Towards equilibrium in income distribution: Theoretical background and empirical evidence for European countries

The paper sets up a theoretical equilibrium concept for personal income distribution which is located in status theory and which draws on the log-normal distribution of personal incomes. The model can explain why a certain degree of inequality is warranted in society.  The authors show in the empirical section of the paper that personal income distribution is already a stationary variable for many European countries. This finding backs earlier results achieved by Ramser (1987). Furthermore, personal incomes do indeed follow a log-normal distribution, regardless of time and location. In the empirical section of the paper, the authors present an in-depth analysis of personal income distribution (before and after government intervention) in 17 European countries (2004-2012). Linear regression exercises - which make use of Gini coefficients “ex-ante” and Gini coefficients “ex-post” - show that the total sample can be clustered into three subgroups. The main group of 10 countries (Germany, Czech Republic, Denmark, Finland, Belgium, Slovenia, Estonia, France, Luxembourg and Austria) seems to have already achieved equilibrium in income distribution. The other two, smaller groups (the so-called “GIIPS”: Greece, Ireland, Italy, Portugal, Spain on the one hand and Poland and Slovakia on the other hand) seem to be on the way to let their personal income distribution converge towards equilibrium, either “from below” or “from above”.

Objectives: On the background of the intense discussion in Europe on the alleged increasing skewness in the distribution of incomes and wealth, we put forward an equilibrium concept of personal income distribution rooted in status theory and an econometric analysis of the possible existence of equilibrium in a sample of 17 European countries.    

Data/Methods: The paper is theoretical in the first part and empirical in the second, making use of standard tools of economic theory under risk and statistical/econometric analysis.

Results: The paper shows that (i) earlier findings of Ramser (1987) on the log-normal distribution of personal incomes can be confirmed with recent data; (ii) equilibrium in personal income distribution can be found in 10 out of 17 European countries; (iii) in 7 out of 17 European countries we find a convergence process towards equlibrium in income distribution.