Income inequality
of income: 9 a larger labour share is associated with a lower Gini index of personal incomes (for example, an increase in the labour share in Mexico to that in the United States would reduce the Gini index of the former by between two and five points). It is therefore important to also consider the functional distribution of income.
Functional distribution of income The classical economists were especially concerned with the distribution of income between labour and capital: the functional income distribution. In effect, functional income distribution was at the centre of the debates on growth and distribution for many years. After a period during which the issue of functional distribution was left somewhat at the margins of the economic debate, renewed attention has been given in recent years to the relation between functional distribution and household income inequality. 10 The focus on functional inequality points to the importance of better understanding the changing position of labour in the production process in order to correctly interpret inequality trends, as labour has been losing ground relative to capital over the past 20 years (ILO, 2011). Furthermore, experience has shown that it is not possible to reduce primary inequality without addressing how incomes are generated in the production process and how this affects functional inequality (van der Hoeven, 2011). Atkinson (2009) argues that there are at least three reasons to pay greater attention to functional income distribution: • To link incomes at the macroeconomic level (national accounts) and incomes at the level of the household • To help understand inequality in the personal distribution of income • To address the social justice concerns with the fairness of different returns to different sources of income
Experience has shown that it is not possible to reduce primary inequality without addressing how incomes are generated in the production process and how this affects functional inequality.
Glyn (2009) furthermore argues that functional income distribution matters to people for at least two reasons. First, despite broader access to capital among households, wealth and especially high-yielding wealth is still extremely unevenly distributed (see section 3.4) and therefore redistribution from labour to property still has a significant effect in raising household income inequality. Second, the fact that profits may be rising much faster than wages conflicts with widely held views of social justice and fairness. However, in the post-World War II period, less attention was given to the functional distribution of income 11 and attention shifted to personal income or household income distribution. It is therefore important to be more explicit about the drivers of functional income distribution as well as the drivers of primary, secondary and tertiary income distribution and the relation between the different types of inequality.
3.3b.
Relation between various drivers and different types of income inequality
Many drivers affect income distribution. One can distinguish between drivers that are largely exogenous (i.e., outside the purview of domestic policy) and ones that are endogenous (i.e., mainly determined by domestic policy). However, a clear line is difficult to draw because even drivers that may look at first sight exogenous or autonomous are often the outcome of policy decisions in the past or the outcome of a political
Humanity Divided: Confronting Inequality in Developing Countries 71