Fix, Blai
Wo king Pape
How In e es Ra es Redis ibu e Income
P o ided in Coope a ion wi h:
The Bichle & Ni zan A chi es
Sugges ed Ci a ion: Fix, Blai (2023) : How In e es Ra es Redis ibu e Income, Economics om he
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How In e es Ra es Redis ibu e Income
Blai Fix
Ap il 16, 2023
[I]n e es a es a e, i s and o emos , a dis ibu ional a iable
ha a ec s he income sha es o a ious social g oups.
—Louis-Philippe Rochon & Ma k Se e ield (2007)
When I ead abou mone a y policy, I ha e a ule o humb. E e y ime I
see he ph ase in e es a e, I eplace i wi h he e m wage a e. Then I ask
mysel whe he he discussion s ill makes sense. O en, i does no .
The eason I make his subs i u ion is ha in concep ual e ms, he in e es
a e and he wage a e a e simila : hey a e bo h a es o e u n. Wages a e
he e u n on employmen . In e es a es a e he e u n on c edi .
Now, he impo an hing abou a es o e u n is ha when we change hem,
we a e oying wi h he dis ibu ion o income. Hike wages and we send mo e
income o wo ke s. Hike he a e o in e es and we send mo e income o
c edi o s. Su e, he speci ics o his edis ibu ion a e open o inqui y. Bu
by de ini ion, a es o e u n a e ‘dis ibu ional a iables’ — hey de e mine
how he income pie ge s di ied up.
Back o my wo d subs i u ion. When i comes o wages, he issue o dis ibu-
ion is ypically on and cen e . Tha ’s why alk o a minimum-wage hike
p omp s businesses (and many economis s) o complain abou educed p o -
i s. Bu when c edi o s hike he a e o in e es , alk o income dis ibu ion
is cu iously absen . Ins ead, we ge a ba age o mac oeconomic ja gon —
e ms like he ‘na u al a e o in e es ’ and he ‘non-accele a ing in la ion
a e o unemploymen ’.
Why he disc epancy?
Blai Fix Economics om he Top Down
One possibili y is ha economis s know some hing ha we don’ . Pe haps
hey’ e looked a he e idence and concluded ha in e es a es ha e a ‘neu-
al’ e ec on he dis ibu ion o income.
Ano he possibili y is ha he mac oeconomic ja gon is mos ly a dis ac ion.
In o he wo ds, like wages, he a e o in e es is a ‘dis ibu ional a iable’.
Bu i ’s one ha mains eam economis s p e e o igno e.
So which op ion is ue? In his pos , I le he e idence speak o i sel . Look-
ing a c oss-coun y e idence, I ind ha in e es a es a e decidedly non-
neu al. As in e es a es ise, h ee hings happen:
1. he in e es sha e o income inc eases;
2. he labo sha e o income dec eases;
3. income inequali y inc eases.
In sho , he e idence sugges s ha in e es a es play a key ole in he game
o class wa a e. And ha makes sense. In e es , a e all, is a a e o e u n.
And when i comes o di ying up he income pie, a es o e u n a e always
ze o sum.
How economis s lea ned o igno e he dis ibu ion o
income
Be o e we jump in o he income-dis ibu ion da a, i ’s wo h e iewing some
his o y. Among he e odox economis s, he dis ibu ion o income is a ho -
bu on opic. Bu among mains eam economis s, i emains a seconda y
conce n. Why?
To unde s and his apa hy, we need o e ace he ajec o y o economic
hough . When he s udy o poli ical economy go olling in he 19 h cen u y,
he dis ibu ion o income was on and cen e . Fo ea ly poli ical economis s,
wha ma e ed mos was class-based income. Why did land owne s, capi alis s,
and wo ke s ecei e hei espec i e cu s? So c ucial was his ques ion ha
Da id Rica do deemed i he ‘p inciple p oblem in poli ical economy’.
As he 19 h cen u y played ou , hinke s like Ka l Ma x and Hen y Geo ge
ecognized ha dis ibu ing income in ol ed ob ious con lic . Fo example,
i Alice he wo ke and Bob he capi alis bo h wan a 60% cu o he pie,
only one o hem can ge hei way. In o he wo ds, he ze o-sum na u e o
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class-based income necessi a es class wa a e. O a he , i necessi a es class
wa a e, supposing ha he a ious classes wan mo e han hei cu en
ake.
