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This paper addresses the impact of productive government expenditure on income inequality using a dataset of 80 countries over the period of 1980–2015. It incorporates the conflicting predictions implied by alternative growth models on this issue. While the neoclassical model suggests that productive government expenditure will reduce long-run income inequality, the corresponding endogenous growth model suggests the opposite. We examine this proposition, by considering both the aggregate Gini coefficient, and the income shares of quintiles. The results obtained using the Gini coefficients provide compelling support for the contrasting impacts of government investment on income inequality, suggested by the underlying theoretical models. These findings are supported, albeit somewhat more weakly by the regressions employing the quintile data. Our general conclusion is that government investment has a mixed effect on income inequality, a conclusion consistent with previous studies.

This paper considers the role of asset price bubbles (crashes) as an important determinant in seeking a further explanation for top income shares. The asset price bubbles caused at least in part by monetary policies, along with other determinants such as top tax rates and innovativeness are the important drivers to explain the surge in top income shares. The empirical results show that correlation between asset bubbles and top inequality is positive and significant. The regression coefficient of stock and housing market bubbles have a positive effect on top income shares, while the stock and housing market crashes fail to reduce the surge in top income shares. In sum, as the asset markets grow, the share of income going to those at the very top increases and the accumulation of income accelerates if the duration of bubbles expands. Concentration of income at the very top is much more important when capital gains are counted as income.

Do policies and institutions matter for pre-tax income inequality? I build an annual panel of 43 countries for the period 1980–2016 to document cross-country facts. I find robust correlations between pre-tax income shares and economic policy—financial development, trade openness, government expenditure, and income taxation—even after controlling for economic development. I further find that proxies of institutional quality—e.g., state development, corruption, or political exclusion—mediate the relationship between top income shares and economic policy, in particular for trade openness and government expenditure. The role of institutions in allowing or limiting rent-seeking can rationalize the results.

One of the most debated questions in alternative macroeconomics regards whether demand policies have permanent or merely transitory effects. While demand matters in the long run in (neo-) Kaleckian economics, both economists operating within other Keynesian traditions (e.g. Skott 1989) as well as Classical economists Dumenil and Levy (Manchester School 67(6):684–716, 1999) argue that in the long-run output growth is constrained by an exogenous natural growth rate. This paper attempts to bridge the gap by analyzing the role of firm beliefs about the state of the economy in a labor-constrained growth and distribution model based on Kaldor (Review of Economic Studies 23(2):83–100, 1956) and Goodwin (Journal of Evolutionary Economics 1(1):29–47, 1991) that is also compatible with the evolutionary perspective on coordination (or the lack thereof) within markets by Metcalfe et al. (Cambridge Journal of Economics 30:7–32, 2006). The main innovation is the inclusion of beliefs about economic activity in an explicitly dynamic choice of capacity utilization at the firm level. We show that: (i) the relevance of such beliefs generates an inefficiently low utilization rate and labor share in equilibrium, but (ii) the efficient utilization rate can be implemented through fiscal policy. Under exogenous technical change, (iii) the inefficiency does not affect the equilibrium employment rate and growth rate, but expansionary fiscal policy has positive level effects on both GDP and the labor share. However, (iv) with endogenous technical change a la Verdoorn (1949), fiscal policy has also temporary growth effects. Finally, (v) the fact that the choice of utilization responds to income shares has a stabilizing effect on growth cycles, even under exogenous technical change, that is analogous to factor substitution.

We study the link between tax progressivity and top income shares. Using variation from Western tax reforms in the 1980s and 1990s and synthetic control method estimation, we find that reductions in tax progressivity had large and lasting positive impacts on top income shares. The effects are largest within the top percentile and almost zero in the lower half of the top decile, and all results are robust to different model specifications, placebo tests in time and space, and controlling for other contemporaneous reforms. Searching for mechanisms, we find that the effects seem to operate mainly through reductions in top marginal tax rates and that the share of capital income in top incomes increased after the reforms, indicating that tax avoidance behavior could explain some of the observed effects.

