# Distribution of income

Income distribution (also: distribution ) called

• the distribution of income in an economy ,
• the distribution of national income among income earners / private households (personal income distribution),
• the distribution of income among the factors labor and capital (functional income distribution)

Economic policy and distributive justice also touch on the question of how income should be distributed for economic or ethical reasons. One means of doing this is through redistribution . Control instruments for these tasks of economic policy, tax policy and social policy are, for these purposes, transfer payments , subsidies , tax progression and social systems .

## Personal income distribution

The personal income distribution shows how the income of an economy is distributed among individuals or groups (e.g. private households ). There are two types:

• Distribution of market income : primary income distribution
• Distribution of Disposable Income : Secondary Income Distribution

Disposable income corresponds to market income plus pensions and other transfer payments as well as pecuniary benefits less income taxes and wealth taxes , social contributions , monetary social benefits and other other ongoing transfers (e.g. solidarity surcharge ). If the households or persons are sorted in ascending order according to the level of their income, the Lorenz curve shows what percentage of households receive what percentage of income.

Fig. 1: Lorenz curve

The personal income distribution can be summarized using various measures of inequality and then analyzed. The most commonly used indicators are the Gini coefficient and quantile ratios . The Theil index is increasingly used.

A sensually impressive representation of income distribution or income inequality is the parade of incomes by the Dutch economist Jan Pen , the basis for creating the corresponding Lorenz curve and evaluating the Gini index.

### Representation using the Gini coefficient

The most common instrument used to represent the distribution of income is the Gini coefficient . The value 0 denotes absolute equal distribution (all people have the same amount), the value 1 absolute unequal distribution (one person owns everything, all others nothing).

Depending on the statistics, a country can have a wide variety of Gini coefficients for income distribution; this is due to the nature of the calculation. Information can only be used effectively for comparisons if the same calculation methods (the same quantilization, the same type of income, etc.) have been used for all information. Correctly, it should always be stated together with the Gini coefficient which measurement resolution it is based on, because the inequality within the quantiles is not recorded.

### Representation according to quantiles

The amount of income and the associated income earners are obtained from the database. These are first sorted according to income level ( pen parade ) and then divided into groups of equal size ( quantiles ). Then the sums of the data contained in the individual quantiles are formed. If the income earners are divided into 10 groups, one speaks of deciles , and 100 groups of percentiles . The tenth, fiftieth and ninety percentiles (corresponding to the first, fifth and ninth deciles) are often used. The fiftieth percentile represents the median value , i.e. exactly the income level that is in the middle. The tenth percentile indicates the level of wages that 10% of employees do not exceed. In order to describe the unequal distribution, the sums of the quantiles are related to each other. In the literature it is assumed that wages up to the tenth percentile stand for the low-skilled or unskilled and that wages above the ninetieth percentile stand for the highly qualified. Other more common quantiles are 30 (for at risk of poverty ), or 25 and 75 (quartiles, income quarters ), and the quintile (income fifths ) .

If the difference between the individual quantiles increases, one speaks of an increasing wage spread; if it decreases, one speaks of wage compression .

### Data collection

#### Germany

The Federal Statistical Office collects the income levels every five years by means of voluntary self-disclosure from a population sample and the total income is statistically extrapolated (income and consumption sample EVS , maximum 0.3% of all households, approx. 55,000 to 60,000 households). Experience has shown that the willingness of respondents to provide information decreases with increasing income and wealth; the Federal Statistical Office therefore only considers net household income up to the cut-off limit of € 18,000 / month. The highest incomes are not included in the distribution calculations. Profits not withdrawn by the self-employed are also not collected. People in communal accommodation, e.g. residents of nursing homes, and homeless people are not included.

As a result, the statistically recorded total income of the self-employed and from assets , for example investment income and rents, is lower than the actual income in the national accounts (VGR) . The actual unequal distribution is therefore greater than the statistically calculated and officially published one.

In 2008, the difference between the statistical self-employed and property incomes of the EVS (139 billion euros) and the similar income total of the national accounts (477 billion euros) was around 338 billion euros - around 71% of this income was not recorded by the EVS and is in not shown in the distribution calculations and thus in the unequal distribution measures such as the Gini index or the wealth rate . According to the Federal Statistical Office, “this indicates a fundamental problem with measuring self-employed and property income in (voluntary) household surveys”.