En e John Ba es Cla k. Seeing he ins abili y in ol ed in class s uggle, Cla k
wan ed o show ha con lic was unnecessa y. And he ound an ingenious way
o do i . Wi h a ew swi assump ions, Cla k ‘p o ed’ ha in a compe i i e
ma ke , each agen ge s back he amoun o weal h which ha agen c ea ed.
Thus was bo n he heo y o ‘ma ginal p oduc i i y’, which ells e e yone
ha hey ea n wha hey dese e. The message? In ma ke economies, class
s uggle doesn’ exis .
O cou se, Cla k’s heo y is based on assump ions ha a e ob iously alse.
(Fo example, you mus assume ha socie y p oduces a single commodi y.)
So he eal ques ion is why economis s se led on a heo y ha was clea ly
w ong.
He e’s my ake.
Fi s , Cla k’s heo y o ma ginal p oduc i i y old powe ul people wha hey
wan ed o hea — namely, ha he dis ibu ion o income is ‘jus ’.
Second, Cla k’s app oached gelled nicely wi h he eme ging obsession wi h
economic g ow h. In he mid 20 h cen u y, economis s ound ha i hey
ea ed all o socie y like a single i m, hey could use a p oduc ion unc ion
o ‘explain’ economic g ow h.
1
Impo an ly, his unc ion assumed no only
ha each class ea ned hei ‘ma ginal p oduc ’, bu ha hei income sha es
we e cons an . In o he wo ds, when modeling economic g ow h, economis s
could ea he dis ibu ion o income as a non-issue. And so hey did.
O cou se, he la ge backd op is ha ollowing Wo ld Wa II, humani y mas-
si ely inc eased i s consump ion o esou ces — a pa e n ha had no hing
o do wi h economis s’ models and e e y hing o do wi h he exploi a ion o
ossil uels. Bu like e e yone else, economis s came along o he ide. And
so hey go obsessed wi h economic g ow h, and lea ned o igno e he dis-
ibu ion o income. Figu e 1illus a es his ideological shi as i is w i en
in English wo d equency.
1
Ac ually, he his o y o economic g ow h heo y is jus as emba assing as he his o y
o Cla k’s heo y o ma ginal p oduc i i y. Like Cla k, neoclassical g ow h heo is s ealized
ha o make hei heo y wo k, hey had o assume ha socie y p oduced a single com-
modi y. Wo se, c i ics la e showed ha economis s’ a o i e p oduc ion unc ion — he
Cobb-Douglas unc ion — was a hinly eiled e sion o an accoun ing iden i y used o de-
ine he na ional accoun s. In o he wo ds, he unc ion ‘wo ked’ because i was a au ology.
Fo mo e de ails, see ‘Economic G ow h Theo y ... Bah Humbug!’.
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Figu e 1: Lea ning o igno e he dis ibu ion o income
Using he Google English co pus, his igu e cha s he equency o he ph ases ‘economic
g ow h’ and ‘dis ibu ion o income’. Un il he 1940s, he wo ph ases we e equally popula .
Bu du ing he pos -WWII boom, economis s lea ned o lo e g ow h and igno e dis ibu ion.
Sou ces and me hods
Looking o he coming cen u y, my guess is ha economis s will e en ually
ekindle hei in e es in he dis ibu ion o income ... bu only because hey
will be o ced o. As he ossil- uel e a wanes, economic g ow h will become
a elic o he pas . And so economis s will be d agged back in o he business
o s udying how he income pie is di ided. In his pos , we’ll ge ahead o
he cu e.
The na ional income pie
Jumping in o he s udy o income dis ibu ion, oday we ha e excellen da a
on how he income pie is di ied up. And ha ’s somewha i onic.
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Blai Fix Economics om he Top Down
You see, he income da a la gely comes om he na ional accoun s, which
we e designed as ools o measu ing economic ‘p oduc ion’. He e’s he i ony.