This paper examines the impact of unemployment and inflation on family income shares. Unemployment and inflation are decomposed into their structural (long-term), cyclical (short-term), anticipated and unanticipated components, respectively. I propose a new framework to analyze family income quintile shares by using a two-state Markov-switching model, also known as Hamilton’s regime-switching model. The benefit of using a Markov-switching model is that it permits capturing complex dynamic behavior of non-linear time series macroeconomic variables. The switching mechanism follows a first-order Markov chain of unobservable state variables and subsequent estimated conditional transition probabilities. This paper applies a two-state regime-switching process to capture the asymmetrical effects of unemployment and inflation on family income shares. The two states of family income quintile shares are state 1 (lower income) and state 2 (upper income). This approach differs from previous studies because it examines income inequality within each quintile rather than between quintiles. It is well documented in the literature that there is income inequality between lower and higher income quintiles. Therefore, the analysis of income inequality within the quintile allows for greater insight into changes in family income share corresponding to changes in the state variables. The general findings are that unemployment has adverse effects on lower income shares while inflation acts like a progressive tax on higher income shares.

This paper looks at the influence of financial deepening (private bank credit) on income inequality in developed economies. Building on a model of financially open economies (Kunieda et al. (Macroecon Dyn 18:1091–1128, 2014)), defining its endogenous economic growth rate, and extending its implications also for top income shares, it is shown that the impact of bank credit on inequality depends on the gap between the real interest rate and the GDP growth rate (‘$$r-g$$ r - g ’). This finding is robustly confirmed by the empirical analysis on a few samples of OECD and EU countries, both for the Gini index and for top income shares. Both the econometric evidence and simple evidence show that the presence of this type of non-linearity (an interaction between financial deepening and $$r-g$$ r - g ) is likely to be one of the reasons for the mixed results that may be found in the empirical literature on the relationship between the financial deepening and income inequality.

A persistent concern about the social consequences of climate change is that large, vulnerable populations will be involuntarily displaced. Existing evidence suggests that changes in precipitation and temperature can increase migration in particular contexts, but the potential for this relationship to evolve over time alongside processes of adaptation and development has not been widely explored. To address this issue, we link longitudinal data from 20 thousand Chinese adults from 1989-2011 to external data on climate anomalies, and use this linked dataset to explore how climatic effects on internal migration have changed over time while controlling for potential spatial and temporal confounders. We find that temperature anomalies initially displaced permanent migrants at the beginning of our study period, but that this effect had reversed by the end of the study period. A parallel analysis of income shares suggests that the explanation might lie in climate vulnerability shifting from agricultural to non-agricultural livelihood activities. Taken together with evidence from previous case studies, our results open the door to a potential future in which development and in-situ adaptation allow climate-induced migration to decline over time, even as climate change unfolds.

Between 1953 and 1985 India implemented various progressive taxes on personal wealth. I use estate tax returns to compute top wealth shares (top 1%, top 0.1% and top 0.01%) over 1966-1985; a period marked explicitly by a dirigiste policy environment. These new series suggest that wealth concentration in India reduced substantially during the 1970s. Although the decline affected the entire top 1%, the losses faced by the top 0.01% were especially large. Combined with identical trends in top income shares, it appears that the 1950-80 expropriations of India’s rich had similarities to institutional transitions and shocks faced by European elites in the early to mid twentieth century.

Using a newly created dataset, this article documents the trends in top income shares for CARICOM member states during the 1960–2015 period. Belize, Suriname, Guyana, Jamaica and Haiti are high-inequality countries as compared to Trinidad & Tobago, The Bahamas, Barbados and St. Lucia. Barbados is the only low-inequality country that is converging to its high-inequality peers, while Belize experiences the greatest decline in top income share. The article argues that differential European settlement and land size are colonial origins explaining why member states are divided into high- and low-inequality groups. However, the article demonstrates the importance of policy for distributional outcomes—like the role of Offshore Financial Centres in the case of Barbados. The paper also shows how structural adjustment policies and natural disasters can account for the volatility observed in top incomes. Finally, the article proposes that the lack of inequality-reducing structural change is an important explanation for the enormous holding power of top incomes across the community.

