Top menu

Rediscovering the Importance of functional distribution

Nowadays, both economists and policy makers have rediscovered the importance of income distribution. In a number of recent papers, even the IMF has warned about the risks stemming from increasing inequalities but the recommendations inferred from its standard theoretical approach do not imply any breakthrough in the policy agenda www.socialeurope.eu

Nowadays, both economists and policy makers have rediscovered the importance of income distribution, while in the past this research remained the domain of a handful of scholars, usually in the heterodox tradition. In a number of recent papers, even the IMF has warned about the risks stemming from increasing inequalities but the recommendations inferred from its standard theoretical approach do not imply any breakthrough in the policy agenda. Thus, old-fashioned and new perspectives on inequality tend not to share either focus or policy conclusions.

In the economists’ jargon, personal distribution is how income is distributed across households, while functional distribution is how different factors of production are remunerated (how annual income is split between capital and labor).

Despite the increasing importance of functional distribution in explaining the increase in inequality in recent decades, the consensus in economics is still based on what happens in the labor market only because of trade and technology. Trade is important because of the entry of players such as China, abundant in unskilled labor and likely to open up new possibilities for production offshoring. Technology is important because of its complementarity with different skills. Trade and technology could be combined in a conjoined explanation: different technologies or offshoring may replace certain occupations, worsening the wages of those workers whose skills match the specific tasks affected. If this is the case, routine tasks and medium skills would be the most seriously affected.

Read more

Share on FacebookTweet about this on TwitterShare on Google+Share on LinkedInPin on PinterestEmail this to someonePrint this page