0.4 Income distribution  (Page 5/18)

Some further questions to ponder:

Income distribution issues involve profound philosophical questions, as well as vital economic and political issues.

The philosophical issues were well stated in late 20th century exchanges between two extraordinary Harvard professors of philosophy: John Rawls and Robert Nozick .John Rawls’ publication of A Theory of Justice (1971), was hailed at the time as “the most important work in moral philosophy since the end of World War II,” and is now regarded as “one of the primary texts in political philosophy.” See also Robert Nozick (1974), Anarchy, State&Utopia and Libertarianism , New York, NY: Basic Books. [MG FIND SOURCE). Philosopher Rawls favored more income redistribution, but within limits. These limits are imposed by effects of redistribution on economic incentives for the better off. Philosopher Nozick favored less income redistribution because of potential adverse economic effects of policies to reduce inequality.

Economists, at least in the 21st century, are rarely philosophers also. In this book, our concern is over what can economists , qua economists say about inequality? Economists as economists have little to offer regarding definitions of what is or is not an ideal income distribution. Economists can however, help shed light upon those factors that might be the causes or consequences of a given income distribution, and how income inequality might be remedied.

Still, decisions about income redistribution must emerge out of a political process. An economist can shed light on interesting and even complicated issues in income distribution. He or she can show, for example, that such rewards as rents and windfalls that everywhere tend to accrue to the higher end of the income distribution can be more heavily taxed without adverse economic effects (see Chapter 9 on Rent-Seeking).

So, in economies such as the U.S., higher income taxes that gather some part of rents and windfalls accruing to individuals have little or no adverse effects on incentives to save, work or invest. We also cover economic rents later when we discuss taxation (See Chapter_____).

Globalization, technological change and the evolution of labor’s share in national income

A long tradition in economics has been the assumption that the share of national income received by labor was almost constant over time. Indeed this constancy was treated as a stylized “fact” from the late forties through the fifties and even up until very recent years. However, this stylized fact no longer holds.

By 2014, it had become clear that an important indicator of increasing or decreasing income equality over time in any nation is the trend in the percentage share of labor wage and salary income (hereafter called labor’s share) in total national income. Historically the distribution of labor income has been much more equal than the distribution of capital income. Capital income tends strongly to accrue to those in higher income brackets. Therefore, a decline in labor’s share in national income over time will itself result in increasing inequality in the overall distribution of income (labor plus capital income). For many large, rich nations, and even a few emerging nations including China and Mexico, a clear pattern in labor’s share has emerged over the past quarter century: the share of labor in national income has declined. In the U.S. and a few European nations, as well as China, the decline in labor’s share has been especially notable and puzzling (see Figure 4-4). A major reason for the decline in labor’s share in the U.S. and several Western nations has been the steady decline in manufacturing employment as a share of total employment: the average decline in the U.S., Canada, France, Germany, Italy, Japan and the U.K. has been in the order of 14%. Martin Neal Baily&Barry P. Bosworth, (2014, Winter), “U.S. Manufacturing: Understanding Its Past and Its Potential Future”, Journal of Economic Perspectives , 28 (1): 3-26.