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Growth and Inequality Revisited: The Role of Primary Distribution of Income. A New Approach for Understanding Today's Economic and Social Crises


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This paper presents an innovative interpretative scheme of the relationship between economic growth and income inequality, taking the primary distribution of income between profits and wages as the main explanatory variable. For that purpose, two lines of research are taken as a reference point: first, the Bhaduri-Marglin Model, which explains growth in terms of the effect that factor shares have on aggregate demand; and second, recent empirical analyses that also use the functional distribution to explain the evolution of the top income shares and the Gini index. After reviewing the literature on the growth-inequality relationship, the paper identifies several relationships between primary and interpersonal distributions of income in each of the Bhaduri-Marglin Model’s growth regimes. It finds multiple causal relationships between growth and inequality as well as inequality and growth, clarifying their implications for economic and social stability. The paper offers final reflections on the way the scheme can further the understanding of current economic and social crises.
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Growth and Inequality Revisited: The Role of Primary Distribution of Income.
A New Approach for Understanding Today’s Economic and Social Crises
Ricardo Molero-Simarro
This paper presents an innovative interpretative scheme of the relationship between
economic growth and income inequality, taking the primary distribution of income between
profits and wages as the main explanatory variable. For that purpose, two lines of research are
taken as a reference point: first, the Bhaduri-Marglin Model, which explains growth in terms of
the effect that factor shares have on aggregate demand; and, second, recent empirical analyses
that also use the functional distribution to explain the evolution of the top income shares and
the Gini index. After reviewing the literature on the growth-inequality relationship, the paper
identifies several relationships between primary and interpersonal distributions of income in
each of the Bhaduri-Marglin Model’s growth regimes. It finds multiple causal relationships
between growth and inequality as well as inequality and growth, clarifying their implications for
economic and social stability. The paper offers final reflections on the way the scheme can
further the understanding of current economic and social crises.
Keywords: Functional Distribution of Income; Factor Shares; Aggregate Demand; Top Incomes;
Gini Index.
JEL classifications: E25, D31, E64.
The Version of Record of this manuscript has been published and is available in the Cambridge Journal
of Economics, 41 (2), pp. 367-390:
Article D.O.I.: 10.1093/cje/bew017 (originally published on 24 June 2016).
The author wishes to acknowledge that the research leading to this article was funded with an pre-
doctoral research fellowship granted by the Universidad Complutense de Madrid. This paper received
useful comments from Luis Buendía García, Clara García Fernández-Muro and Antonio Ramos Barrado.
Edition advice was provided by the same Luis Buendía García and Miguel Montanyà Revuelto. And the
language of the initial versions of paper was improved by Richard Reive. He would also like to thank the
referees for providing useful comments which serve to substantially improve the paper. Needless to say,
all the remaining mistakes are his own.
1. Introduction
This paper seeks to develop an innovative interpretative scheme regarding the
relationship between economic growth and income inequality, taking the primary, so-called
factorial or functional, distribution of income as the main explanatory variable. For this purpose,
two main lines of research are referenced: first, the Bhaduri-Marglin Model (Bhaduri and
Marglin, 1990), which explains growth in terms of the effect that factor shares have on aggregate
demand; and, second, recent empirical analyses that also use the functional distribution to
explain the evolution of the Gini index and/or the top income shares (Daudey and García-
Peñalosa, 2007; Giovannoni, 2010; Adler and Schmid, 2012; Schlenker and Schmid, 2013; Wolff,
Recently, the Bhaduri-Marglin Model has been applied to several national economies
(Stockhammer and Onaran, 2012). However, the implications of those developments for the
relationship between growth and inequality have not been further explored. On the other hand,
an increase in the top income share in disposable income has been found as a result of the
collection of household income statistics from several countries’ fiscal data (Atkinson, Piketty
and Saez, 2011). In particular, Thomas Piketty’s (2014) Capital in the Twenty-First Century has
attracted wide attention to the issue of rising inequality. Nevertheless, several criticisms have
arisen regarding his treatment of the relationship between growth and income distribution (see,
for example, Fullbrook and Morgan, 2014).
Some analyses (Daudey and García-Peñalosa, 2007; Giovannoni, 2010; Adler and Schmid,
2012; Schlenker and Schmid, 2013; Wolff, 2015) have related household or individual disposable
income inequality, measured by both quantiles of income shares and the Gini index, to the
evolution of factor shares. With few exceptions (Atkinson, 2009), most of those analyses have
stated purely empirical relationships between the primary and personal distribution of income.
Indeed, Andrew Glyn concludes that there is a “need for more research to uncover the causes
of swings in factor shares and to establish the links between functional and personal distribution
of income” (Glyn, 2009: 104).
The goal of this paper is to meet that need by analysing the implications that the
Bhaduri-Marglin Model’s outcomes have in terms of personal income inequalities. To that end,
we establish several relationships among factor shares, growth rates and the evolution of
household income quantile shares, according to the growth patterns considered by the Bhaduri-
Marglin Model. This approach helps to identify multiple causal relationships between inequality
and growth, which, in turn, explain the contradictory conclusions obtained by the authors who
have analysed that relationship to date.
As we shall see, policies aimed at fostering economic growth in one Bhaduri-Marglin
growth regime or another could have either a positive or negative effect on income inequality.
Conversely, policies aimed at reducing inequality could have either a positive or negative effect
on growth. Moreover, these seemingly paradoxical results may help to understand why some
contexts of marked inequality do not develop into social or economic instability, in contrast to
other contexts with fewer inequalities.
The next section reviews the principal literature that has tried to understand growth-
inequality and inequality-growth relationships. Then, Section 3 introduces the main
relationships between the functional distribution, aggregate demand and economic growth.
Section 4 posits the link between factor shares and interpersonal distribution of income. In
Section 5, by integrating these different contributions within a fully consistent scheme, the
paper seeks to overcome the causal logic that appears to be the main weakness of previous
explanations. Empirical evidence of the main relationships stated is shown in Section 6, and the
cases of China and the Eurozone are analysed in more depth in Section 7. Finally, the paper
concludes by discussing the main findings, offering final reflections and presenting the main
limitations of the analysis.
2. Literature Review: Growth and Inequality, Inequality and Growth
The relationship between economic growth and income distribution has been at the
core of economics since the emergence of political economy. Insofar as profits constitute the
main source of investment funding, income distribution is the last determinant of the
accumulation process and, consequently, the engine of economic growth. David Ricardo
declared that “to determine the laws which regulate distribution is the principal problem in
Political Economy”. In contrast, Karl Marx’s account of the inner contradictions of capitalism and
the ways the capitalist class seeks to avoid them was rooted in the conflictive nature of the
income distribution between the capitalist and working classes.
The role of income distribution as a factor explaining growth fell into neglect with the
emergence of neoclassical economics. Resource allocation became the discipline’s primary
subject. In the neoclassical logic, achievement of efficiency through the market mechanism was
the only requirement for growth. Distribution came to be explained as an outcome of a putative
framework of perfect competition, as determined by capital and labour supply as well as their
respective marginal productivity. According to this school of thought, factor substitution ensures
saving and investment equality. Although it has significant problems1, this has become the
mainstream approach to account for growth and distribution.
