, the Socio-Economic Panel (SOEP) for West Germany and the Panel Study of Income Dynamics (PSID) for the US provided by the Cross-National Equivalent File (CNEF).

  4. The authors use data from the Luxembourg Income Study dataset.

  5. For a discussion of this issue see Behringer et al. (2014).

  6. For details see http://epp.eurostat.ec.europa.eu/portal/page/portal/microdata/eu_silc.

  7. The first EU-SILC wave in 2003 has only been conducted as an experiment in six European countries. The sample size is too small to apply our econometric analysis to this data set. In 2004, for example, Germany, the Netherlands and the United Kingdom did not take part in EU-SILC because their deadline to introduce EU-SILC was extended to 2005.

  8. Income from private pension schemes is neglected in our analysis as a source of capital income. We decided not to treat the variable PY080 (“pensions received from individual private plans other than those covered under ESSPROS”) as capital income due to limitations in the data. First, there has been a change in the treatment of the variable concerning household income in 2010 that may cause inconsistencies. Second, the share of missing values is quite large in comparison to other income variables. Third, the share of income from private pension schemes is negligible in size because it counts for less than 0.1% of gross household income. We thank the reviewer for raising this point.

  9. Working is defined as one of the following employment statuses: full-time worker (employee or self-employed), part-time worker or in compulsory military service.

  10. Solely taking into account market income implies that households that live on transfer payments such as retirees cannot be included in the analysis as their market income only consists of capital income and is therefore close to zero in most cases.

  11. The cross-correlations presented in Table 2 confirm these relationships.

  12. As described in Sect. 2 we approximate atypical employment with part-time employment.

  13. For a discussion of the appropriateness of approximating developments in income concentration with changes in top income shares see for example Leigh (2007).

  14. Calculations for single years yield qualitatively identical results.

  15. These findings are in line with the evidence provided by Adler and Schmid (2013) for the German economy.

  16. We thank the reviewers for drawing our attention to this point. Detailed information on the distribution of capital income shares on total capital income is available from the authors upon request.

  17. Exceptions to this general pattern are on the one hand Austria, Cyprus, France, Italy, Luxembourg, the Netherlands and Portugal. Here, according to our data the average capital income share did not fall during the crisis. On the other hand, for Germany, France and Norway we do not observe an increase in unemployment during this period.

  18. These basic patterns are also visible when contrasting inequality measures, capital shares and unemployment rates for each single country as presented in Fig. 7.

  19. We run the same regressions and excluded the households that belong to the dop decile concerning capital income share. The results remain positive and significant. However, the effect decreases to a 0.5 percentage point increase in the Gini coefficient given a 1 percentage point increase in the capital share. Additionally, we conducted an additional robustness check using equavalized househould incomes. The estimation results do only change marginally in size. All additional results are available upon request.

  20. The estimates correspond to the model in column 4 of Table 3. However, the results are very similar across the different sets of covariates.

  21. While with regard to individual earnings this mechanism is straightforward, it is less clear on the basis of household income. This is because a rising proportion of part-time occupation in the labor force may rather reflect additional labor income than a substitution of full-time occupation within households.

  22. For a discussion of this issue see, for example Adler and Schmid (2013) and Ryan (1996).

References

  • Adler M, Schmid KD (2013) Factor shares and income inequality—evidence from Germany 2002–2008. J Appl Soc Sci Stud 2(133):121–132

    Google Scholar 

  • Arpaia A, Perez E, Pichelmann K (2009) Understanding labour income share dynamics in Europe. Economic Papers 379, European Comission

  • Atkinson AB (2009) Factor shares: The principal problem of political economy? Oxf Rev Econ Policy 25(1):3–16

    Article  Google Scholar 

  • Atkinson AB, Piketty T, Saez E (2011) Top incomes in the long run of history. J Econ Lit 49(1):3–71

    Article  Google Scholar 

  • Behringer J, Theobald T, van Treeck T (2014) Income and wealth distribution in Germany: a macroeconomic perspective. IMK Report 99, Macroeconomic Policy Institute

  • Brandolini A (2003) A bird’s-eye view of long-run changes in income inequality. Mimeo, Bank of Italy

    Google Scholar 

  • Checchi D, García-Peñalosa C (2010) Labour market institutions and the personal distribution of income in the OECD. Economica 77(307):413–450

    Google Scholar 

  • Daudey E, García-Peñalosa C (2007) The personal and the factor distributions of income in a cross-section of countries. J Dev Stud 43(5):812–829

    Article  Google Scholar 

  • Ellis L, Smith K (2010) The global upward trend in the profit share. Appl Econ Q 56(3):231–256