## Distribution of income in major industrialized countries

Application of the Gini coefficient to determine income inequality (2014)

### Development of income inequality since the beginning of the 20th century

According to a study by the economists Anthony Atkinson , Thomas Piketty and Emmanuel Saez , the development of incomes in major industrial nations is as follows: Worldwide income inequality increased from 1910 to 1992. The share of the super-rich in total global income decreased from 1910 to 1970 and increased from 1970 to 1992.

The World Inequality Report 2018 - based on data from the World Wealth and Income Database (WID) - estimates the current global income and wealth inequality. It was edited by Facundo Alvaredo, Lucas Chanel, Thomas Piketty, Emmanuel Saez, and Gabriel Zucman. The report describes that the gap between rich and poor has widened around the globe since 1980. In Europe, inequality rose less rapidly, while in North America and Asia it rose rapidly. In the Middle East, Africa and Brazil, income inequality persisted at very high levels. It is greatest in the Middle East, where the top 10% of the population receive 60% of the national income.

### 1910 to 1970s

In Great Britain and the United States, the percent at the top of the income pyramid in 1910 earned about a fifth of all wages and profits; the two world wars and the global economic crisis halved the proportion of the richest by 1950. In Germany and France, on the other hand, in 1910 the richest percent of all income earners received around 20 percent of economic output. During the Nazi era in Germany, the rich got richer again. They gained five percentage points during the upswing before the war - many also through the expropriation of Jewish property. In 1950 it was eleven percent in West Germany and nine percent in France.

• In the United States, productivity rose 119 percent between 1947 and 1979, and the income of the bottom fifth rose 122 percent.

### 1970s until today

Income inequality increased from the 1970s: Margaret Thatcher (United Kingdom) and Ronald Reagan (United States) cut income taxes sharply, curtailed union power and liberalized labor markets. The share of very high incomes rose sharply. This process continued in the 1990s under Bill Clinton (USA) and Tony Blair (Great Britain). Today the top percent gets as much as it did 100 years ago. In the United States, productivity increased 80% between 1979 and 2009, the income of the bottom fifth fell 4%, while in roughly the same period the income of the top 1% fell 270%. rose.

In Germany (figures up to 1998) and in France, the share of the top percentage of all income earners has also increased, but compared to the period after the Second World War, its share of total value added is at a similar level - still around 10 percent.

In 2014, the OECD found that the share of the highest income percentage increased sharply in almost all OECD countries between the early 1980s and 2012. The fact that up to 47% (as in the USA) of total income growth between 1975 and 2007 went to the highest income percent, explains that the population perceives a discrepancy between total growth on one side and their own income on the other Side lies. This was caused by the lowering of the top tax rates, which in 1981 averaged 66% in the OECD (maximum 93%, minimum 48%) to an OECD average of 43% in 2013 (maximum 60% and minimum at 15%). In addition, there would be further reductions in taxes, which particularly affect high-income people. As measures, the OECD recommends increasing the top tax rates, which have been sharply reduced since the 1970s, and reducing tax avoidance . The data is largely based on the Top Income Database by Thomas Piketty , Anthony Atkinson and Emmanuel Saez .

### Net income

A comparison of the inequalities in net income in 26 OECD countries was published by the Council of Economic Experts for 1985, 1995 and 2000 in a report on income distribution in Germany. Of these countries, Denmark had the lowest inequality in 2000 ( Gini coefficient 0.22). Sweden followed with 0.24. Germany was slightly below the middle at 0.27. The US was above the middle at 0.35. The top positions were held by Turkey with 0.44 and Mexico with 0.48.

### Available income

For the disposable income of households in Germany, the Gini coefficient increased from 0.247 to 0.288 between 1991 and 2012. In 2012, Germany was the country with the second highest wealth inequality in the eurozone. In France, the Gini index was 0.327 in 1995, in Great Britain it was 0.360 (1999), in Japan it was 0.249 (1993) and in the USA it was 0.408 (2000). The data is based on a rough breakdown into four quartiles .

