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The Impact of Household Capital Income on Income Inequality - A Factor Decomposition Analysis for the UK, Germany and the USA

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  • Fräßdorf, Anna
  • Grabka, Markus M.
  • Schwarze, Johannes

Abstract

This paper analyses the contribution of capital income to income inequality in a cross-national comparison. Using micro-data from the Cross-National Equivalent File (CNEF) for three prominent panel studies, namely the BHPS for the UK, the SOEP for West Germany, and the PSID for the USA, we use the factor decomposition method described by Shorrocks (Econometrica 50:193–211, 1982). The factor decomposition of disposable income into single income components shows that capital income is exceedingly volatile and that its share in disposable income has risen recent years. Moreover, capital income makes a disproportionately high contribution to overall inequality in relation to its share in disposable income. This applies to Germany and the USA in particular. Thus capital income accounts for a large part of disparity in all three countries.

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  • Fräßdorf, Anna & Grabka, Markus M. & Schwarze, Johannes, 2011. "The Impact of Household Capital Income on Income Inequality - A Factor Decomposition Analysis for the UK, Germany and the USA," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 9(1), pages 35-56.
    • Handle: RePEc:zbw:espost:66150
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    4. Brewer, Mike & Wren-Lewis, Liam, 2012. "Accounting for changes in income inequality: decomposition analyses for Great Britain, 1968-2009," ISER Working Paper Series 2012-17, Institute for Social and Economic Research.
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    7. Grabka, Markus M., 2015. "Income and Wealth Inequality after the Financial Crisis: The Case of Germany," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 42(2), pages 371-390.
    8. Miriam Rehm & Kai Daniel Schmid & Dieter Wang, 2014. "Why Has Inequality in Germany Not Risen Further after 2005?," SOEPpapers on Multidisciplinary Panel Data Research 690, DIW Berlin, The German Socio-Economic Panel (SOEP).
    9. Juan C. Palomino & Gustavo A. Marrero & Juan G. Rodríguez, 2018. "One size doesn’t fit all: a quantile analysis of intergenerational income mobility in the U.S. (1980–2010)," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 16(3), pages 347-367, September.
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    11. Klemm, Marcus & Weigert, Benjamin, 2014. "Does composition matter? Wage inequality and the demographic and educational structure of the labor force in Gemany," Working Papers 06/2014, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    12. Markus M. Grabka & Ursina Kuhn, 2012. "The Evolution of Income Inequality in Germany and Switzerland since the Turn of the Millennium," SOEPpapers on Multidisciplinary Panel Data Research 464, DIW Berlin, The German Socio-Economic Panel (SOEP).
    13. Weigert, Benjamin & Klemm, Marcus, 2015. "Composition matters! Wage inequality and the demographic and educational structure of the labor force in Germany," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112914, Verein für Socialpolitik / German Economic Association.
    14. Gustav A. Horn & Sebastian Gechert & Miriam Rehm & Kai D. Schmid, 2014. "Wirtschaftskrise unterbricht Anstieg der Ungleichheit," IMK Report 97-2014, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    15. Dirk Bezemer & Anna Samarina, 2019. "Debt shift, financial development and income inequality," DNB Working Papers 646, Netherlands Central Bank, Research Department.
    16. Chi, Wei, 2012. "Capital income and income inequality: Evidence from urban China," Journal of Comparative Economics, Elsevier, vol. 40(2), pages 228-239.
    17. Ali T. Cem Başlevent, 2014. "Social Transfers and Income Inequality in Turkey: How Informative Is the Survey of Income and Living Conditions?," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 3(3), pages 23-42, September.
    18. Coveri, Andrea & Pianta, Mario, 2022. "Drivers of inequality: wages vs. profits in European industries," Structural Change and Economic Dynamics, Elsevier, vol. 60(C), pages 230-242.
    19. Bofinger, Peter & Schnabel, Isabel & Feld, Lars P. & Schmidt, Christoph M. & Wieland, Volker, 2014. "Mehr Vertrauen in Marktprozesse. Jahresgutachten 2014/15 [More confidence in market processes. Annual Report 2014/15]," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201415.
    20. Xiaozhun Peng & Hongyou Lu & Jiaming Fu & Zhijuan Li, 2021. "Does Financial Development Promote the Growth of Property Income of China’s Urban and Rural Residents?," Sustainability, MDPI, vol. 13(5), pages 1-20, March.
    21. Perugini, Cristiano, 2020. "Patterns and drivers of household income dynamics in Russia : The role of access to credit," BOFIT Discussion Papers 11/2020, Bank of Finland, Institute for Economies in Transition.
    22. Tahnee Christelle Ooms, 2021. "Correcting the Underestimation of Capital Incomes in Inequality Indicators: with an Application to the UK, 1997–2016," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 157(3), pages 929-953, October.
    23. Cem Baslevent, 2016. "Social Transfers and Income Inequality in Turkey: How Important is the Gender Dimension?," Working Papers 1013, Economic Research Forum, revised Jun 2016.
    24. Ooms, Tahnee, 2021. "Correcting the underestimation of capital incomes in inequality indicators: with an application to the UK, 1997–2016," LSE Research Online Documents on Economics 108900, London School of Economics and Political Science, LSE Library.

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