Capitalist systems and income inequality

Abstract

The paper investigates the relationship between capitalism systems and their levels of income and compositional inequality (how the composition of income between capital and labor varies along income distribution). Capitalism may be seen to range between Classical Capitalism, where the rich have only capital income, and the rest have only labor income, and Liberal Capitalism, where many people receive both capital and labor incomes. Using a new methodology and data from 47 countries over the past 25 years, we show that higher compositional inequality is associated with higher inter-personal inequality. Nordic countries are exceptional because they combine high compositional inequality with low inter-personal inequality. We speculate on the emergence of homoploutic societies where income composition may be the same for all, but Gini inequality nonetheless high, and introduce a new taxonomy of capitalist societies.

Heterogeneity in Macroeconomics: The Compositional Inequality Perspective

“…In other words, economies characterized by a relatively equal distribution of the propensities to save across the population display higher saving rates. To theoretically explain this result, let us consider the following relationship derived by Ranaldi and Milanovic (2022) on the link between compositional inequality in capital and labor incomes, on the one hand, and inter-personal income inequality, on the other:…”

“…To measure the IFC index for capital and labor incomes, we rely on the Ranaldi and Milanovic Database (Ranaldi and Milanovic, 2022). This database includes estimates of the IFC for several definitions of capital and labor incomes, calculated using the Luxembourg Income Study (LIS) Database.…”

“…The second type is heterogeneity in the distribution of capital and labor incomes across the income distribution. Recent studies have shown that, globally, poor individuals derive most of their income from labor, whilst rich individuals derive most of their income from capital (Ranaldi and Milanovic, 2022, Iacono and Palagi, 2022b, Iacono and Ranaldi, 2022. We call this type of heterogeneity endowment heterogeneity.…”

Is Income Inequality in Bulgaria Underestimated in Survey Data?

“…In another recent study on the topic, Ranaldi and Milanović (2022) focus on the relationship between capitalist systems and income inequality, using data for 47 countries over the period 1995-2018. Based on empirical analysis, they conclude that rich countries benefit from capital while poor countries benefit from labour, with income inequality higher in Latin America and significantly lower in Nordic countries.…”

Functional and personal income distributions

“…To address this topic, Ranaldi (2021) develops the concept of income composition inequality, which is measured by the distribution of factor incomes across the total income distribution. Then, a high level of income composition inequality -e. g., high concentration of capital income in the top 3 -means a strong relationship between functional and personal distributions (Ranaldi, 2021;Ranaldi and Milanović, 2021). However, Ranaldi (2021) does not relate all the three Lorenz curves.…”