    Article  Google Scholar 

  • Fräßdorf A, Grabka M, Schwarze J (2011) The impact of household capital income on income inequality—a factor decomposition analysis for the UK, Germany and the USA. J Econ Inequal 9(1):35–56

    Article  Google Scholar 

  • García-Peñalosa C, Orgiazzi E (2013) Factor components of inequality: a cross-country study. Rev Income Wealth 59(4):689–727

    Article  Google Scholar 

  • Giovannoni O (2010) Functional distribution of income, inequality and the incidence of poverty: stylized facts and the role of macroeconomic policy. Inequality Project Working Paper 58, The University of Texas

  • Glyn A (2009) Functional distribution and inequality. In: Salverda BN, Smeeding TM (eds) Oxford handbook of economic inequality. Oxford University Press, Oxford

    Google Scholar 

  • Grabka MM, Frick JR (2011) Country case study—Germany. In: Jenkins SP, Brandolini A, Micklewright J, Nolan B (eds) The great recession and the distribution of household income. A report prepared for, and with the financial assistance of, the Fondazione Rodolfo Debenedetti, Milan, Chap 3, pp 3.1–3.36

  • Hauser R (2007) Probleme des deutschen Beitrags zu EU-SILC aus der Sicht der Wissenschaft - Ein Vergleich von EU-SILC, Mikrozensus und SOEP. SOEP Papers 69, German Institute of Economic Research (DIW)

  • Heathcote J, Perri F, Violante G (2010) Unequal we stand: an empirical analysis of economic inequality in the United States. Rev Econ Dyn 13:15–51

    Article  Google Scholar 

  • Hoover GA, Giedeman DC, Dibooglu S (2009) Income inequality and the business cycle: a threshold cointegration approach. Econ Syst 33:278–293

    Article  Google Scholar 

  • ILO (2013) Global Wage Report 2012/13: Wages and equitable growth. Tech rep, International Labour Office, Geneva

  • Jenkins SP, Brandolini A, Micklewright J, Nolan B (2013) Introduction: scope, review of analytical approaches, and evidence from the past. In: Jenkins SP, Brandolini A, Micklewright J, Nolan B (eds) The great recession and the distribution of household income. Oxford University Press, Oxford

    Google Scholar 

  • Katz L, Autor D (1999) Handbook of labor economics, No. 3A. In: Changes in the wage structure and earnings inequality. North Holland, Amsterdam, pp 1463–1555

  • Krueger D, Perri F, Pistaferri L, Violante GL (2010) Cross sectional facts for macroeconomists. Rev Econ Dyn 13:1–14

    Article  Google Scholar 

  • Leigh A (2007) How closely do top income shares track other measures of inequality? Econ J 117(524):F619–F633

    Article  Google Scholar 

  • OECD (2008) Growing Unequal? Income distribution and poverty in OECD Countries. Tech rep, Organisation for Economic Co-operation and Development, Paris, France

  • OECD (2011) Divided we stand. Why inequality keeps rising. Tech rep, Organisation for Economic Co-operation and Development, Paris, France

  • Piketty T (2014) Capital in the twenty-first century. Harvard University Press, Cambridge

    Google Scholar 

  • Rehm M, Schmid KD, Wang D (2014) Why has inequality in Germany not risen further after 2005? Working Papers 333, ECINEQ, Society for the Study of Economic Inequality

  • Ryan P (1996) Factor shares and inequality in the UK. Oxf Rev Econ Policy 12(1):106–127

    Article  Google Scholar 

  • Schmid KD, Stein U (2013) Explaining rising income inequality in Germany, 1991–2010. IMK Study, Macroeconomic Policy Institute at the Hans-Boeckler Foundation

Download references

Acknowledgments

We thank Jan Behringer, Debopam Bhattacharya, Jonas Frank, Cecilia García-Peñalosa and Gerhard Wagenhals for their helpful comments.

Author information

Authors and Affiliations

  1. University of Hohenheim, 70593, Stuttgart, Germany

    Eva Schlenker

  2. Macroeconomic Policy Institute, Hans-Böckler-Str. 39, 40476, Düsseldorf, Germany

    Kai D. Schmid

Authors
  1. Eva Schlenker
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Kai D. Schmid
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Kai D. Schmid.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Schlenker, E., Schmid, K.D. Capital income shares and income inequality in 16 EU member countries. Empirica 42, 241–268 (2015). https://doi.org/10.1007/s10663-015-9282-6

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10663-015-9282-6

Keywords

JEL Classification

Search

Navigation