An alternative economic growth model was developed by Roy F. Harrod (1939) and
Evsey Domar (1946). However, they did not consider income distribution as an explanatory
variable for achieving equilibrium. Indeed, Nicholas Kaldors (1957) stylized facts” later claimed
that factor shares are constant. Robert Solow (1958) declared himself “skeptical” of the
widespread belief “that the share of the national income accruing to labour is one of the great
constants of nature” (op.cit.: 618). Nevertheless, in his model (Solow, 1956), Solow did not take
into account the establishment of any distributive pattern to ensure growth.
Champernowne (1953) analysed “the development through time of the distribution of
incomes” as “a stochastic process” (Champernowne, 1953: 319). He found that “the
approximate observance of Pareto’s law (…) has its explanation in a similarity at different high
income-levels of the prospects of given proportionate changes of incomes” (op.cit.: 346). In all
the cases studied, the equilibrium distribution appears to be asymptotic to a straight line.
Nevertheless, the same author notes that there is a lack of consideration “of models which do
not lead to a Pareto distribution” (op.cit.: 347) (italics in original). Moreover, in his model, there
is no analysis of the relationship between the distribution and growth.
The emergence of Kuznetss (1955) seminal paper resuscitated “economic growth and
income distribution” issues. His analysis shifted focus from national income aggregate
distribution among classes to the distribution of available household or individual income.
Kuznets posited that the Gini index would move at the pace of economic development. It would
increase during the early stages of industrialization and decrease afterwards. Some authors
(Paukert, 1973; Ahluwalia, 1976) allegedly found “substantial confirmation of a statistically
significant relationship between those variables (Ahluwalia, 1976: 129). New measurements,
however, call into question the validity of these results (Deininger and Squire, 1996;
Bourguignon and Morrisson, 1998).
Considering the role given to human capital by some new growth theorists (Romer,
1986; Lucas, 1988; and Barro, 1990), a branch of the literature has since studied the effect of
inequality on growth, shifting focus yet again to inequality as the explanatory variable (see, for
example; Alesina and Rodrik, 1994; Persson and Tabellini, 1994; Li and Zou, 1998; Forbes, 2000;
Barro, 2000). Overall, however, these works are inconclusive because their answers differ
concerning the main question: Does inequality damage or benefit growth?
Over the last decade, others (Banerjee and Duflo, 2003; Lunberg and Squire, 2003;
Voitchovsky, 2005) have found more complex relationships between our variables. According to
García-Peñalosa and Turnovsky (2006: 26), “[a]n economy’s growth rate and its income
distribution are both endogenous outcomes of the economic system. (…) They are therefore
subject to common influences, both with respect to structural changes as well as
macroeconomic policies. Nevertheless, to analyse these relationships properly, it is imperative
to re-establish the central role of factor shares in explaining growth and distribution.
Following the general acknowledgement of the pro-profit path that functional
distribution of income has followed during recent decades (European Commission, 2009; IMF,
2012; ILO, 2013; and OECD, 2012), the debate on the constancy of factor shares has been
rekindled in recent years. Some authors have found empirical evidence to confirm Kaldors
“stylized fact” that factor shares are constant (Gollin, 2002). Nevertheless, increasing research
supports Solow’s rejection of that statement (Garrido Ruiz, 2005; Carter, 2007; Lindenboim,
2008). Indeed, other authors (Atkinson, 2009) have called attention to the previously neglected
topic of the evolution of the functionalthe so-called factorial or, in this paper, primary
distribution of income.
Recently, Piketty’s (2014) already well-known book has driven current debates on
increasing income going to capital. In short, this author explains rising inequality as a
consequence of the faster growth of wealth in comparison to output, which, in his view, has led
to the increase in the share of income from capital in national income. This conclusion is
obtained from two “fundamental laws of capitalism”, according to Piketty. The first is that “the
share of capital income in national income is equal to the average rate of return of capital times
the capital/income ratio” (Piketty, 2014: 168). The second is that “the higher the savings rate
and the lower the growth rate, the higher the capital/income ratio (op.cit.: 55).
The former is simply “a pure accounting identity”. However, the latter allows Piketty to
claim that “in a quasi-stagnant society, wealth accumulated in the past will inevitably acquire
disproportionate importance”. Thus, “[t]he return to a structurally high capital/income ratio in
the twenty-first century, close to the levels observed in the eighteenth and nineteenth centuries,
can therefore be explained by the return to as low-growth regime” (op.cit.: 166). Accordingly,
Piketty demands “a global tax on capital” (op.cit.: 515) as the most effective policy tool to fight
rising income inequality.
Several criticisms have been raised in response to Piketty’s analysis and proposal (see,
for example, Fullbrook and Morgan, 2014). Some of them (see Pålsson Syll, 2014) have focused
on Piketty’s reliance on the “marginal productivity theory” and others (see Fullbrook, 2014) on
Piketty’s “confusion” in the use of the concept of capital meaning wealth instead of productive
capital. In our view, these shortcomings prevent Piketty from understanding the relevance of
the functional distribution of income as the last determinant of both the growth path and the
income distribution pattern.
Thus, as explained in the introduction, no author has integrated the outcomes of the
different empirical analyses that, on the one hand, link the functional distribution of income and
growth rates and, on the other hand, link that distribution with the top income shares and the
Gini index. Therefore, to fill that gap, after reviewing the literature on primary distribution-
growth and primary distribution-interpersonal inequality relationships, this paper will integrate
both in an extended explanatory schema.
3. Primary Distribution, Aggregate Demand and Growth: The Bhaduri-Marglin Model
Classical economists only considered one way in which distribution affected growth: the role
of profit in financing investment. Thus, in that tradition, there was an implicit positive
relationship between pro-profit distribution and growth. However, the emergence of
Kaleckian/Keynesian thought introduced a new line of causality: the potential positive effect of
a real wage increase on growth through rising consumption (due to a higher propensity to
consume out of wages than out of profits), increasing productive capacity utilization, and,
ultimately, generating a higher profit rate.
That idea is the basis for the model constructed by Amit Bhaduri and Stephen Marglin.
Their seminal paper (Bhaduri and Marglin, 1990) argues for the indefinite effect of a rise or fall
in real wages on the level of output and employment. Their starting point is the definition of a
savings function that is totally dependent on profits. It is assumed that a constant portion of
profits is saved, but this is not true of wages. If the function is expressed in terms of capacity
utilization of the economy, then:
S = s(R/Y) (Y/Y*) Y* => S = shz; Y*=1
where R = total profits; Y = national income; Y* = full capacity utilization income (treated as
constant in the short run); h = R/Y = profits share; and z = Y/Y* = capacity utilization degree.
