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The capital share and income inequality: Increasing gaps between micro and macro-data

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Abstract

In this paper, I study how the contrasting coverage of labour and capital incomes affects inequality estimates. I use national accounts as a benchmark to evaluate the scope of household surveys, for a number of countries, and tax data for the United States. Due to both measurement error and conceptual differences, capital income is always more underestimated. In most countries, the gap grows during the last two decades. Based on accounting identities, I show that inequality estimates are likely affected in level, trend and composition. Surveys thus largely exaggerate the impact of changes in the labour income distribution, while they undermine the capital share and its dynamics. As a reference, in a panel of nineteen countries, households collect half of total capital income, as opposed to corporations; but surveys only capture close to twenty percent of that half, versus seventy percent of total labour income. For any quantile group –e.g. the top 10% or bottom 50% share– a unit increase of its labour income share translates into an increase of nine tenths of a unit in the overall share, for capital income, the effect is only one tenth of a unit. Gaps are narrower but still present in tax data.

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Acknowledgements

I gratefully acknowledge funding from ERC (Grant 340831), Ford Foundation, INET (Grant INO14-00023) and from other partners of the World Inequality Lab. I thank Facundo Alvaredo, François Bourguignon, Thomas Blanchet, Emmanuel Flachaire, Jérôme Gautié, Amory Gethin, Elvire Guillaud, Pablo Gutiérrez, Julián Messina, Marc Morgan, Nora Lustig and Li Yang for helpful discussions of earlier versions of this paper. I also thank Markus Jäntti and two anonymous referees for their valuable advice.

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  1. INSEAD, Office 2-10, Boulevard Constance, 77305, Fontainebleau, France

    Ignacio Flores

  2. Paris School of Economics, Office R5-01, 48 Boulevard Jourdan, 75014, Paris, France

    Ignacio Flores

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Correspondence to Ignacio Flores.

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Replication codes and data are available at: https://github.com/ignacio-flores/income-under-the-carpet, along with an appendix that provides further insight, figures

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Flores, I. The capital share and income inequality: Increasing gaps between micro and macro-data. J Econ Inequal 19, 685–706 (2021). https://doi.org/10.1007/s10888-021-09482-x

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