This paper aims at highlighting the effects of large natural resource endowments on the institutions of the so-called Scandinavian or Nordic model, through a comparative quantitative case study. Focusing on two key features of the Scandinavian model, namely (a) low income inequality and (b) high welfare spending, this study presents evidence on the shocks to these features for Norway after the country became one of the world’s largest oil exporters. A synthetic control unit constructed by weighting Nordic countries provides the most reliable comparison unit to estimate the comparative effects constituting the paper’s twofold contribution. First, the resource windfall did not contribute to significantly higher top income shares. Second, resource revenues contributed to finance the steadily increasing gap between Norway and other Nordic countries in the degree of welfare generosity. This is a pre-print of an article published in [Comparative Economic Studies]. The final authenticated version is available online at: https://doi.org/10.1057/s41294-018-0071-7

To make energy efficiency policies for consumers, changes in the demands for multiple goods or services and the corresponding cumulative energy consumptions should be considered together to estimate residential rebound effects. A hybrid methodology, which combines the consumer’s expenditure re-allocation with cumulative energy consumption through integrating a re-spending framework and an input–output analysis under different scenarios, is often used to estimate residential rebound effects. However, the specifications of the expenditure change caused by the re-spending effect are controversial. By introducing the Hicks decomposition of price effect both in absolute and elasticity forms, we have explained the re-spending effect and re-examined the hybrid methodology. We find that determinants such as the proportion of energy efficiency improvement, non-compensated price and income elasticities, income shares, cumulative energy intensities of each final demand, and energy intensity of investment would influence the combined rebound effect. We also find that the direct rebound effect may not be necessarily represented as the negative value of the own-price elasticity of energy service. The parameter of the extent to which the energy efficiency has improved and other energy intensity variables should also be considered. Thus, it would be risky to use only elasticity to indicate the direct rebound effect when the hybrid methodology is applied.

Public debates about the rise in top income shares often focus on the growing dispersion in earnings, and the soaring pay for top executives and financial-sector employees. But can the change in the marginal distribution of earnings on its own explain the rise in top income shares? Are top executives replacing capital owners in the group of top-income earners, or are we rather witnessing a fusion of top capital and top earnings? This paper proposes an extension of the copula framework and uses it for exploring the changing composition of top incomes. It illustrates that changes in top income shares can easily be decomposed into respective changes in the marginal distributions of labour and capital income and the changing association between the two types of income. An application using tax record data from Norway shows that the association between top labour and capital incomes grew stronger between 1995 and 2005 in the top half of the wage and capital income distribution, though it declined for the top 1% of capital income receivers. A gender decomposition demonstrates that the association of wage and capital incomes at the top is particularly striking for men, whilst women are largely under-represented in the top halves of the two marginal distributions.

Economic integration has brought about not only benefits and opportunities but also required adjustment, especially for the youth entering the labour force. The lower growth rates characterizing the post Global Financial Crisis era and the concerns about income inequality put to the fore the degree that better targeted investment in human capital may ameliorate the challenges facing the working poor. Using cross-country data, we find the association between the income shares of the working poor, dependence on manufacturing sector, and the availability of vocational education. Conditioning on tertiary educational attainment, improved access to better vocational education will probably contribute more than large increase in regular college attainment. Comparing the US to Germany suggests that pushing more students to BA granting colleges may no longer be the most efficient way to deal with the challenges caused by the decline in manufacturing employment affecting in particular lower-income households. We also note that a tracking of technical training and educational budget, shown in the case of Vietnam in comparison to Thailand, as well as government subsidies for reskilling of labour fource throughout their career in Singapore, is a potential explanation for their relative manufacturing competitiveness.