Bhaduri and Marglin assume that firms set a given profit margin on their marginal and
average costs: a positive relationship between that profit margin and the profit share. They state
that, at a given level of labour productivity, there is a distributional conflict: profit margin and
share against the real wage. The real wage has a negative effect on investment via a lower profit
margin/share but a positive effect on consumption. To determine which effect is stronger, they
define an investment function that is positively dependent on profit share and capacity
I = I(h,z); Y* = 1; Ih> 0; Iz> 0
where I = investment.
Equating savings and investment, Bhaduri and Marglin imply for the above equations
shz = I(h,z)
with the following being the curve’s slope:
dz/dh = (Ih sz)/(sh - Iz); Ih = (dI/dh)> 0
The slope can be positive or negative depending on the relative response of investment
and savings to variations in both profit share and capacity utilization. Bhaduri and Marglin take
as a standard assumption that savings are more reactive than investment to variations in
capacity utilization. Thus, the final effect of a change in profit share on capacity utilization and,
therefore, on output depends on whether investment is more or less responsive than savings to
the positive effect that capital share in GDP has on both.
On one hand, if the response of investment to a change in the profits share is stronger
than that of savings, then investment is the dominant component of aggregate demand and the
growth is profit-driven. In this “exhilarationist regime”, the positive effect of a higher profit share
on investment is more important than its effect on savings. Given the assumed higher propensity
to save from profits than from wages, the positive effect of capital share on investment is also
higher than the negative effect of real wage restraint on private consumption.
In an exhilarationist regime, the working class as a whole may obtain gains in the total
real wage bill via the increasing employment thereby created. This situation, however, generates
a conflict within the working class, i.e., between different groups of workers, insofar as new jobs
are created at the expense of the real wages of those already employed. Moreover, this can also
generate eventual problems for the capitalist class: an overaccumulation crisis may develop
through the excessive investment required to maintain aggregate demand relative to the higher
productive capacity created.
If, on the other hand, the response of investment to profitability is weaker, then
consumption leads demand and the growth is wage-driven. In this “stagnationist regime”, a
lower profit share and a higher wage share allow aggregate demand and capacity utilization to
grow as long as the positive effect on total consumption is greater than the negative effect on
capital formation.
In a wage-led pattern of growth, total profit may increase through higher sales that
compensate for lower profit margins, although an intra-capitalist class conflict may emerge
because different capitalist groups suffer differing losses on their profits. The authors call this
pattern “cooperative capitalism”. The cooperative relationship between capital and labour
reaches its limit, however, when the improvement in capital utilization, resulting from the higher
real wage, is insufficient to counterbalance the worsening profit margins. Thus, “profit-squeeze”
caused by income distribution in favour of wages can hamper growth. This situation requires
real wages to grow below productivity improvement to avoid an underaccumulation crisis.
In summary, in the short term and in a closed economy, a variation of factor shares in
favour of either profits or wages can impact growth either positively or negatively. On the one
hand, in profit-led regimes, the increased profit share promotes growth through higher
investment, but pro-labour distributional policies pose obstacles to it. In wage-led regimes, the
increased wage share promotes growth through higher consumption, but pro-capital
distributional policies generate stagnation or unstable growth processes (Stockhammer and
Onaran, 2012).
If the economy is open, the results of the model in a context of wage-led growth may be
altered. The larger the share of exports and imports in national income and the greater the
elasticities of both exports and imports vis-à-vis international prices competitiveness, the less
relevant are the relationships described by the stagnationist regime. The negative effect of a
lower real wage on aggregate demand can be outweighed by the positive effect of lowered costs
on external sales. This can cause a shift from a wage-led to a profit-led wage regime.
Nevertheless, the problem faced by any economy following a policy of real wage restraint is the
impossibility for all countries to simultaneously achieve competitive gains.
That generates a context in which policies aimed at lowering labour costs are taken in
economies that are still wage-led. As we shall see in Section 5, this not only poses obstacles to
growth but also generates social instability. The link between those processes is mediated by
the effect that a change in factor shares has on the distribution of household income. This last
relationship will be analysed next.
4. Primary Distribution, Households Incomes and Inequality
As explained in the introduction, in recent years, a relevant line of research has been
developed on the evolution of the share of the richest population groups in various countries’
distribution of household income (Atkinson, Piketty and Saez, 2011). Its main finding is a U-
shaped pattern in the evolution of top income shares during the twentieth century, dropping in
the first half, increasing during the second, and concentrating gains within the top percentile of
disposable income for most countries under study. Piketty (2014) has developed a general
explanation for this trend based on the faster growth of wealth in comparison to output.
However, as explained in Section 2, reliance on the marginal productivity theory and confusion
on the concept of capital exclude the particular role of the functional distribution of income
from the explanation.
The only systematic account of increasing top incomes is that of other authors who have
argued in favour of a central relationship between the primary and personal distributions to
explain the evolution of top incomes. These authors have supported that relationship with
empirical evidence (Daudey and García-Peñalosa, 2007; Giovannoni, 2010; Adler and Schmid,
2012; Schlenker and Schmid, 2013; Wolff, 2015). For that purpose, they have considered
variables other than those used in the usual “empirical work on cross-country differences in
personal income inequality” that for decades has “consisted of tests of the Kuznets hypothesis”
(Daudey and García-Peñalosa, 2007: 825).
According to Atkinson (2009: 8), today “people have multiple sources of income (…) and
there is considerable inequality within categories of income”. In fact, some categories of workers
not only receive wage income but also acquire capital incomes2; likewise, some of the capitalists
and landlords receive not only proprietor income but also payments for serving as CEOs or
company directors. In addition, it is necessary to consider the distribution of capital incomes
within different families’ income shares and the wage dispersion between low-paid and well-
paid workers. This would diminish the “profits/wages split’s (…) importance as a direct
determinant of personal income distribution” (Glyn, 2009: 102). Nevertheless, Glyn’s conclusion
is that the “functional distribution is still important in discussions of economic inequality” (op.cit.:
As noted above, the empirical studies quoted find relevant relationships between the
primary distribution of income and overall inequality. Specifically, those studies determine that
in any economy, a lower (higher) share of wages in national income tends to generate a lower
(higher) share of middle- and lower-income households in the distribution of disposable income.
The Gini coefficient of the personal income distribution is thus raised (lowered), in accordance
with Leigh’s (2007: 628) finding of a significant relationship between top income shares and the
Gini index.
Conversely, a higher (lower) share of profits results in a higher (lower) share of the
richest householdsdisposable incomes, thus rising (lowering) that coefficient. The capital share,
in fact, is linked to proprietor income, which now accounts for a higher proportion in the top 1%
and 10% of incomes than in the incomes of lower household percentiles and deciles.
Consequently, an increasing profit share generates higher income concentration in those top
income shares. On the contrary, as labour’s share is more equally distributed, its increase would
generate a decrease in Gini index.
