Theories of redistribution and share of labour income

We review the functional and size theories of income distribution in the context of growing inequality around the world, and the causes for the observed patterns on shares of labour and capital income in classical, neoclassical, Marxian, structuralist or general equilibrium theories. Classical theory attributes such inequality to growing specialization that has caused increased automation among industries.  The neoclassical theory suggests that development in the financial sector and increased supply of capital goods has caused substitution of labour by capital. In contrast, Marxian economists find that an increased prevalence of the  iron law of wages and squeezing of workers by owners of capital has led to sharper division between “have” and “have not” groups as the major cause of declining share of labour. Structural economists explain growing disparity as a result of the differences in the saving rate between workers and capitalists. Microeconometric analysis of earnings functions in Mincerian tradition relates earnings to qualifications, work experiences, and productive capacities of individuals, along with training and education. While Hahn’s dynamic theory of wage share based on multiplier and accelerator theories emphasizes the role of MPC in the labour share, Mortensen and Pissarides theories relate to the power of unions and firms in bargaining for the output share with search and matching frictions.  The relative price mechanism underlies the distribution system under general equilibrium analyses where the share of labour and capital are determined by supply and demand factors, which evolve according to consumer preferences and firm technology.

Each of these theories is helpful in explaining income inequality observed in the OECD, emerging and developing economies. Shares of income by quintile, decile or percentile indicators are constructed to study income inequality. These indicators show share of labour has decreased from 59 to 51 percent among the OECD countries. In general Gini coefficients have increased significantly for each country of the OECD. While the Gini was about 0.25 in Denmark, it was close to 0.50 in Mexico and above 0.4 in the US. Health and qualifications were important in the cross sectional analysis of 386,258 households from the UK Annual Population Survey. Panel data model estimations show that labour share increases when consumption, public spending and import increase. Significant empirical evidence exists for declining labour share as shown by panel data estimation of 127 countries from 1990-2011.  Simulations of social welfare functions indicate that preferences of policy makers are significant determinants.