IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2501.02371.html

The Effect of Capital Share on Income Inequality: Identifying the Time Patterns

Author

Listed:
  • Ou{g}uzhan Akgun
  • Ezgi Ozsou{g}ut

Abstract

This study explores the link between the capital share and income inequality over the past four decades across 56 countries. Calculating the capital share from national accounts alongside top income share data from the World Inequality Database, which is based on the Distributional National Accounts methodology, we ensure the consistency in the theory and measurement. Employing a structural econometric approach, we account for heterogeneous and time-varying transmission coefficients from the capital share to personal income inequality. Our findings reveal that a one percentage point (pp) increase in the capital share raises the income share of the top 5% by 0.17 pp on average. Advanced economies show a stable transmission coefficient with rising capital and labor income inequality, while emerging economies experience an increasing transmission coefficient alongside growing capital income inequality. In contrast, a third group exhibits a declining transmission coefficient and rising labor income inequality. Overall, changes in the capital share account for approximately 50% of the rise in income inequality, underscoring its pivotal role over the last four decades.

Suggested Citation

  • Ou{g}uzhan Akgun & Ezgi Ozsou{g}ut, 2025. "The Effect of Capital Share on Income Inequality: Identifying the Time Patterns," Papers 2501.02371, arXiv.org.
    • Handle: RePEc:arx:papers:2501.02371
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2501.02371
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ignacio Flores, 2021. "The capital share and income inequality: Increasing gaps between micro and macro-data," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 19(4), pages 685-706, December.
    2. Rolf Aaberge & Anthony B. Atkinson & Sebastian Königs, 2018. "From classes to copulas: wages, capital, and top incomes," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 16(2), pages 295-320, June.
    3. Cecilia García-Peñalosa & Elsa Orgiazzi, 2013. "Factor Components of Inequality: A Cross-Country Study," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 59(4), pages 689-727, December.
    4. Lerman, Robert I & Yitzhaki, Shlomo, 1985. "Income Inequality Effects by Income," The Review of Economics and Statistics, MIT Press, vol. 67(1), pages 151-156, February.
    5. S. N. Wood, 2000. "Modelling and smoothing parameter estimation with multiple quadratic penalties," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 62(2), pages 413-428.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Iryna Kyzyma & Alessio Fusco & Philippe Van Kerm, 2022. "Distributional Change: Assessing the Contribution of Household Income Sources," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(1), pages 158-184, February.
    2. 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).
    3. Koen Caminada & Chen Wang, 2011. "Disentangling Income Inequality and the Redistributive Effect of Social Transfers and Taxes in 36 LIS Countries," LIS Working papers 567, LIS Cross-National Data Center in Luxembourg.
    4. David Gallusser & Matthias Krapf, 2022. "Joint Income-Wealth Inequality: Evidence from Lucerne Tax Data," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 163(1), pages 251-295, August.
    5. repec:osf:socarx:akq89_v1 is not listed on IDEAS
    6. Xunhua Tu & Jie Yan & Jing Zheng, 2024. "Income composition inequality of Chinese residents and fiscal redistribution effect: An empirical analysis on individual income tax and transfer system," PLOS ONE, Public Library of Science, vol. 19(1), pages 1-21, January.
    7. Marco Ranaldi, 2016. "On the Measurement of Functional Income Distribution," Documents de travail du Centre d'Economie de la Sorbonne 16051rrr, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne, revised Oct 2018.
    8. Luis Ayala & Ana Pérez & Mercedes Prieto-Alaiz, 2022. "The impact of different data sources on the level and structure of income inequality," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 13(3), pages 583-611, September.
    9. Marco Ranaldi, 2018. "On the Measurement of Functional Income Distribution," Post-Print halshs-01379229, HAL.
    10. Marco Ranaldi, 2022. "Income Composition Inequality," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 68(1), pages 139-160, March.
    11. Luca Giangregorio & Davide Villani, 2023. "Income inequality, top shares of income and social classes in the 21st century," JRC Working Papers on Social Classes in the Digital Age 2023-05, Joint Research Centre.
    12. Luca Giangregorio & Davide Villani, 2025. "Functional distribution, personal income inequality, and top shares of income: do social classes still matter?," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 23(1), pages 143-176, March.
    13. De Rosa, Mauricio & Flores, Ignacio & Morgan, Marc, 2024. "More unequal or not as rich? Revisiting the Latin American exception," World Development, Elsevier, vol. 184(C).
    14. Daniele Checchi & Cecilia García-Peñalosa & Lara Vivian, 2016. "Are changes in the dispersion of hours worked a cause of increased earnings inequality?," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 5(1), pages 1-34, December.
    15. Francesca Gastaldi & Paolo Liberati & Elena Pisano & Simone Tedeschi, 2014. "Progressivity-Improving VAT Reforms in Italy," Working papers 6, Società Italiana di Economia Pubblica.
    16. Michele Giammatteo, 2006. "Inequality in Transition Countries: The Contributions of Markets and Government Taxes and Transfers," LIS Working papers 443, LIS Cross-National Data Center in Luxembourg.
    17. Stéphane Mussard & Kuan Xu, 2006. "Multidimensional Decomposition of the Sen Index: Some Further Thoughts," Cahiers de recherche 06-08, Departement d'économique de l'École de gestion à l'Université de Sherbrooke.
    18. Olivier Bargain & Tim Callan, 2010. "Analysing the effects of tax-benefit reforms on income distribution: a decomposition approach," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 8(1), pages 1-21, March.
    19. Duro, Juan Antonio & Ramirez, Noemí & Wieland, Hanspeter & Wiedenhofer, Dominik & Haberl, Helmut, 2025. "Global inequalities in countries' demand for raw materials: Twenty years of expansion and insufficient convergence," Ecological Economics, Elsevier, vol. 234(C).
    20. Antonio Abatemarco & Massimo Aria & Sergio Beraldo & Michela Collaro, 2023. "Measuring Access and Inequality of Access to Health Care: a Policy-Oriented Decomposition," CSEF Working Papers 666, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    21. Thomas Dohmen & Hartmut F. Lehmann & Mark E. Schaffer, 2014. "Wage Policies of a Russian Firm and the Financial Crisis of 1998: Evidence from Personnel Data, 1997 to 2002," ILR Review, Cornell University, ILR School, vol. 67(2), pages 504-531, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2501.02371. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.