Overall, the extent to which redistribution of national income between wages and
profits affects the personal income distribution depends on the distribution of those factors’
among households. As Adler and Schmid (2012: 10) state, if the income structure were the same
in all quintiles, a change in the primary distribution would not alter the personal income
distribution. If, however, households only received income from one source (wages or profits),
a change would severely modify the personal distribution. In the case where households or
individuals receive incomes from both sources, the magnitude of an altered primary distribution
depends on the respective concentration of capital or labour incomes among different
household income strata.
Daudey and García-Peñalosa (2007: 814) assert that to “assess the contribution of each
of these variables to inequality” it is necessary to have data, not only of the functional
distribution but also on the distribution of labour and capital endowments. This set of data is
rare, making it necessary to utilize proxies. However, it is possible to use the distribution of the
two income factors of capital and labour to determine the extent of the effect that redistribution
between them will have on overall inequality.
The starting point lies in the following assumptions: there are only two sources of
income (wages and profits); profits are completely distributed to shareholders; there is no
redistributive action by the state. Any household quantile’s share of total available income is,
therefore, the result of multiplying its share of labour and capital incomes by the share of wages
and profits in national income:
Hi = (Li/W)((W/Y))+ (Ci/R)(R/Y)
where Hi= household i’s quintile share in total available income; Li = household i’s quintile labour
income; W = sum of wages; Y = national income W/Y = wages share; Ci = household i’s quintile
capital income; R = sum of profits; R/Y = profits share.
L1 = L2 = L3 = … = Ln; C1 = C2 = C3 = … = Cn
then the Gini index = 0 and the functional distribution will have no effect on interpersonal
distribution of income.
Li = Ci ≠ Ln =Cn
then the functional distribution will have no effect on the interpersonal distribution of income,
but wages and capital gains concentration will have an effect, making the Gini index 0.
Li = 0 when Ci≥0 and the opposite
then the functional distribution will completely determine the interpersonal distribution of
Li ≠ 0 and Ci ≠ 0
then the functional distribution will thus affect the interpersonal income distribution depending
on the degree of concentration of labour and capital incomes within households. If labour
incomes represent a large (small) share of low- and medium-income households, then the
regressive effect of the primary redistribution in favour of profits would be large (small); by
definition, the Gini index would worsen (improve). With these simple relationships as a
reference, the Bhaduri-Marglin framework can be extended to analyse potential relationships
between growth and inequality.
5. Growth-Inequality Relationships in the Bhaduri-Marglin Model’s Regimes
As we will see in this section, either pro-capital or pro-labour policies can promote or
hamper growth at the expense of / due to inequality or due to distributional equality, depending
on an economy’s growth regime. Moreover, there are contexts of high growth and increasing
inequality that are both economically and socially stable. Equality could also allow growth while
enabling economic and social stability. In other contexts, however, egalitarianism can generate
instability if distributive polices reduce growth rates. Instability can also be generated by an
increase in inequality that hampers growth.
In an exhilarationist regime, a national income redistribution in favour of profits not only
increases growth rates but also impacts poverty rates positively through increased employment.
The overall effect of that growth on inequality is indeterminate. It depends on the degree of
capital gains concentration in the top incomes. If that degree is high, the Gini index will increase
as an effect of the pro-profit distributional policies. However, if total income rises for low-
income households, social stability will prevail, at least until an overaccumulation problem
appears or productivity becomes affected by the lack of incentive to develop labour-saving
Conversely, if an exhilarationist regime experiences a national income redistribution in
favour of wages, then profits and growth rates decrease. If capital incomes are concentrated,
the top income share declines and the Gini index falls due to higher real wages, but the total
earnings of low income households will deteriorate because of rising unemployment. This
eventuality would probably increase poverty. Although social stability is assumed a priori, an
economic crisis could ensue because of decreasing investment and/or worsening international
In a stagnationist regime, pro-wage policies push growth. This reduces inequality and
poverty by increasing the absolute level of medium- and low-income households’ share of
incomes. In spite of the falling profit share, the total revenue of the top income share also rises.
Both economic and social stability will prevail, particularly if higher employment rates improve
workers bargaining power, at least until a profit squeeze harms profitability and investment.
Conversely, however, a stagnationist regime’s redistribution of national income in
favour of profit undermines growth, increases the top income share, decreases the medium-
and low-income shares (because of falling real wages), and increases unemployment rates. All
those factors raise the Gini index and, perhaps, the poverty rate. Economic growth eventually
confronts an underconsumption crisis; social instability rises along with economic inequality.
In an exhilarationist regime, policies that foster income inequality still promote
economic growth. In a stagnationist regime, however, egalitarian policies promote growth. In
both cases, economic and social paths are stable. Conversely, egalitarian policies in an
exhilarationist regime affect growth negatively, whereas inegalitarian policies undermine
growth in a stagnationist regime.
Nevertheless, there are significant differences. In an exhilarationist regime, anti-growth
policies may not generate social instability, but anti-growth policies in a stagnationist may cause
instability. In any event, inequality affects growth either positively or negatively according to the
regime. This observation would explain the divergent findings of several empirical studies on the
relationship between the distribution of income and growth.
All these potential relationships between growth and inequality mediated by the
evolution of factor shares can be summarized using a two-figure scheme. In the first (Figure 1a),
the effect of distributional policies at the macroeconomic level in different Bhaduri-Marglin
Model regimes is analysed by linking GDP growth to labour share variation. In the second (Figure
1b), the effect of those policies on household inequality is analysed by also linking an inequality
indicator, such as the Gini index, to labour share variation. Several possibilities and combinations
Figure 1a: Distributive Policies, Labour Share and Growth in Bhaduri-Marglin’s Regimes
Source: Own Elaboration.
Figure 1b: Distributive Policies, Labour Share and Households Incomes Inequality
Source: Own Elaboration.
Economies situated in the upper- or lower-right areas of Figure 1a, which grow above
average, are those following the “appropriatepolicies of each of the growth regimes. Either
cooperative capitalism or classical / export-led growth patterns can be established. On the
contrary, if pro-labour policies are implemented in profit-led economies, or pro-capital policies
in wage-led economies, they will be situated in the left areas of that figure, where growth rates
are lower than average. A profit squeeze or overaccumulation crisis can appear. If exhilarationist
growth regimes prevail, a downward trend will be drawn. In the case of a majority of
stagnationist regimes, there will be an upward trend.
On the other hand, it is expected that economies will be situated in the downward
diagonal of Figure 1b, showing the positive (negative) impact of pro-labour (pro-capital) policies
on income distribution. There will be economies situated in the lower-left or upper-right area of
that figure only if capital incomes represent a large (small) share of low- and medium- (high)
income households or if labour earnings are unequally distributed, respectively. In those cases,
pro-capital policies will generate an improved household income distribution, whereas pro-
labour policies will provoke worsened inequality.
In the usual case, however, if stagnationist regimes prevail and the labour share is
correlated negatively with inequality, the upward diagonal of the labour share-growth
relationship will form a combined cross figure with the downward diagonal of the labour share-
inequality relationship (Figure 2a). On the contrary, if exhilarationist regimes prevail and the
negative wage share-inequality relationship is maintained, the downward diagonal of the labour
share-growth relationship will run parallel to the labour share-inequality relationship’s diagonal
(Figure 2b).