According to data from a report by the ILO , income inequality has increased in industrialized countries since the 1990s, including in countries that traditionally counteract this through government measures, such as France. This can be seen in the falling wage share . The proportion of corporate incomes and large fortunes relative to the wage share increased. The reasons for this were weak unions, falling tax rates on capital, rising tax rates on labor, globalization and the growing influence of the financial markets. These causes led to this redistribution of national income . Between 1999 and 2011, labor productivity increased more than twice as much as the average wage. For example, productivity in Germany has increased by 25% in the last 20 years, but real wages have remained the same and even fell between 1999 and 2007.

The gap between rich and poor ( income gap ) in Germany is widening and poorer households are getting poorer. Only 60 percent of the people in Germany still belong to the middle class in 2010.

### Swedish model

Some Scandinavian countries have a higher state quota than Germany ; this is especially true for Sweden (see Folkhemmet , Swedish Welfare State ).

Income redistribution was reduced somewhat as the top tax rate was lowered after the Swedish banking crisis from 1990 to 1992 . Until then, Swedish tax law had made it possible to reduce the individual tax burden by deducting up to 50 percent of the loan interest from taxable income . Therefore there was a strong incentive to buy real estate and to lend it heavily. The Conservative government then lowered the top tax rate to 56.6%, among other changes.

## Consequences of unequal distribution

Unequal distribution of income has economic, political , social , health and cultural effects .

### Economic consequences

According to analyzes by UNCTAD in the Trade and Development Report 2012 , a concentration of national income in the upper income brackets has a detrimental effect on the development potential of an economy , as it weakens the growth in demand for goods and services. It also restricts educational opportunities and social mobility for large sections of the population. This should be countered through tax reforms and a targeted increase in social spending , as well as through improved labor market policy .

The IMF comes to very similar results in a study. Countries with low inequality after taxation (ie usually after redistribution) show faster and more sustained economic growth than countries with high inequality. In general, redistribution (such as progressive taxation , government investment in health and education) has positive effects on economic growth (only in extreme cases is there some evidence that it could have negative effects).

"It would be a mistake to focus on growth and leave inequality to its own devices, not only because inequality is morally undesirable, but also because otherwise the resulting growth would be small and unsustainable."

Another study by the IMF confirmed the result. When massive portions of a nation's income are concentrated in the hands of a few, overall economic growth suffers. The 2015 study found that "as the income share of the top 20% (the rich) increases, in the medium term GDP growth actually declines, suggesting that profits are not trickling down, " while "an increase in the income share of the bottom 20% (of the poor) is associated with higher GDP growth. "

### Political and social consequences

The distribution of income is important for maintaining the social peace of social systems . A highly unequal distribution can be perceived as unjust and lead to social unrest.

He Qinglian gave an example of an attempt to determine critical inequality thresholds in market income using the Gini coefficient: A coefficient of 0.3 or less indicates a clear uniform distribution, 0.3 to 0.4 is the range of acceptable normality, 0 , 4 or more is considered too high. Above 0.6 there would be social unrest ( riot , revolt , mutiny , uprising , etc.).

The acceptance of inequality is also determined by cultural factors and perception. Inequality measures that include the perception of inequalities can usually be derived from information measures. There are also studies that investigate the valuation of resource unequal distributions by individuals.

### Health consequences

Unequal distribution of income can be a cause of deterioration in health and happiness in a society, not just among the poorest in society but across all income groups.

## Causes of unequal distribution

Many economists attribute income differentials to educational differences, since less education implies lower productivity. According to Jörg Baten and Ralph Hippe (2017), one reason for such educational differences within Europe is the agricultural structures in the 19th century. The decisive factor is the size of the farms, which in turn was influenced by the nature of the soil. In the smaller farms, the farmers attached greater importance to the fact that their children were educated, as they would later take over the farm. This was u. a. typical for north and north-west Europe around 1900. However, if the soil and climate were favorable for large wheat fields and thus large estates, political elites often developed, which hindered access to education for rural workers. The resulting educational differences had an impact on general economic development.