Entry regulations, including fees, permits and licenses, can make it prohibitively difficult for low-income individuals to establish footholds in many industries, even at the entry-level. As such, these regulations increase income inequality by either preventing access to higher paying professions or imposing costs on individuals choosing to enter illegally and provide unlicensed services. To estimate this relationship empirically, we combine entry regulations data from the World Bank’s Doing Business Index with various measures of income inequality, including Gini coefficients and income shares to form a panel of 115 countries. We find that countries with more stringent entry regulations tend to experience more income inequality. In countries with average inequality, increasing the number of procedures required to start a new business by one standard deviation is associated with a 7.2% increase in the share of income accruing to the top decile of earners, and a 12.9% increase in the overall Gini coefficient. This result is robust to the measure of inequality, startup regulations, and potential endogeneity. We conclude by offering several policy recommendations designed to minimize the adverse effects of entry regulations.

This paper explores the relationship between tariff reductions and income inequality for 37 countries over the period 1984 to 2010, a period of extensive trade liberalization. Using panel data techniques we find that a permanent reduction in the tariff rate will significantly increase short-run income inequality. To obtain further insight into how the distribution of income is affected, we also estimate the impact of tariffs on income shares by quintiles. We find that the relative income of the lowest quintile is the most adversely affected, while the greatest beneficiaries are the agents in the second richest quintile. By adopting a panel data approach, and including a wide range of control variables, we are confident that these findings reflect causal effects rather than merely reflecting spurious correlations. We also find that reducing tariffs will likely increase long-run income inequality, although these results are less conclusive. The empirical evidence provides some support for the proposition that the speed with which, and the initial level from which, the tariff is adjusted affects income inequality. Finally, our empirical analysis confirms the conventional result that tariff reductions have an expansionary effect on aggregate output. This suggests that tariff reduction involves at least a short-run tradeoff between increasing the level of economic activity coupled with more income inequality.

Most previous studies of income inequality have either ignored capital gains or have used taxable realized capital gains to estimate top incomes. Neither of these approaches is fully satisfactory. We apply for the first time a new methodology that allows us to account for fundamental accrued capital gains as part of the top incomes in a theoretically consistent manner. We estimate the shares of the superrich in Chile showing that accrued capital gains have a dramatic impact on these estimates. Also, the top income shares estimated using fundamental capital gains appear to exhibit a more stable and presumably more plausible time profile than estimates based on capital gains derived from asset market variations.

Literature on convergence in inequality is sparse and has almost entirely focused on the notion of testing beta convergence in the Gini indices. In this paper, for the first time, we test for sigma convergence in decile income shares across countries. We compile panel data on decile income shares for more than 60 countries over the last 25 years. Regardless of the level of development, within-country inequality increased; income shares of the poorest deciles declined and those of the top decile increased significantly. Importantly, the decile income shares exhibited a statistically significant decline in dispersion between 1985 and 2011, providing strong evidence of sigma convergence in inequality. Convergence was more prominent among developing countries and less so among developed countries. The findings are robust to an array of sensitivity tests. Our analysis suggests that cross-country income distributions became more unequal but noticeably similar over time.

This paper studies the triad “concentration, diversification and dominance” in an ecosystem $$(\Omega _{t})$$ defined as the macro-fishery comprised by the entire commercial fish species landed in a specific geographical area and time horizon (1986:1–2011:12). This is faced computing alternative monthly concentration indices (CIs) based on the income shares of individual species and, afterwards, analysing the structural features and overall dynamics of the monthly time series related to each of the CIs. Special attention will be paid on categorising not only the long-term cycles, but also the seasonal components found in the series.