Figure 2a: Growth-Inequality Relationships in Stagnationist Regimes
Source: Own Elaboration.
Figure 2b: Growth-Inequality Relationships in Exhilirationist Regimes
Source: Own Elaboration.
In those typical cases, pro-labour policies taken in a stagnationist regime, shown in the
upper-right area of Figure 1a, will be accompanied by decreasing inequality, shown in the upper-
left area of Figure 1b. Likewise, pro-capital policies implemented in an exhilarationist regime,
shown in the lower-right area of Figure 1a, will come together with increasing inequality, shown
in the lower-right area of Figure 1b. In both cases, economic and social stability will be ensured.
On the contrary, economies situated in either the upper-left or lower-left areas of Figure
1a, which indicate that inappropriate” policies were implemented in each of the regimes, will
be socially stable only if they are also situated in the left areas of Figure 1b, which indicate that
those policies are at least reducing inequality. Otherwise, social instability will probably arise
together with the economic instability generated by those policies.
In summary, different distributional policies can lead to higher or lower growth rates. At
the same time, the multiple engines of economic growth can lead to greater or less social
stability. In the next section, we analyse which of those relationships prevailed in the period
before current economic crisis.
6. Empirical Evidence: Falling Labour Share, GDP Growth and Top Incomes, 2000-2007
As already noted, the Bhaduri-Marglin Model has been applied to several national
economies. These include economies in Asia (China, India, Japan, Korea, Thailand, Turkey),
Europe (Austria, France, Germany, Italy, the Netherlands, the United Kingdom), North America
(Canada, United States), South America (Argentina, Mexico) and also Australia and South Africa.
According to Stockhammer and Onaran (2012: 8), who review these works, “most studies
conclude that domestic demand is wage-led (…). Thus demand is profit-led only when the effect
of distribution on net exports is high enough to offset the effects on domestic demand, and this
is likely only in small open economies” (italics in original).
As also mentioned, there are other recent works that have tried to analyse the
relationship between the functional and personal distribution of income. Daudey and García-
Peñalosa (2007) conducted such an analysis using a panel of observations from 39 different
countries; Giovannoni (2010) using a 26-country group; Adler and Schmid (2012) using German
micro data; Schlenker and Schmid (2013) using a panel of 17 European Union countries during
the 2005-2011 period; and Wolff (2015) analysing the long run (1947-2012) relationship
between top income shares and the profit share in the United States economy. All these works
agree with Daudey and García-Peñalosa’s (2007: 825) conclusion that “a larger labour share is
associated with lower inequality.
In this section, we will study the links between both processes by analysing the trends
followed by labour share, growth and top income shares in a panel of 20 countries. The selection
of variables and countries is based on the availability of homogenous data. The Annual
Macroeconomic Database of the European Commission (AMECO) provides the widest coverage
of homogeneous data on the functional distribution of income at the international level. The
same applies for the World Top Incomes Database, which provides homogeneous data of top
income shareswhich, as stated by Leigh (2007: 628), are significantly related with the Gini
indexfor a number of countries around the world.
Both databases provide data for 19 common countries. Most of these countries are
European (Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway,
Portugal, Spain, Swede, Switzerland and the United Kingdom), but the group also includes
countries from Asia (Japan and Korea), North America (the United States and Canada) and
Oceania (Australia and New Zealand). AMECO does not provide data for China, but given its
relevance for recent growth in the world economy, it has also been included based on data
calculations for the functional distribution of income (Molero-Simarro, 2015), GDP growth, and
top 10% income share (Molero-Simarro, 2013).
For the rest of the countries, AMECO’s “adjusted wage share”3 and the World Top
Incomes Database’s “top 10% income share” (not including capital gains) series have been used.
This election makes it possible to focus on the direct relationship between total labour share
and both GDP growth and top incomes, avoiding the potential bias derived from the recent
evolution of both self-employment income and housing bubble gains.
At first sight, there appear to be quite strong relationships between the variables
chosen. Paradoxically, in the short run, the average share of wages on GDP seems to behave
countercyclically (Figure 3a). This is probably due to composition effects during crisis periods
when low value added and wage jobs are first destroyed and to productivity gains going to
profits during the growth periods, when wages usually grow below GDP per capita. However, in
the long run, the decrease in the labour share is accompanied by a reduction in the overall GDP
growth rate. This is consistent with Onaran and Galanis’s (2012. 42) finding that “the global
economy is wage led”.
Figure 3a: Average Labour Share and GDP Growth Rates (20 countries sample), 1960-2012
Source: Own calculations based on data from AMECO and author’s own for China.
On the other hand, a robust negative relationship between the wage share and the
average top 10% income share of the 20 countries under study is shown (Figure 3b). From the
1960s to the 1980s, the rising labour share drove a decrease in top income shares. Afterwards,
the richest households started to recover through the fall in the wage share of GDP. This is
consistent with the conclusions of previous studies (Daudey and García-Peñalosa, 2007;
Giovannoni, 2010; Adler and Schmid, 2012; Schlenker and Schmid, 2013; Wolff, 2015), which
point to the policies that reduced the labour share to explain higher inequality during recent
decades. The average top income reached its peak in 2012 when the crisis had already
deteriorated the labour share, and once the composition positive effect on its share finished.
Figure 3b: Average Labour Share and Top 10% Income Share (20 countries sample), 1960-2012
Source: Own calculations based on data from AMECO, World Top Incomes Database
and author’s own for China.
More detailed results for the 2000-2007 period are presented in Figures 4a and 4b,
which are similar to Figures 1a and 1b introduced in the previous section. Some trends can be
Figure 4a: Labour Share and GDP Growth Rates in a Sample of 20 Countries, 2000-2007
Source: Own calculations based on data from AMECO and author’s own for China.
Figure 4b: Labour Share and Top 10% Income Share in a Sample of 20 countries, 2000-2007
Source: Own calculations based on data from AMECO, World Top Incomes Database
and author’s own for China.
First, if China’s (where an exhilarationist regime prevails) data are removed from the
calculation, an upward trend line is drawn in Figure 4a that relates adjusted labour share
variation rates with GDP average growth rates. As previously stated, this points to the
predominance of wage-led growth regimes. This is consistent with Stockhammer and Onaran’s
(2012) finding, quoted earlier, of that predominance in those economies in which Bhaduri-
Marglin Model has been applied. Contrary to the nature of their regimes, however, a majority
of countries are situated in the lower area of that figure. This indicates a general trend of a falling
labour share during the first years of the twenty-first century, which has undermined growth.
Only in China has that trend pushed growth rates up substantially. In other countries, it has
maintained growth rates below average.
Second, in Figure 4b, a downward trend line is drawn, as expected. The falling labour
share has driven an increase in top income shares for the majority of the countries under study.
