Can the link between functional and personal income distribution enhance the analysis of inequality?

Aim of the paper is to present a framework for linking the functional and the personal income distribution. In the first part the Piketty’s book “Capital in the XXI Century” is briefly reviewed. Piketty’s framework is discussed arguing that it can explain only partially level and changes within the personal income distribution. Piketty links in a very innovative way the returns from capital r to the rate of growth of national income g comparing them in a macroeconomic framework. He claims that when returns on capital rise more quickly than the overall economy and taxes on capital remain low, a vicious circle of ever-growing dynastic wealth and growing concentration of wealth takes place. However, the rise in the inequality of personal income distribution cannot be explained only by the rise of capital incomes. An analysis of the generation of personal incomes, and consequently of inequality, requires a suitable framework that links incomes at the macroeconomic level (national accounts) and incomes at the level of the individual/household. It is possible to build this framework starting from the individual endowments and their links to the productive structure: that is from what it can be called the “generating function of personal income”. This function transforms personal endowments in personal earnings, given the productive structure, the technologies, and the market rules that determine the functional distribution. The personal income distribution and its inequality are linked to the functional one, through the shares of capital and labor owned by each individual. The framework here introduced seems to be a suitable tool for taking in account that the personal income distribution is inextricably tied up with different sources of inequality in the distribution of national income. Sources such as what comes from the institutional and productive structures (matrix Y), but also what comes from the distribution of endowments and of individual/ household entitlements (matrix S). This approach, we argue, can allow assessing and evaluating the effects of “ambitious new policies”, aimed to reducing poverty and inequality ex-ante, as suggested by Atkinson in his last book.