Despite similar levels of per capita income, education and technology, the development of labour income shares in OECD countries has displayed different patterns since 1960. The paper examines the role of demography in this regard. We first use a standard overlapping generations model to derive the mechanisms by which demographic change can affect the labour share. It turns out that demographic change can affect the labour share either by altering the domestic capital intensity, by causing factor-biased technological change or in a small open economy framework by creating a gap between domestic savings and investments. The latter affects the country's investments abroad and in return its net foreign asset income which directly leads to changes in the labour share. Empirical estimations based on these insights, provide evidence that an increases in the expected retirement durations and old-age dependency ratios as well as declines in labour force growth rates have indeed been major forces behind the decline in labour shares that took place in many countries. These effects tend to be larger in open economies and pension reforms towards a funded pension system seem to have accelerated the effects.

This paper analyzes the relationship between macroeconomic factors and the income distribution using data on equivalized disposable household income from the United Kingdom for 1961–99. We argue in favour of fitting a parametric functional form to the income distribution for each year, and then modeling the time series of model parameters in terms of the macroeconomic factors, as this better allows us to take into account non-stationarity in the time series. Estimates from models that relate income distribution parameters to cyclical variables in first differences (to account for non-stationarity) suggest that neither inflation nor unemployment have significant effects on income inequality. Compared to the commonly-used method of modelling the income shares directly, our approach indicates that there was no clear cut relationship between macroeconomic factors and the UK income distribution during the last third of the twentieth century.

In this paper, we examine trends in intercountry income inequality during the period 1960 – 1990. Our methodology involves two steps. The first step involves estimating the shares of global income accruing to percentiles of global population which are defined on the basis of relative national affluence. The second step involves using those income shares to calculate the Theil index. We then make use of this methodology and data from the Penn World Tables to address the issue of global income convergence over the period 1960-1990. We find that intercountry inequality did not improve during this period.

For the analysis of the allocation of personal disposable income to the different consumption goods and savings, an “indirect-addilog-expenditure-system” (IAES) has been constructed. Compared to the “linear-expenditure-system” (LES) the IAES to far more flexible and is not based upon the idea of minimum-consumption- or minimum-saving-quotas. On the other hand, marginal income shares are not fixed parameters. The IAES allows the derivation of a “systematic” savings- and consumption-function and supplies consistent income elasticities. But it will be shown that consistent demand systems are only restrictively able to consider all major determinants of the decision-problem consumption or saving. The derived system does not only neglect the effects of wealth on consumption and savings but also the results of real income fluctuations due to the business cycle. Also phenomena like unemployment and uncertainties regarding estimates of the future or inflation are neglected. With the help of an “adjustment-procedure” a part of these disadvantages has been eliminated. The “adjustment” with regard to the entire private consumption and savings supplied income elasticities which lead to an almost constant consumption- and savings-share in the period under investigation.

To avoid confusion arising from mixing up methods, the methodological arsenal was restricted to the computation of percentiles as this was the favoured device in the Kuznets-paper. But with an increasing population the interpretation of rising percentiles is by no means straightforward (which is equally true with other measures of inequality). When the number of income-receiving units and their mean income are held constant, rising shares of the top-income receivers can be interpreted in terms of “rich people getting richer and poor people getting poorer”. But when both, the number of units and their mean income are rising, the interpretation of rising percentiles is quite a problem. For example, aggregating two populations with all percentiles alike (i.e. identical Lorenz curves) but different mean incomes would result in a greater population with increased shares of the top-income receivers and lessened shares of the low-income receivers (i.e. a Lorenz curve more close to the boundaries of the rectangle). It is obvious from this example that the welfare implications of increasing percentiles cannot be separated from the welfare implications of rising mean incomes. Especially, with rising populations and rising mean incomes the income shares of the top-income receivers may very well increase without any poor man getting poorer, so that not even Rawls [1971] would necessarily object to such a development. Bearing these limitations in mind, the outcomes of the previous sections may be summarized in confirming Kuznets’ surmise that income inequality in Prussia increased within the second half of the last century. Furthermore, it is emphasized that the peak was most probably reached around the turn of the century with the First World War merely fortifying the equalizing tendencies which originated from the economic development process itself.