In some of these countries (mainly Denmark, Ireland and Italy), the top 10% income share still
rose despite increasing wage share. As stated in the previous sections, this is due to the
enlargement of labour earnings dispersion4. In other cases (mainly Finland and Norway), the top
10% income share decreased despite the falling labour share. As also stated, this would be due
to a higher than usual share of capital incomes in low- and/or medium-income households
earnings5. However, despite the progression of the indicators in those countries, there is a
general trend showing that the greater the decrease in the labour share, the larger the increase
in the top income share.
If the sample is divided between those economies labelled profit-led and those labelled
wage-led in Stockhammer and Onaran’s (2012: 21-22) reviewed works, the stated trends are
also confirmed. In the first case, profit-led economies (Australia, Canada and China) present a
strong positive relationship between the falling labour share and GDP growth rates (Figure 5a).
This also seems to be true for the relationship between the share of wages on national income
and top 10% income share progression in those countries (Figure 5b). It is China’s economy that
seems to drive the link between those last variables. However, Australia and Canada contribute
to the trend stated, as well.
Figure 5a: Labour Share and GDP Growth Rates in Profit-Led Economies, 2000-2007
Source: Own calculations based on data from AMECO and author’s own for China.
Figure 5b: Labour Share and Top 10% Income Share in Profit-Led Economies, 2000-2007
Source: Own calculations based on data from AMECO, World Top Incomes Database
and author’s own for China.
In the case of wage-led economies, a positive relationship is shown between the labour
share and GDP growth (Figure 6a). The largest falling labour shares (in Japan and Germany) have
been accompanied by some of the lowest average growth rates. The trend is as strong in the
case of the relationship between the share of wages on GDP and the top 10% income share
progression (Figure 6b), although the inclusion of Korea flattens the trend line. Even taking into
account this exception, growth-inequality relationships in wage-led economies seem to have
been negatively affected by pro-capital policies.
Figure 6a: Labour Share and GDP Growth Rates in Wage-Led Economies, 2000-2007
Source: Own calculations based on data from AMECO.
Figure 6b: Labour Share and Top 10% Income Share in Wage-Led Economies, 2000-2007
Source: Own calculations based on data from AMECO and World Top Incomes.
Overall, if the general trends lines in the evolution of the labour share, growth rates and
the top income share are put together, a picture similar to that in Figure 2a emerges. As
explained in the previous section, this figure shows the generalized negative effect that a falling
labour share has on both growth and inequality when stagnationist regimes prevail.
Consequently, the period before the crisis can be characterized as a phase of low growth rates
and increasingly higher inequality due to pro-capital policies implemented in a context in which
most economies were driven by wages.
Figure 7: Growth-Inequality Relationships, 2000-2007
Source: Own Elaboration.
The main implications of these trends are presented in the concluding section of the paper.
However, in the next section, the cases of China and the Eurozone are analysed further to
understand the implications of distributional policies in different growth regimes.
7. Pro-Profit Policies in Exhilarationist versus Stagnationist Regimes.
The Cases of China and the Eurozone
As stated, a particular distributional policy can promote or hamper growth depending on
whether a profit-led or wage-led regime prevails. If the appropriate policies are implemented in
profit-led regimes, social stability can be ensured despite rising income inequality. However, if
pro-profit policies are also undertaken in wage-led regimes, a risk of both economic and social
instability may emerge. In this section, two cases will be presented that shed light on the
mechanisms behind those processes: China and the Eurozone. During the last decades in both
economies, policies aimed at increasing profitability have been adopted. Such policies helped
China to become the second-largest economy in the world. Nevertheless, similar policies are
behind the onset of the current crisis in the Eurozone.
In China, intense rural-urban migration, together with the disappearance of the urban
employment protection system curbed wage improvements. Real wages in the secondary and
tertiary sectors increased by an annual average of 5.5% in comparison to a 14.5% increase of
productivity between 1991 and 20076. Consequently, the labour share fell almost incessantly
until reaching a level of just 42.5% of GDP7. This, together with the devaluation of the renminbi,
allowed China to reduce the nominal unit labour costs, obtaining very relevant external
competitiveness gains.
Thus, according to UNCTAD data, China’s share of world exports rose from 0.8% in 1978 to
8.7% in 2007. Decreasing private consumption on GDP due to the falling labour share caused
external sales to become the primary source of final demand. In addition, growing profitability
due to lower labour costs and expanded exports generated huge surpluses for businesses. As
the main source of large internal savings (He and Cao, 2007), the reinvestment of a large
proportion of those profits explains the increasing investment rates of the Chinese economy,
which accounted for 39.5% of GDP, on average, during the 1992-2007 period. Thus, the Chinese
economy’s growth path has become dependent on both exports and investment (Zhu and Kotz,
2010) and, consequently, is profit-driven (Molero-Simarro, 2015). This is the way China became
the world’s second-largest exporter and the second-largest economy in 2007. However, the path
followed by the functional distribution generated the conditions for the worsening of the
personal distribution pattern.
China’s rising inequality has usually been explained as a result of the enlargement of the
urban-rural income gap. Nevertheless, “[i]n urban China (…) income inequality among all
residents also increased rapidly, nearly doubling within about a decade” (Wang, 2008: 6). This
increase is mainly explained by the progress of factor shares (Molero-Simarro, 2015). Whereas
the falling wage share reduced medium- and low-income urban families’ shares of available
income, the rising profit share increased the richest 10% of urban families’ share from 16.5% in
1985 to 25.5% in 20078. Thus, average income ratio of the top 10% to the bottom 10% of income
in the Gini index of China from 0.310 in 1981 to 0.484 in 2007 (Molero-Simarro, 2013).
Nevertheless, social stability has been ensured. As explained above, in an exhilarationist
regime, such as that in China, aggregate distributional policies in favour of profits not only
support growth rates but also allow poverty rates to be reduced through increased employment.
This is what occurred in China. Despite rising inequality, if total income rises for low- and
medium-income households, social stability will prevail, at least until an overaccumulation
problems appear or external markets collapse. In that case, pro-wage distributional policies to
reorient growth towards internal markets are required. Nevertheless, if this measure is
insufficient to move the growth regime from a profit-led to a wage-led pattern, those
distributional policies could lower profitability and absolute profit levels as well as investment
and growth rates. This appears to be the dilemma facing the Chinese economy after the
outbreak of the latest global economic crisis.
In contrast with the case of China, the adoption of pro-profit policies in most Western
economies in recent decades, which according to estimations are mainly wage-led, has posed
obstacles to growth. The concentration of capital gains in upper family-income quintiles
provoked an increase in the top income share, increasing the Gini index (for the case of the
United States, see Wolff, 2015). Thus, private consumption declined because of reduced wage
share. That decline was provisionally counterweighted through the expansion of mortgage and
consumption credit enabled by financial market deregulation. Nevertheless, this loosened policy
created asset bubbles, which floated growth from 2001-2007, but culminated in the 2008
financial meltdown and ensuing crises of social legitimacy.
