1
Economy and Society
Lecture 2+3 (rising inequality in the
western world)
Measures of Inequality
by all measures economic inequality has risen sharply in many advanced capitalistic
economies nevertheless they cross national differences can be observed
1- Functional Income distribution
2- Personal Income distribution
3- Wealth distribution
Functional Income distribution
Functional labor distribution is the division of total income among workers based on their roles and
contributions to the production of goods and services within an economy. So they can either be
those who have a labour income through the wages and salaries or they can have the capital income
which is through the corporate profits of different kinds
• In this we measure the the income distribution through the likes of labour and capital
share in national income
• We measure the labour and capital share of the GDP
• Since we need both labour and capital to produce goods and services, it allows us to
have a larger picture
• We use functional distribution with top 1% or gini index measure because GDP alone
does not tell us much about the distribution of income across the different groups
Economy and Society 23/24 Muhammad Jaffar Mahdi
, 2
• In other words we have to see how much the added value from profit of the firm is
shared between the labor and capital income holders.
• This way of measuring inequality is based on the Marxist notion of capitalism as it
focuses on the competing interests of working class and the owners of the capital
• Zero sum concept also plays a part if we look at the labour share from the marxist
perspective as it tells us that gain of one (capital share) will be lose of the other
(labour share)
• The labor income share has been falling in the advanced capitalist world since the
1970s
• Neoclassicals always wanted the labour share to remain constant in the economies but
in reality it kept falling
• Labour income share is falling since 1970, as the higher share is moving towards the
capital share thus making them accumulate more= so now we know that those who
are the top 1% are usually the ones with more capital share at the expense of
shrinking labour share= leading to the higher inequality
• Higher levels of income inequality often indicate a skewed distribution of income in
favor of capital or certain segments of the population, highlighting disparities in
functional income distribution.
Q: why the fall in labor share in continental Europe is more pronounced compared to the US
and UK
A: there are two reasons, firstly the labor share of income is not just based on the pay of low
skilled labor but it has everyone from retail to the top level managers so a sudden rise in the
pay of the top level managers allowed this level to stay and not fall much, but due to this we
need to look at the median wages in reality secondly we know that in continental Europe
there was always strong bargaining power which declined in 70s mainly due to globalisation
and this caused the wages to decline also we know that rise in unemployment was caused
after the fall of Keynesians in 1970s
Economy and Society 23/24 Muhammad Jaffar Mahdi
, 3
Personal income distribution
Gini index
- The Gini index is a statistical measure used to quantify the extent of income or wealth
inequality within a population, ranging from 0 (perfect equality) to 1 (maximum inequality).
This is used for personal income distribution
- Very abstract as it sums up everything in one number which is not very good realistically and
make it more abstract
• There is a trend of higher income inequality since 1980 although with some exceptions
• Belgium and france usually remained on the same level
• Finland and sweden rose to equality from being close to having highest inequality
• We will explain these through cross country cleavages
• In Gini index we use the Lorenz curve for the reference
Now we will look at a survey of OECD which used Gini to look at disposable income.
Economy and Society 23/24 Muhammad Jaffar Mahdi
, 4
measures the distribution of disposable income after all taxes have been paid and
government transfers have been received. It includes income from labour (wages and
salaries, profit sharing bonuses and other forms of profit-related pay, income from self-
employment) and capital (income from non-financial assets like real estate and financial
assets like banking accounts, bonds and stocks)
several conclusions from this
First of all, Anglo-Saxon countries tend to have higher levels of income inequality than
most continental European countries and Japan. Inequality also rose faster in the former
countries between 1985 and 2008 than in the latter. Although Finland and Sweden are an
exception to this trend, their Gini-coefficients were the lowest in the 1980s and they
remain among the most equal countries according to this measure. France and Belgium
are the only two countries whose Gini coefficient remained more or less the same dur- ing
this period. So while the rise in income inequality was an almost universal phenom- enon
in the advanced capitalist world, there are substantial cross-national differences between
OECD countries both in terms of the level of inequality and the pace at which it increased
since the 1980s.
Some problems with the system of Gini Co-efficient
- It underestimates the degree of income household survey cannot capture, that is
specially the income of those on the top
- It also cannot account the under the table income which people make
Share of top 1% in national income share
- The method of the Share of top 1% in national income share provides a clearer indication of
extreme income concentration at the top of the distribution compared to the Gini index,
which can sometimes mask disparities at the upper end of the income spectrum.