Because he na ional accoun s a e based on mone a y ansac ions, hey a e
adubious measu e o ‘p oduc ion’. Bu hey a e a good measu e o income.
2
To s udy he dis ibu ion o income, we do he opposi e o wha mos
economis s do. Ins ead o using he na ional accoun s o look a he size
o he income pie, we measu e he pie’s composi ion. Typically, ha means
spli ing he pie in o i e ca ego ies o income:
1. employee compensa ion
2. p o i
3. p op ie o income
4. en
5. in e es
To gi e you a sense o he size o each income ca ego y, Figu e 2shows he
US income spli in 2021.
Looking a hese income ca ego ies, we na u ally wan o know whe e hey
come om. Economis s ha e an answe . They claim ha each class ep esen s
a ‘ ac o o p oduc ion’.
This ja gon e lec s economis s’ lo e o equa ing income wi h ‘p oduc ion’. I
ad ise you o igno e i . The eali y is ha he a ious classes o income a e
legal cons uc s. In o he wo ds, he law de ines di e en o ms o p ope y
igh s. And om hese igh s s em di e en ca ego ies o income.
Fo example, people who own co po a ions by de ini ion ea n ‘p o i ’. People
who own uninco po a ed businesses by de ini ion ea n ‘p op ie o income’.
People who own physical and/o in ellec ual p ope y ea n ‘ en ’. People
who own deb ea n ‘in e es ’. And people who own no hing ea n ‘wages’.
A e hese di e en ypes o p ope y igh s a bi a y? Yes. Bu in some sense,
ules a e always a bi a y. Wha ma e s is ha hese p ope y ules a e
hea ily en o ced, which means ha hey dic a e he e ms o class wa a e.
2
Income measu es om na ional accoun s s ill ha e p oblems. The main one is ha
because he na ional accoun s os ensibly measu e ‘p oduc ion’, hey exclude income ha is
deemed ‘unp oduc i e’. Fo his eason, he na ional accoun s exclude capi al gains, which
a e an impo an sou ce o p ope y income.
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Blai Fix Economics om he Top Down
Figu e 2: The US income pie in 2021
This cha shows he composi ion o US na ional income in 2021. Sou ces and me hods
The in e es sha e o income
Speaking o class wa a e, le ’s alk abou he a e o in e es . As Rochon and
Se e ield pu i , in e es a es a e p ima ily a “dis ibu ional a iable ha
a ec s he income sha es o a ious social g oups.” Tha ’s a sub le way o
saying ha in e es a es a e a ool o waging class wa .
On his ac , he e idence is qui e clea . Bu be o e we ge o he da a, le ’s
ame he ba le. In he na ional accoun s, in e es income is abula ed as
‘ne in e es ’. (The ‘ne ’ pa means ha when adding up in e es paymen s,
s a is ical agencies sub ac in e es ecei ed om in e es paid.)
Re u ning o Figu e 2, we can see ha ne in e es is cu en ly he smalles
slice o he US income pie. Bu don’ be misled by his ecen da a. When
we look a US his o y, we ind ha he in e es sha e o income is ex emely
ola ile.
Figu e 3 ells he s o y. He e, he ed cu e shows he in e es sha e o US
na ional income. O e he las 120 yea s, i a ied om a low o 1% (in 1946)
o a high o nea ly 10% (in 1982). Wha explains his a ia ion? Well, he
ough and peak o he in e es sha e o income co espond o some impo an
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Figu e 3: In he Uni ed S a es, he in e es sha e o income ose and
ell wi h he yield on bonds
The ed cu e shows how he in e es sha e o US na ional income a ied o e he las
cen u y. The blue cu e shows he co esponding change in bond yields, which p oxy he
a e o in e es . E iden ly c edi o s’ cu o he pie is de e mined la gely by he a e o in e es .
Sou ces and me hods
geopoli ical e en s ( he end o WWII in 1945 and he s ag la ion c isis o
he ea ly 1980s, espec i ely). Bu in mo e abs ac e ms, he in e es sha e
o income is dic a ed by some hing simple : he a e o e u n on c edi .