In the case of the European Union, these problems have been enhanced by the
particular shape of the European Monetary Union. On the one hand, due to the adoption of the
euro as a single currency, member states were deprived of the ability to devalue currency in
response to externalcompetitiveness problems. Thus, the response of the peripheral economies
of the Euro area (including, among others, Greece, Ireland, Portugal and Spain) has been the
implementation of labour reforms aimed at wage restraint. Far from allowing competitiveness
gains, this strategy has led to the maintenance of external trade deficits in these economies. On
the other hand, some of the core economies, especially Germany, have increased their share of
world exports due to their improved productive and trade specialization in industries with high
added value. However, the approval of their own labour-flexibility policies during the period
before the crisis resulted in lower rates of growth potential, which was due to a negative net
effect on demand.
According to data from AMECO, between 1999 and 2007, the adjusted wage share at
market prices in the Eurozone declined, on average, from 56.7% to 54.2% of GDP. Estimates
have found that the Euro area is wage-led (Stockhammer, Onaran and Ederer, 2009); thus, that
reduction of the wage share limited both growth and potential unemployment reduction. In the
core economies, the enhancement of productive and trade specialization allowed them to
achieve some productivity improvements. However, given the greater relative importance of
domestic demand compared with external demand, weakening private consumption caused
lower-than-potential growth. In the peripheral economies, the relative expansion of public
expenditure in some countries and real estate bubbles in others, enabled significant job
creation. Nevertheless, productivity barely improved.
On the other hand, the increase in the capital share contributed to the deterioration of
the concentration of household income in most European countries, both before and after the
crisis (Schlenker and Schmid, 2013). According to Eurostat data, the average Gini index of
inequality in the Euro area worsened slightly (from 29.3 to 30 points between 2005 and 2007
(only data available), compared with the stable 30.6 level in the EU-27). Moreover, the average
rate of people at risk of poverty or social exclusion (AROPE) also increased slightly (from 21.5%
to 21.7% between 2005 and 2007 (only data available), compared with the reduction from 25.7%
to 24.4% between those same years in the EU-27). However, despite the limits to further growth
set by the wage share reduction, partial job creation during the period of expansion ensured
social stability.
Since the bubble burst, the external debt problems of the peripheral economies have
led to an expansion of labour market reform measures in recent years. These measures include
the reduction of minimum wages and the creation of sub-minimum wages; permission for opting
out of collective bargaining agreements at the firm level; enlargement of the causes for objective
(justified) dismissals; retrenchment of unemployment benefits; cuts in public sector employees’
earnings, etc9. As a result, earnings have deteriorated substantially, even in nominal terms, and
the wage share has suffered even greater declines. In several of the core economies, such wage
share has increased since 2010, generating a surprising divergence from that in the peripheral
economies. For example, in Germany, the labour share increased from 53.7 to 56.8% of GDP
between 2007 and 2014, but in the Spanish economy, that share fell from 56.0% to 54.5% during
the same period. Although the trade deficits of the peripheral economies have declined, the
collapse of private consumption has deepened the economic downturn and increased job losses.
This, coupled with the sharp increase in income inequality promoted by the increase in
the capital share (Schlenker and Schmid, 2013), has generated a further worsening of living
conditions as measured by the AROPE rates in Greece (from 28.3% to 35.7% between 2007 and
2013), Ireland (from 23.1% to 29.5%), Portugal (from 25.0% to 27.5%) and Spain (from 23.3% to
27.3%), compared to the Eurozone average (from 21.8% to 23.0%) and especially to the EU-27
(from 24.4% to 24.5%). All this has generated intense social instability in those countries.
Following the results of the analysis presented in this paper, only a shift in economic
policy measures towards a wage share increase would reduce income inequality while
promoting higher rates of growth to substantially reduce unemployment rates and ensure social
8. Conclusions
To date, analyses have dealt with the causes of the falling wage share and of the
increasing top incomes. Although some authors have linked both processes empirically, a
comprehensive theoretical framework to explain their relationship in depth has been lacking.
The present paper attempts to address this gap by integrating those analyses into a single
theoretical scheme. Its main conclusion is that complex economic and social relations operate
between growth and inequality; each affects the other simultaneously in different ways. In
particular, the analysis focuses on the effect of either pro-wage or pro-profit distributional
policies on both economic growth and inequality in different Bhaduri-Marglin Model regimes.
Appropriate policies can improve growth and income distribution at once, whereas
inappropriate ones can worsen inequality at the same time that they reduce growth below
In an exhilarationist regime, growth sustained by profit share generates a higher top
income share. Weakening private consumption requires improved international
competitiveness to avert an overproduction crisis. If that improvement is not achieved, or if
external markets collapse, pro-wage distributional policies to reorient growth towards internal
markets require reduced exposure to international competition. Nevertheless, if this measure is
insufficient to move the growth regime from a profit-led to a wage-led pattern, those
distributional policies could lower profitability and absolute profit levels as well as investment
and growth rates. Nevertheless, in the context of an increasing labour share, top incomes and,
ultimately, the Gini index will decrease.
In a stagnationist regime, higher growth rates pushed by a higher wage share are linked
to a lower top income share and a decreasing Gini index. The upward pressure of falling
unemployment rates on real wages leads capitalists to increase capitalization, thereby spurring
technological change. However, if this move does not succeed in increasing productivity above
real wage growth, a subaccumulation crisis could erupt. Government response to this crisis, by
pro-profit distributional policies, necessarily includes external openness. Still, if openness is
insufficient to move a wage-led to a profit-led growth regime, the economy will grow below
potential, top incomes will increase from larger profits, and worsening inequality could
potentially trigger an economic and social crisis.
Moreover, according to our results, it is the rising profit share that explains the
increasing concentration of income and wealth, not the other way around, as Piketty (2014)
suggests10. Indeed, in only a few countries did the enlarged share of income from capital in
national income lead to higher growth rates. In most of them, the mounting capital share caused
economies to grow below potential, contributing to the slower growth of output in comparison
to wealth, as highlighted by Piketty.
If a growth path is to be resumed in prevailing wage-led economies, the Bhaduri-Marglin
Model holds that pro-labour distributional policies are needed to reduce households’ financial
leverage for private consumption. In the short run, these policies will undermine profitability,
but increased capacity utilization will improve total profits and enable a response to the social
crisis by reducing income inequality. Nevertheless, this effective challenge to the top incomes
will create resistance to those measures.
These conclusions notwithstanding, two assumptions still hamper the analysis. First,
only two sources of family income existwages and capital gains, and second, business profits
are entirely distributed. That said, if those assumptions are discarded the analysis can still
address issues such as the extent to which property rent distribution affects inequality or the
influence of policies that expand distributed capital earnings.
Other limitations of the scheme relate to the Bhaduri-Marglin conception of
international competitiveness as determined solely by real wages. This paper does not dispute
that conception, although this way of explaining competitiveness does limit the understanding
of the operation of the global economy.