Economy and Society 23/24 Muhammad Jaffar Mahdi
Economy and Society
Lecture 2+3 (rising inequality in the
western world)
Measures of Inequality
by all measures economic inequality has risen sharply in many advanced capitalistic
economies nevertheless they cross national differences can be observed
1- Functional Income distribution
2- Personal Income distribution
3- Wealth distribution
Functional Income distribution
Functional labor distribution is the division of total income among workers based on their roles and
contributions to the production of goods and services within an economy. So they can either be
those who have a labour income through the wages and salaries or they can have the capital income
which is through the corporate profits of different kinds
• In this we measure the the income distribution through the likes of labour and capital
share in national income
• We measure the labour and capital share of the GDP
• Since we need both labour and capital to produce goods and services, it allows us to
have a larger picture
• We use functional distribution with top 1% or gini index measure because GDP alone
does not tell us much about the distribution of income across the different groups
Economy and Society 23/24 Muhammad Jaffar Mahdi
, 2
• In other words we have to see how much the added value from profit of the firm is
shared between the labor and capital income holders.
• This way of measuring inequality is based on the Marxist notion of capitalism as it
focuses on the competing interests of working class and the owners of the capital
• Zero sum concept also plays a part if we look at the labour share from the marxist
perspective as it tells us that gain of one (capital share) will be lose of the other
(labour share)
• The labor income share has been falling in the advanced capitalist world since the
1970s
• Neoclassicals always wanted the labour share to remain constant in the economies but
in reality it kept falling
• Labour income share is falling since 1970, as the higher share is moving towards the
capital share thus making them accumulate more= so now we know that those who
are the top 1% are usually the ones with more capital share at the expense of
shrinking labour share= leading to the higher inequality
• Higher levels of income inequality often indicate a skewed distribution of income in
favor of capital or certain segments of the population, highlighting disparities in
functional income distribution.
Q: why the fall in labor share in continental Europe is more pronounced compared to the US
and UK
A: there are two reasons, firstly the labor share of income is not just based on the pay of low
skilled labor but it has everyone from retail to the top level managers so a sudden rise in the
pay of the top level managers allowed this level to stay and not fall much, but due to this we
need to look at the median wages in reality secondly we know that in continental Europe
there was always strong bargaining power which declined in 70s mainly due to globalisation
and this caused the wages to decline also we know that rise in unemployment was caused
after the fall of Keynesians in 1970s
Economy and Society 23/24 Muhammad Jaffar Mahdi
, 3
Personal income distribution
Gini index
- The Gini index is a statistical measure used to quantify the extent of income or wealth
inequality within a population, ranging from 0 (perfect equality) to 1 (maximum inequality).
This is used for personal income distribution
- Very abstract as it sums up everything in one number which is not very good realistically and
make it more abstract
• There is a trend of higher income inequality since 1980 although with some exceptions
• Belgium and france usually remained on the same level
• Finland and sweden rose to equality from being close to having highest inequality
• We will explain these through cross country cleavages
• In Gini index we use the Lorenz curve for the reference
Now we will look at a survey of OECD which used Gini to look at disposable income.
Economy and Society 23/24 Muhammad Jaffar Mahdi
, 4
measures the distribution of disposable income after all taxes have been paid and
government transfers have been received. It includes income from labour (wages and
salaries, profit sharing bonuses and other forms of profit-related pay, income from self-
employment) and capital (income from non-financial assets like real estate and financial
assets like banking accounts, bonds and stocks)
several conclusions from this
First of all, Anglo-Saxon countries tend to have higher levels of income inequality than
most continental European countries and Japan. Inequality also rose faster in the former
countries between 1985 and 2008 than in the latter. Although Finland and Sweden are an
exception to this trend, their Gini-coefficients were the lowest in the 1980s and they
remain among the most equal countries according to this measure. France and Belgium
are the only two countries whose Gini coefficient remained more or less the same dur- ing
this period. So while the rise in income inequality was an almost universal phenom- enon
in the advanced capitalist world, there are substantial cross-national differences between
OECD countries both in terms of the level of inequality and the pace at which it increased
since the 1980s.
Some problems with the system of Gini Co-efficient
- It underestimates the degree of income household survey cannot capture, that is
specially the income of those on the top
- It also cannot account the under the table income which people make
Share of top 1% in national income share
- The method of the Share of top 1% in national income share provides a clearer indication of
extreme income concentration at the top of the distribution compared to the Gini index,
which can sometimes mask disparities at the upper end of the income spectrum.
Economy and Society 23/24 Muhammad Jaffar Mahdi