The Steuerprogressivität has declined in some industrialized countries in recent decades, which has led to the fact that households and businesses have high-income now lower effective tax rates. In fact, an analysis by the IMF suggests that the increasing concentration of pre-tax income at the top in many industrialized countries was also related to falling top tax rates: the higher the reduction in the top tax rate, the higher the increase in the share of income in a top 1% National economy.

Other reasons for income differences include:

• The experience and responsibility of employees influence the level of wages in such a way that the company ultimately sees the level of wages as an instrument for the efficient design of its production processes.
• Training costs and the resulting training bonus are usually reflected in higher wages, since the investment costs of the qualified employees must pay off after a certain period of time (return on education ).
• Relative scarcity or oversupply of required labor leads to wages being adjusted by companies depending on the degree of availability of the employees.
• Inadequate quality adjustment of employees to the job offer reduces employers' willingness to pay higher wages due to the increased need for training.
• The development of the labor force participation of women increases the wage spread, insofar as women are paid less than men with the same qualification level ( gender pay gap ).
• Labor-saving technical progress reduces the production of labor-intensive goods. Automation reduces the availability of jobs with routine activities, including those in the middle income bracket, and there is a polarization in the demand for labor (see also empirical data on technical progress ).
• The loss of importance of the industrial sector due to the increase in international trade with low-wage countries leads to a reduction in low-skilled jobs because, above all, jobs in the industrial sector are available for unskilled and low-skilled workers. The economists Max Roser and Jesus Crespo-Cuaresma found evidence that trade with low-wage countries increases inequality in a study of the causes of rising income inequality in 32 industrialized countries.
• Institutional interventions in the market through minimum and collectively agreed wages usually bring about an equalization of the labor income of the qualified and the low-skilled, the wage spread stagnates or compresses in the area of ​​the affected employees. A reduction in union density and a real reduction in minimum wages have the opposite effect. The wage spread is widening, since the low-skilled are again paid according to their productivity. Roser and Crespo-Cuaresma found empirical evidence for this as well.

The respective share of the factors in unequal wages is controversial.

The European Commission concludes that the development of labor income is the result of a complex interaction between technological progress, the organization of the labor market and, to a lesser extent, other driving forces such as the opening up of trade.

What is essential for the interpretation of the wage spread is the fact that it (similar to the wage share ) fluctuates noticeably over the course of the economy . One main reason is that the incomes of employees in the upper quantiles receive much higher variable salary components, which fluctuate with the profit situation of the company. Furthermore, the adjustment of the collective wages typically follows the economic trend with a time lag. As a result, the wage spread increases at the beginning of an upswing and then falls again at the end of the upswing.

### Non-economic causes

Economic explanations for observable differences in income are sometimes rated as insufficient. These approaches cannot resolve why many of the tasks on which society depends (such as nursing, selling groceries, or maintaining public order) are paid less than jobs we can do without in social emergencies (such as e.g. investment bankers). Therefore, economic explanations are supplemented by a sociological one, namely that income is mainly distributed according to power . Accordingly, one should not ask about the unequal distribution of income, but about the unequal distribution of power.

## Reducing inequality

Improved education for the low-skilled is seen as a suitable means of reducing the wage spread. This reduces the spread of qualifications and workers with low qualifications acquire the opportunity to move up to higher salary levels. On the one hand, weak pupils should be encouraged to the extent that they achieve a school leaving certificate , on the other hand as many young people as possible should receive vocational training . Since these measures are also suitable for reducing the unemployment of the group concerned, the benefit and necessity of these measures are undisputed.

Various measures to reduce the wage spread are also being discussed in labor market policy. Examples are the subsidization of the employment of low-skilled workers by means of a combination wage , the introduction of minimum wages or the introduction of an unconditional basic income . These measures are highly controversial as the effects on employment and growth are assessed differently.

## Functional distribution of income

functional distribution of income

The functional (or functional) income distribution shows how income is distributed among the factors of production ( labor , human and various types of physical capital ). Parameters such as the wage share and the profit share show the sectoral distribution of national income.

If the arithmetic average (= arithmetic mean ) of the per capita income is calculated from the gross national income, the result is often an amount that an “average citizen” may find surprisingly high due to the influence of peak incomes. That is why the median is often used to represent average income . Alternatively, Amartya Sen (later expanded with James E. Foster) developed the welfare function .