Finally, this paper does not consider the influence of political variables on social stability
issues. In this last respect, however, the proposed analytical scheme does suggest an approach
to understanding current economic and social processes.
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1 See Felipe and McCombie (2012).
2 It was Luigi Pasinetti (1962) who first considered the implications of this fact for the theory of the
relationship between income distribution and economic growth. He concluded “the irrelevance of
workers’ propensity to save” (Pasinetti, 1962: 274). However, this allows him to assert that the relation
“between capitalists' savings and capital accumulation (…) is valid independently” (op.cit.: 275) of any
assumption on workers’ savings.
3 As explained by Krämer (2010: 2), “[n]ational accounts provide the share of employees’ compensation
in total income, but do not identify separately the labour income of other categories of workers (self-
employed, employers, and family workers). The most common correction procedure is to augment the
employees’ compensation with compensation of other categories of workers by assuming that other
categories of workers earn the same average wage as employees”. This is what AMECO does by calculating
the adjusted wage share” as [(Compensation of Employees / Employees) / (Gross Domestic Product /
Employment)], the same formulation proposed by Krämer (2010: 3).
4 According to OECD’s Employment and Labour Market Statistics data, in those countries where the top
incomes increased despite the rising labour share, the Decile 9/Decile 1 ratio increased between 2000 and
2007. In Denmark, it rose from 2.50 to 2.69, and in Ireland, it rose from 3.27 to 3.78. In Italy it increased
from 2.22 in 2000 to 2.36 in 2006.
5 Unfortunately, there are no available comparable data on capital income shares in household quantiles
of total earnings.
6 Own calculations based on National Bureau of Statistics of China’s data.
7 Own calculations based on National Bureau of Statistics of China’s data.
8 Own calculations based on National Bureau of Statistics of China’s data.
9 Information on the content of the labour reforms approved are obtained from the European
Commission’s database LABREF.
10 As explained above, Piketty explains rising inequality as a consequence of the faster growth of wealth
in comparison to output, which, in his view, has led to the increase in the share of income from capital in
national income. In our view, the relationship is the other way around: the increase in the share of income
from capital has led to the faster growth of wealth in comparison to output due to capital gains
concentration in top wealth shares.
... They argue that their decisions and their preferences depend on power relationships and the social classes to which they belong and the ones to which they aspire to belong (Hanmer and Akramb-Lodhi 1996). Power dynamics between classes and the resulting inequalities are central to any analysis (Seguino 2020;Braunstein et al 2020;Molero-Simarro 2017;Van Staveren 2010;Bhaduri and Marglin 1990). This is the opposite of cultural endogenous growth theories, which regard firms and consumers as isolated and identical atoms who act purely according to their self-interest and independently of their social class or the social groups to which they belong. ...
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... 22 Our theoretical prediction is greatly supported by empirical evidence of the causality between output growth and income inequality (e.g. Molero-Simarro, 2017) ...
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... Following Kuznets (1955), the relationship between inequality and growth has been subject to intense debate in the existing literature (Binatli 2012, Naguib, 2017Molero-Simarro, 2017, World Bank , 2016 for recent surveys). The findings are ambiguous. ...
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Conference Paper
Most analyses explain the increase in China's overall inequality during the reform period principally by means of the expansion of urban-rural income gap. This paper tries to shed light on a more complex relationship that appears to exist between primary distribution of income, top income share, and the Gini index. This relationship is mediated by the same urban-rural disequalizing mechanism existing in the Chinese economy, which is based on the hukou system. After presenting the main theoretical contributions that clarify the general relationship among those three variables, we describe that mechanism which has connected them in China during three last decades. As we shall see, there exists a link between the relative impoverishment of Chinese peasants, due to declining agricultural prices, the consequent flow of rural-urban migration, its depressive effect on industrial wages, the resulting increase in the profits’ share, and rising top incomes. The enrichment of urban top income households drives the increase in the urban-rural gap, while labour’s loss of share in national income ultimately accounts for the overall increase in the Gini Index. The paper ends with a reflection on the ability of the latest policy measures taken by the Chinese government to reverse this pattern of inequality during the current global economic crisis.
There has been a significant decline in the wage share in both the developed and developing world which has coincided with the introduction of neoliberal policy reforms since the 1980s. The promise of these reforms was to stimulate private investment and exports, which was expected in turn to generate higher growth, more jobs and trickledown effects. The reasons for this fall have recently been the subject of a growing amount of literature that has tried to pin down the effects of technology, globalization, and changes in labour market institutions (see, inter alia, IMF, 2007; OECD, 2007; EC, 2007; ILO/IILS, 2011; Rodrik, 1997; Diwan, 2001; Harrison, 2002; Onaran, 2009; Rodriguez and Jayadev, 2010; Stockhammer, 2011). This chapter offers a theoretical and empirical assessment of the effects of this pro-capital redistribution of income on growth at both national and global levels.
The relationship between economic growth and income distribution is an essential economic issue that has attracted attention of economists, in particular development economists, who have offered a long range of opinion to explain the issue. Some strongly believe there is a conflict and inadaptability between equal income distribution and economic growth, and believe that in any country, at the earliest phases of growth, unequal income is imperative. Because, with unequal income distribution, the wealthy segment of the society, in comparison to the lower income social segments, desires more saving and attends to saving and accumulation of capital, and with more investments, leads to a more rapid growth. The opponents of this hypothesis reject generalizing this behavior to the wealthy class in the developing countries. They state increased inequality not only is ineffective in creating and accumulation of capital, but also through reduction of both labor efficiency and demand for domestic products, it impedes growth. In this regards, Kuznets claims that economic growth in its earliest phases, increases inequality of income distribution, and later it equalizes it and in final stages it reduces the income inequalities. This hypothesis has been tested in different countries with different results. Because of the significance of social justice in core values of Iranian society, and obvious existence of related social sensitivities, testing Kuznets hypothesis in Iran, to obtain the mutual relationships of economic growth and income distribution, is very important. In this article, using available data and statistics and on the basis of estimations of regression models, it is demonstrated that combination and shares of sectors in economic growth, has an impact on how income is distributed. Therefore, it is necessary to recognize the methods of resource allocation that lead to reduction of income inequalities. In this article, systems of resource allocation among different economic sectors that could reduce income disparity are introduced and policy making options are recommended.
This article focuses on the importance of functional distribution in discussions of economic inequality. Section 2 reviews theoretical perspectives on functional distribution while Section 3 discusses measurement issues. The USA is used as a case study to show how levels and trends in factor shares may be affected by measurement choices. The preferred measure of labour's share shows a very shallow inverted U-shaped pattern, peaking in the late 1970s. In Section 4, the more pronounced rise and decline of labour's share in the post-war period observed in the OECD outside the USA is noted, and the influences behind the recent decline in labour's share are surveyed. Section 5 reports longer-term trends in labour's share from early in the 20th century calculated from national sources. The article concludes by drawing attention to the need for more research to uncover the causes of swings in factor shares and to establish the links between the functional and personal distribution of income.