In Figu e 3, he blue cu e es i ies o he connec ion be ween he in e es
sha e o income and he in e es a e. This cu e shows he long- e m his o y
o US bond yields, which ise and all wi h he in e es sha e o income. And
bond yields, i you’ e un amilia , a e a way o measu ing he e u n on c edi
— o he wise known as he a e o in e es .
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Summa izing he e idence, i appea s ha Rochon and Se e ield a e co ec
o call in e es a es a ‘dis ibu ion a iable’. We can hink o he a e o
in e es as a dial o se ing he in e es sha e o income.
Tha said, i ’s unwise o d aw sweeping conclusions om s udying a single
coun y. So be o e we decla e in e es a es an income-sha e dial, le ’s widen
ou ne .
To do ha , we’d ideally look a da a o a huge sample o coun ies. Bu he
p oblem wi h his app oach is ha income-sha e da a is no widely epo ed.
(This da a sca ci y s ems om he ac ha economis s mos ly ca e abou he
size o he income pie, no i s composi ion.) To da e, I’ e been able calcula e
in e es -sha e da a o a hand ul o OECD coun ies co e ing he las wo
decades. This sample is no g ea . Bu i ’s enough o a consis ency check.
On ha on , Figu e 4shows ha he OECD da a i s wi h he pa e n ound
in he Uni ed S a es. Ac oss hese coun ies, he in e es sha e o income
ises and alls wi h he a e o in e es .
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Blai Fix Economics om he Top Down
A i s glance, he op 1% sha e has li le o do wi h he class-based income
ha I’ e discussed so a . A e all, he legal ca ego y o you income ells us
no hing abou i s size (la ge o small). And since income size and income
class a e seemingly un ela ed, he e’s no eason o suspec ha in e es a es
a ec income inequali y.
The ca ch is ha income size and income class a e ela ed. And because
hey’ e ela ed, he a e o in e es does a ec income inequali y. Le ’s see
how i wo ks.
The in e es - o-wage a io
When i comes o in e es income, he old adage is co ec : i akes money
o make money. And so i ’s a good be ha i you ea n mo e income, you’ll
ha e mo e money o in es , hence you’ll ea n mo e in e es .
To lesh his hinking ou , le ’s look a he ela ion be ween income size and
income composi ion. Speci ically, I’m going o calcula e some hing ha I
call he in e es - o-wage income a io. This a io akes he income ha an
indi idual ea ns om in e es and di ides i by he income ha hey ea n
om wages/sala ies:
in e es - o-wage a io =in e es income
wage income
Fo mos people, he in e es - o-wage a io is small, since hei wages dwa
hei in e es income. Bu o a ew indi iduals, in e es is a signi ican sou ce
o money. As i u ns ou , hese indi iduals also happen o be op ea ne s.
Figu e 7shows he pa e n in he Uni ed S a es. He e, he ho izon al axis
anks Ame icans by hei income pe cen ile. The e ical axis plo s hei
in e es - o-wage a io. You can see ha as we app oach he uppe c us o
ea ne s, in e es income explodes.
Now in di ec e ms, Figu e 7 ells us abou in e es income. Bu indi ec ly,
i ells us abou he dis ibu ion o c edi . You see, as a i s app oxima ion,
he a e o in e es doesn’ a y much be ween in es o s. And so he end
in Figu e 7mus be d i en by he owne ship o c edi . The e o e, we can
conclude ha op ea ne s own a mo e c edi han he es o us.
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Blai Fix Economics om he Top Down
Figu e 7: The in e es - o-wage a io in he Uni ed S a es
This igu e measu es he composi ion o Ame icans’ income as a unc ion o hei income
pe cen ile. The ho izon al axis shows income pe cen ile, anked by o al income. The e ical
axis shows he in e es - o-wage a io — he a io be ween annual in e es income and annual
wage/sala y income. The s eps in he blue line indica e di e en pe cen ile bins. The line
indica es he median in e es - o-wage a io ac oss he yea s 1918 o 2015. The shaded
egion indica es he middle 50% o da a. Sou ces and me hods
Wi h his c edi dis ibu ion in mind, le ’s hink abou wha happens when
we aise he a e o in e es . Doing so sends money o people who own mo e
c edi . And he people who own mo e c edi also happen o be op ea ne s.