In development aid , the direct distribution of income is an important factor so that the losses on the way from the payer to the recipient remain low.

## Individual evidence

1. Examples: the state pays contributions to the pension insurance for certain people because they cannot bear the contributions; certain people do not need to pay a GEZ fee and thus have a pecuniary advantage
2. Federal Statistical Office: Income and Consumption Sample - Task, Method and Implementation. P. 9. In: Fachserie 15, issue 7, economic calculations, item number: 2152607089004, Federal Statistical Office , Wiesbaden, 2013.
3. Federal Statistical Office: Sample Income and Consumption - Income Distribution in Germany. P. 7. In: Fachserie 15 Heft 6, WirtschaftsrechUNGEN , Federal Statistical Office, Wiesbaden, 2012.
4. ^ Federal Statistical Office: Quality of the results of the EVS 2008. In: Fachserie 15 Heft 7, Wirtschaftsrechnungen. Sample of income and expenditure. Task, method and implementation. P. 39. Federal Statistical Office, Wiesbaden, 2013.
5. http://elsa.berkeley.edu/~saez/atkinson-piketty-saezJEL10.pdf Atkinson, Piketty and Saez examined the proportion of the richest percentage of all income earners in 22 countries over the past 100 years. They used tax tables from these countries for this. Article in the American journal "Journal of Economic Literature". Unfortunately, the figures for Germany only last until 1998 . see. The World Top Income Database ( Memento of the original from October 12, 2012 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice.
6. http://elsa.berkeley.edu/~saez/atkinson-piketty-saezJEL10.pdf Atkinson, Piketty, Saez p. 11.
7. http://elsa.berkeley.edu/~saez/atkinson-piketty-saezJEL10.pdf Atkinson, Piketty, Saez p. 11.
8. Short version in German
9. http://www.freitag.de/politik/1145-das-grosse-wuerfelspiel
10. Atkinson, Piketty, Saez
11. http://www.oecd.org/els/soc/OECD2014-FocusOnTopIncomes.pdf p. 3; Archive link ( Memento of the original from June 9, 2014 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice.
12. Advisory Council on the Assessment of Overall Economic Development : Development of Personal Income Distribution in Germany (PDF; 7.8 MB), International Comparison: pp. 444ff, 2006/2007
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22. Era Dabla-Norris, Kalpana Kochhar, Nujin Suphaphiphat, Frantisek Ricka, Evridiki Tsounta: Causes and Consequences of Income Inequality: A Global Perspective . Ed .: International Monetary Fund. June 2015 ( imf.org [PDF]): "if the income share of the top 20% (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down" [while] " an increase in the income share of the bottom 20% (the poor) is associated with higher GDP growth. "
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29. Era Dabla-Norris, Kalpana Kochhar, Nujin Suphaphiphat, Frantisek Ricka, Evridiki Tsounta: Causes and Consequences of Income Inequality: A Global Perspective . Ed .: International Monetary Fund. June 2015, p. 21st f . ( imf.org [PDF]): “... many advanced countries have now seen an increase in net income inequality, indicating gaps in existing tax-and-transfer systems to counteract rising market inequality. The progressivity of tax systems has declined in some advanced economies over the past few decades, with the result being that high-income households and corporations now face lower effective tax rates (Hungerford 2013). Indeed, Figure 18 indicates that rising pre-tax income concentration at the top of the distribution in many advanced economies has also coincided with declining top marginal tax rates ”
30. Era Dabla-Norris, Kalpana Kochhar, Nujin Suphaphiphat, Frantisek Ricka, Evridiki Tsounta: Causes and Consequences of Income Inequality: A Global Perspective . Ed .: International Monetary Fund. June 2015, p. 24 ( imf.org [PDF]): “For some Organization for Economic Co-operation and Development (OECD) countries with available tax and benefits data, we also considered alternative measures for redistributive policies as well as top marginal personal income-tax rates . The results, not reported here but available upon request, suggest that lower marginal tax rates are associated with higher market and net inequality and a higher income share of the top 10 percent. "
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