And so wha do in e es - a e hikes do? They send money o he ich.
(Ac ually, he ma h is a bi mo e complica ed han I’m making ou . See he
appendix o de ails.)
To summa ize, he e’s good eason o suspec ha highe in e es a es migh
wo sen inequali y. So le ’s see i hey do.
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Figu e 8: Highe in e es a es a e associa ed wi h g ea e income
inequali y
This igu e looks a he in e na ional ela ion be ween he lending in e es a e (ho izon al
axis) and he op 1% sha e o income ( e ical axis). The da ase co e s 148 coun ies,
obse ed o e he yea s 1954 o 201. To illus a e he end, I’ e binned he da a by in e es
a e. Each poin shows he midpoin o an in e es - a e bin. Blue line shows he median
op 1% sha e o income wi hin each bin. The shaded egion shows he middle 50% o da a.
No e ha each bin con ains a leas 10 coun y-yea obse a ions. Sou ces and me hods
In e es a es and he op 1% sha e o income
Wi h inequali y in mind, le ’s look a Figu e 8. He e, I’ e gone o he Wo ld
Inequali y Da abase and downloaded all o hei da a o he op 1% sha e o
income wi hin coun ies. Then I’ e me ged his da a wi h in e es - a e ime
se ies, and plo ed he esul . As you can see, he pa e n is ai ly ob ious.
Ac oss coun ies, highe in e es a es a e associa ed wi h g ea e income
inequali y.
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Now, he ca ea he e is ha he inequali y pa e n is non-linea . As in e es
a es inc ease, he op 1% sha e g ows — bu only o a poin . Why? Well,
i we assume ha changing in e es a es ope a e on a ixed dis ibu ion o
wages and c edi , hen his ype o non-linea pa e n is exac ly wha we
expec . (Fo de ails, see he appendix.)
Speci ics aside, i ’s clea ha income inequali y is ela ed o he a e o in-
e es . So again, Rochon and Se e ield a e co ec o label in e es a es a
‘dis ibu ional a iable’.
The a e age sabo age
All in all, he e idence shou s a us ha he a e o in e es a ec s he dis i-
bu ion o income. O cou se i ’s nice o ha e his empi ical con i ma ion. Bu
hen again, he ‘dis ibu ional’ na u e o in e es a es was ne e in doub .
As a a e o e u n, in e es a es a e by de ini ion a ‘dis ibu ional a iable’.
O in mo e incendia y e ms, in e es a es a e a weapon o class wa a e.
Now, his language migh sound hype bolic, bu I hink i ’s accu a e. Con a y
o wha neoclassical economis s claim, he e a e no neu al ma ke o ces
ha alloca e income in p opo ion o p oduc i i y. Ins ead he e a e only
ideas and he powe o implemen hem. In o he wo ds, people ha e ideas
abou wha hei income should be (and also wha o he people’s income
should be). And hey ha e he powe (o lack he eo ) o make hese ideas
a eali y. Tha ’s i .
So iewed h ough he lens o powe , a es o e u n a e, by de ini ion, ou -
comes o social con lic . S ill, his an age poin doesn’ ge us e y a in
unde s anding eal-wo ld ou comes. I ’s like saying ha animal beha io
is an ou come o e olu ion. I ’s ue. Bu i ’s only he s a ing poin o a
scien i ic explana ion.
On ha on , how should we s udy he class s uggle in ol ed in in e es
income? Fo Ma x, he answe was ha in e es is abou in e -capi alis com-
pe i ion. In e es paymen s, Ma x a gued, ans e o he ‘money-capi alis ’
some o he p o i s ecei ed by he ‘indus ial capi alis ’.
Al hough I admi e he simplici y o his app oach, i implies ha we can
cleanly di ide be ween ‘indus ial’ and ‘money’ capi alis s. And by ex ension,
Ma x’s iew implies ha p o i is ea ned om ‘p oduc i e’ ac i i ies, whe eas
in e es s ems om he unp oduc i e owne ship o money.
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Faced wi h his Ma xis di ision, capi al-as-powe heo is s Jona han Ni zan
and Shimshon Bichle hink ha i misses he poin . Looking a capi al, hey
a gue ha all o i is unp oduc i e. Tha ’s because capi al is no hing bu he
quan i ica ion o p ope y igh s. And p ope y igh s, in u n, a e inhe en ly
nega i e; hey a e an ins i u ional ac o exclusion. So in ha sense, p o i
and in e es bo h s em om en o ced exclusion — wha Ni zan and Bichle
call s a egic sabo age.
Viewed his way, p o i and in e es ep esen di e en ac ics o in lic ing
sabo age:
[I]n e es on deb ep esen s a e age sabo age, while p o i on
equi y deno es di e en ial sabo age.
(Ni zan and Bichle , 2009; emphasis added)
Unpacking his claim, he idea is ha when you pu chase equi y in a speci ic
company, you a e in es ing in ha company’s abili y o wield p ope y igh s
o you bene i . And because you hope ha his company will bea he
a e age a e o e u n, you a e in es ing in ‘di e en ial’ sabo age.
Wi h deb , howe e , you’ e no in es ing in any speci ic se o p ope y igh s.
Ins ead, you’ e buying access o an a e age e u n on all p ope y igh s —
he a e age sabo age.
Clea ly his hinking is a wo ld away om mains eam mac oeconomics,
which iews he a e o in e es as a a iable o b inging ‘ inancial ma -
ke s in o equilib ium’ (G ego y Mankiw’s wo ds).
6
Bu we should expec as
much. The co e o neoclassical economics has always been o pape o e class
con lic .
By using language like ‘sabo age’, Ni zan and Bichle emphasize he con lic
in ol ed in se ing a es o e u n. Now whe he he a e o in e es ep esen s
he ‘a e age sabo age’ is some hing ha we can deba e. Bu one hing seems
clea : when i comes o dis ibu ing income, in e es a es a e no ‘neu al’.
6
The e’s a deligh ul i ony o Mankiw’s in e es - a e desc ip ion, ound in he 7 h edi ion
o his ome Mac oeconomics. A e claiming ha in e es a es equilib a e inancial ma ke s,
he moun s a case s udy which he calls ‘wa and in e es a es’. In i , he shows ha in he UK,
in e es - a e spikes co ela e wi h wa -d i en spikes in mili a y spending (measu ed as a
po ion o GDP). I akes a ue neoclassical economis s o desc ibe wa in e ms o inancial
equilib ium.
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Blai Fix Economics om he Top Down
Suppo his blog
Economics om he Top Down is whe e I sha e my ideas o how o c ea e a
be e economics. I you liked his pos , conside becoming a pa on. You’ll
help me con inue my esea ch, and con inue o sha e i wi h eade s like
you.
Deb and he in e es sha e o income
Assuming ha o al deb and o al income g ow oge he , he e’s why he
in e es sha e o income should be la gely de e mined by he a e o in e es .
Le
be he annual a e o in e es . Le
D
be he amoun o ou s anding deb
wi hin a coun y. The in e es ea ned on his deb will be
·D
. Le ing
Y
be
na ional income, he in e es sha e o na ional income is:
in e es sha e o income = ·D
Y
Now, i o al deb is oughly he same as na ional income
(D≈Y)
, i ollows
ha he in e es sha e o income is de e mined solely by he a e o in e es ,
:
in e es sha e o income = ·D
Y
≈ ·Y
Y=
O cou se, his equi alence is an app oxima ion. In he eal-wo ld, deb le els
a e a ely iden ical o na ional income — much o he chag in o deb hawks.
In e es a es and labo -sha e clawbacks
He e’s a simple model o how highe in e es a es cause he labo sha e o
income o decline.
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Blai Fix Economics om he Top Down
We s a wi h he obse a ion (plo ed in Figu e 4) ha highe in e es a es
a e associa ed wi h a g ea e in e es sha e o income. Fi ing a linea e-
g ession o he end, we can say ha o e e y pe cen age poin inc ease
in he a e o in e es , he in e es sha e o income inc eases by abou 0.7
pe cen age poin s.
Nex , we assume ha a g owing in e es sha e o income is di ec ly clawed
ou o labo income. In ha case, o e e y pe cen age poin inc ease in he
a e o in e es , he labo sha e o income will dec ease by 0.7 pe cen age
poin s:
labo sha e o income =c−0.7 ×( a e o in e es )
Yes, his model is almos nai ely simple. And ye i i s he in e na ional end
ai ly well. Figu e 6-mod uns he numbe s. O cou se, he ca ea is ha I’ e
chosen he pa ame e
c
o i he da a. Bu he main poin is ha he slope
o he model is on pa wi h he empi ical end.
Now his clawback model has ob ious limi a ions. Fo example, i he in e es
a e exceeds 80%, he model p edic s ha he labo sha e o income becomes
nega i e — an impossibili y. S ill, i ’s ascina ing ha such a simple model
says any hing abou he labo sha e o income.
How in e es - a e hikes edis ibu e income
Looking a Figu e 7( he ela ion be ween income pe cen ile and he in e es -
o-wage a io), I hink i ’s in ui i e ha aising in e es a es sends income o
he ich. Bu since in ui ion some imes misleads, le ’s do some o mal ma h.
To di e in o he ma hema ics o income edis ibu ion, we’ll s a wi h a
common misconcep ion. I Alice owns mo e c edi han Bob, i seems ob ious
ha she will p e e en ially bene i om an in e es - a e hike. I ha ’s you
in ui ion, know ha i is w ong.
You see, when i comes o income inequali y, i is income a ios ha ma e .
And hese a ios, in u n, a e no a ec ed by changes in he a e o in e es .
Fo example, suppose ha Alice owns 10 imes mo e c edi han Bob. As long
as Bob and Alice ea n he same a e o in e es , Alice will ecei e 10 imes as
much in e es . In o he wo ds, (uni o m) a e hikes don’ edis ibu e in e es
income.
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Blai Fix Economics om he Top Down
Figu e 9: A clawback model o he labo sha e o income
The blue line eplo s ( om Figu e 6) he c oss-coun y end be ween in e es a es and
he labo sha e o income. The ed line shows a simple model o his pa e n. Using he
eg ession om Figu e 4, I assume ha he in e es sha e o income is p opo ional o he
a e o in e es . Nex , I assume ha his in e es income ge s clawed ou o labo income.
F om he e, i ollows ha he labo sha e o income will decline linea ly wi h ising in e es
a es. Sou ces and me hods
And now you a e con used. You see, I jus claimed ha in e es - a e hikes
send money o he ich. Bu now I’m now a guing ha hey don’ edis ibu e
in e es income. Wha gi es?
To uncon use ou sel es, we need o b ing o he o ms o income in o he
equa ion. To do ha , le ’s imagine a wo ld in which he e a e wo ypes
o income: wages and in e es . Nex , imagine ha we hike he a e o in e -
es while keeping wages unchanged. Wha happens o he dis ibu ion o
income? Ob iously c edi o s ge a aise ela i e o wo ke s.
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Blai Fix Economics om he Top Down
Tha ’s nice and simple. Bu he e’s he p oblem: in he eal wo ld, he e’s
no di iding line be ween ‘wo ke s’ and ‘c edi o s’. In o he wo ds, almos
e e yone ea ns some combina ion o wage and in e es income. And so when
i comes o he dis ibu ion e ec o in e es - a e hikes, we’ e back o being
con used.
To uncon use ou sel es o a second ime, we need o do some ma h. We’ll
s a by w i ing an equa ion ha desc ibes indi idual income. In ou imagi-
na y wo ld, each pe son’s income consis s o hei annual wage
(w)
plus any
in e es (i) hey ea n on c edi in es men s:
income =w+i
In e es income, in u n, is se by he size o he c edi in es men
(K)
and
he a e o in e es
( )
. In o he wo ds,
i=K·
. Pu ing ha in o ou income
equa ion, we ge :
income =w+K·
Nex , we wan o know how income will change i we hike he a e o in e es
bu lea e wages he same. Le ’s suppose ha he a e o in e es ises om
1 o 2. In ha case, income g ow h is:
income g ow h =w+K· 2
w+K· 1
One las s ep. In mos cases, we don’ ca e abou he absolu e alue o you
wage o you c edi in es men . Wha ma e s is he a io o hese wo quan-
i ies — he c edi - o-wage a io,
K
w
. So le ’s ew i e ou income-g ow h equa-
ion in e ms o his a io. Fac o ing ou
w
in bo h he nume a o and he
denomina o gi es:
income g ow h =1+K
w· 2
1+K
w· 1
This equa ion ells us how you income g ows in esponse o an in e es - a e
hike. The la ge you c edi - o-wage a io, he mo e you bene i .
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Blai Fix Economics om he Top Down
Figu e 10: How in e es - a e hikes edis ibu e income
This igu e illus a es how he income a ec o in e es - a e hikes depends on he amoun
o c edi ha you own. To ha end, he ho izon al plo s he c edi - o-wage a io — he
a io o an indi idual’s c edi owne ship o hei annual wage. (The la ge his a io, he
mo e you a e a ‘c edi o ’. The smalle his a io, he mo e you a e a ‘wo ke ’.) The e ical
axis shows how income g ows in esponse o an in e es - a e hike (while wages a e kep
cons an ). Each colo ed cu e shows he e ec o a di e en a e hike, which s a s om a
baseline in e es a e o 3%.
To ge a sense o how his equa ion wo ks, le ’s look a Figu e 10. He e, he
ho izon al axis shows he c edi - o-wage a io, which basically indica es he
deg ee o which you a e a wo ke (le ) o a c edi o ( igh ). The e ical axis
hen shows how income g ows in esponse o a gi en a e hike. Ob iously,
he la ge he a e hike, he bigge he pay aise o c edi o s. Bu mo e
impo an ly, he colo ed cu es show how he deg ee o bene i changes
con inuously as a unc ion o you class s a us.
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Blai Fix Economics om he Top Down
Now, ax eco ds come wi h some p oblems — he simples being ha axes
a e ypically epo ed by households, no indi iduals. Bu he o he ‘p oblem’
is ha ax eco ds a e no consis en wi h he accoun ing de ini ions used
by he na ional accoun s.
I’ e used sca e quo es he e, because I don’ hink his inconsis ency is a
p oblem. I any hing, ax eco ds o e he bes way o accoun o income.
You see, income is undamen ally a legal concep . And so wha be e way o
measu e i han by using he eco ds gene a ed by he ax code — he legal
sys em ha codi ies and classi ies income.
Bu o be e o wo se, Pike y and collabo a o s ha e decided o abandon
he ax app oach, and ins ead, make hei me hods consis en wi h he na-
ional accoun s. (They go he ball olling in his 2016 pape .)
In one sense, he mo e is a good idea, since i ’s nice o ha e accoun ing
echniques ha a e consis en ac oss da abases. Bu in ano he sense, I hink
he change is a mis ake. You see, he na ional accoun s we e ne e designed
o gi e a comp ehensi e measu e o income. They we e designed o measu e
p oduc ion. Tha ’s why capi al gains — which a e ob iously income — a e
no pa o he na ional accoun s. They we e deemed ‘unp oduc i e’.
A any a e, he legacy ax da a s ill si s in he Wo ld Inequali y Da abase (i
you know whe e o ind i ). Bu i ’s no being upda ed. And i ’s a ailable o
only a hand ul o ich coun ies.
Figu e 8
•Fo in e es a e sou ces, see he sou ces o Figu e 6.
•
Da a o he op 1% o income is om he Wo ld Inequali y Da abase,
using he ollowing income sha e se ies: sp inc992j, sp inc992i, sp -
inc992 , sp inc999i, sp inc996i
Fu he eading
Ni zan, J., & Bichle , S. (2009). Capi al as powe : A s udy o o de and c eo de .
New Yo k: Rou ledge.
Rochon, L.-P., & Se e ield, M. (2007). In e es a es, income dis ibu ion,
and mone a y policy dominance: Pos Keynesians and he “ ai a e” o
in e es . Jou nal o Pos Keynesian Economics,30(1), 13–42.
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